Santhaprakash S. borrowed Rs.7.5 lakh from a state-run bank to join the post-graduate programme at the Indian Institute of Management, Bangalore, (IIM-B) last year. He plans to borrow Rs.2.5 lakh more to pay his fees for the coming term.
“The fee structure at premier institutes like IIMs, top B-schools and engineering institutes is quite high, which makes it necessary for a student from a typical middle class (background) to go for an education loan,” Santhapakash said.
In normal times, a student of an elite business or engineering school lands a job that pays well enough to start repaying the loan almost immediately after graduation. In today’s economic environment, he said, “even big companies are hiring less number of people, which makes it even difficult for students to meet the repayment commitments”.
For many banks, especially government-owned lenders, student loans are emerging as a new source of stress as slowing economic growth hurts the employment prospects of new entrants into the job market, impairing their ability to service loans taken to fund their college education.
Many firms have frozen fresh hiring or are offering lower salaries. The emergence of a large number of sub-standard educational institutions run with poor infrastructure and under-qualified faculty have also made employers wary of hiring, contributing to the increase in student loan defaults.
Indian banks had education loans of Rs.53,500 crore outstanding in September, up from Rs.48,300 crore a year ago. Some 6% of student loans outstanding as of 31 March, the end of the last fiscal year, had turned bad, up from 2% in March 2008. A break-up of bad loans as of end-September wasn’t available.
“Non-viability of the education loan product due to the cash flow mismatches inherent in the product given the low starting salaries of students compound the problem for banks,” Mumbai-based Espírito Santo Securities India Pvt. Ltd said in an October report.
Banks are already under pressure as their asset quality deteriorates in the face of slowing economic growth and high interest rates that have made it difficult for borrowers to repay their loans. India’s economic growth slowed to a nine-year low of 5.3% in the quarter to March before rising slightly to 5.5% in the three months to June.
Bhanu M., who graduated from a Bhubaneswar-based management school in the previous academic year (2011-12), said he is yet to start repaying a loan he took from State Bank of India (SBI) in 2010 because the money he makes isn’t enough.
“I got a job in a private company, but it’s a contractual one—for one year—subject to renewal. The starting salary is Rs.17,000 per month, and with this kind of offer I cannot start repayment till next one year or (till) I get a better offer,” he said.
The rise in bad loans has been a major concern for Indian banks in recent years. Their gross bad loans rose to Rs.1.67 trillion in September from Rs.1.13 trillion a year ago. A large chunk of restructured assets, about 25-30%, is also projected to turn bad.
Education loans on the books of Indian banks are more than double the credit card outstandings (Rs.23,000 crore as of September), which used to be the largest contributor to bad loans in the wake of the global financial crisis in 2008.
‘A serious problem’
In the seven years ended March, banks’ education loan portfolio expanded at a compounded annual growth rate of 35% compared with the industry loan growth of 23% in the banking system.
This segment of banks’ loan book has grown at the fastest pace and emerged the largest contributor to bad loans. While most banks have been reducing unsecured personal loans, their education loan portfolio has been expanding; bad assets have kept pace.
“There is a serious problem,” said Saikiran Pulavarthi, a banking analyst at Espírito Santo. “There may be institutions, especially in the south, which do not have sufficient infrastructure, but they benefit from the facility of education loans, which are often pushed by the government through nationalized banks.”
The government has promised a credit guarantee fund to safeguard banks against defaults on education loans, but the scheme has not come into effect yet. “There is uncertainty regarding the actual implementation of the scheme,” Pulavarthi said.
SBI, India’s top lender, has the largest share of education loans with about Rs.13,491, crore, or 28% of the outstanding portfolio. Among state-run banks, Chennai-based Indian Bank has the largest pile of sticky assets in this segment. As a percentage of its total education loans outstanding, its gross non-performing assets (NPAs) are 7.65%.
Other lenders witnessing growing defaults are Canara Bank, Oriental Bank of Commerce and State Bank of Mysore.
Banks are under continuous pressure from the government and regional political parties to extend loans even to those students who secure admissions under the so-called management quota. This quota refers to students chosen by a college to fill seats typically at a higher charge than that paid by students who win their places on merit.
Commercial banks typically lend at 10-11% for a tenure of five-seven years with a moratorium for a few years after the completion of a course. Under current norms, banks cannot demand any security for loans of up to Rs.4 lakh. For loans of up to Rs.7.5 lakh, they can seek personal guarantees from any working individual in the family of the borrower.
