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Five years ago, when he approached State Bank of India (SBI) and Bank of Baroda for an education loan to pay for an engineering course at a college in Thane, Maharashtra, Rahul Garg’s application was rejected. Back then, his extended family chipped in and helped Garg pursue his dream.

Earlier this year, he again approached SBI and Bank of Baroda for a 45-lakh loan to pursue a Masters degree in data science in Colorado. This time around, both banks were eager to sanction the loan, despite the amount sought being much higher. After evaluating his options, Garg went with SBI, which sanctioned the loan within 45 days at a 10.7% interest rate. He left in August to commence his studies.

Soring high
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Soring high

Incidentally, Karnataka Bank, too, was willing to extend Garg the education loan, as were other lenders, particularly private ones. “We had also applied at HDFC, which directed us to Credila (a subsidiary), and they, too, offered us a loan easily. Private lenders Mpower Financing and Prodigy Finance (based in the US) were also keen to offer the loan at flat rates of around 6%. But we didn’t take them up as