It is difficult to recover the money in case a student fails to pay back as there is no collateral against such loans. Banks typically restructure such loans by stretching the repayment period.
“The fact that there have been fake institutions targeting student loans is clearly the failure of the credit appraisal system of banks. If a bank fails to correctly judge the borrower and the institution, it cannot hold anybody else responsible,” said Shinjini Kumar, director (banking regulations) at audit and consulting firm PricewaterhouseCoopers Pvt. Ltd. “Though education loans are important from the social perspective, at the end of the day, a bank is taking the credit risk. Hence, it is important to create (an) ecosystem giving importance to proper credit appraisal mechanism, recovery and job placements.”
The education loan scheme was launched in 2001-02 by then finance minister Yashwant Sinha in his budget announcement. It was modified in 2004-05 by P. Chidambaram. In fact, banks started focusing on education loans in 2005 after Chidambaram announced several incentives to promote such loans.
Over the next four years, educational loans clocked a 48% year-on-year growth. The proportion of education loans increased from 0.5% of total non-food credit to 1.17% in the past one decade, between March 2003 and March 2012. In the four southern states, it was 2.55% in March 2012, according to the Espírito Santo report.
Indian banks lend to students under a scheme that defines the type of institutions, category of students and collateral requirements.
In the recent past, the Indian Banks’ Association, the industry lobby of lenders, revised the scheme to accommodate management quota students and those enrolled in nursing colleges after being persuaded by Chidambaram and despite fears that it may be difficult to recover such loans.
The revision of education loan norms came three months after they were tweaked, based on the recommendations of an expert panel headed by Indian Bank chairman and managing director T.M. Bhasin. The banks had initially ruled out lending to these categories to pare bad debt in this segment.
To be sure, management quota students also have to be “meritorious” to qualify for the loans, according to the changed norms.
Some banks weren’t happy to lend to management quota students in the belief that these students are less likely to secure good jobs; as they have to pay more for their courses, it would be harder for them to repay loans in time.
Banks are also worried about the absence of a mechanism to determine the credentials of educational institutions pertaining to the infrastructure they have in place and their ability to place students in jobs.
“The primary reasons for rising bad loans under educational loan segments are due to economic slowdown in general, and unemployment and under-employment of student borrowers in particular,” Bhasin of Indian Bank said. “After completion of the course, they are either unemployed or secure a job with meagre salary and could not meet the repayment obligations.” Indian Bank has an exposure of Rs.3,617 crore to student loans, out of which Rs.276 crore has turned bad.
In south India, scores of educational institutes have mushroomed, attracting students from across the country. Such institutions specifically target the education loan market, experts say. They operate without adequate infrastructure or qualified teaching staff and most of them do not have any placement records. Such institutes in Andhra Pradesh, Karnataka and Tamil Nadu offer courses in business management and nursing, among other subjects.
“There was an explosion of educational institutions beginning late 1980s in south India offering various courses. The quality of education in these institutions was questionable,” said M.V. Rajeev Gowda, chairperson of Centre for Public Policy at IIM-B. Such institutions, according to Gowda, have been producing “unemployable graduates” who could not secure jobs because of the poor quality of education they received, which subsequently leads to loan defaults, he said.
According to V.K. Unni, associate professor (public policy and management) at IIM, Calcutta, such institutes number more than 100. “There are many institutions, primarily in Andhra Pradesh, which had to be closed down due to lack of placement, infrastructure and lack of qualified people. There needs to be a regulator to check such institutions and impose penalty on those which do not operate with sufficient standards,” Unni said.
Instances of default on study loans have increased in eastern India, too. According to a report in The Times of India newspaper on 8 November, the number of defaulters on loans have more than doubled in Kolkata since 2009-10. The ratio of bad debt rose to 4.5% in 2011-12 from 3% in the previous year, the report said, quoting banking industry officials.
According to Unni, job losses in the aftermath of the 2008 financial crisis created an oversupply of talent in the market and limited the opportunities for freshers to secure good jobs. “For freshers, except those from premium institutions, salary levels are still low. Unlike the boom time, when the perception was India was growing fast, after 2008 lots of retrenchments are happening, which adds pressure to the job market,” he said.
Prashant Nanda in New Delhi contributed to this story.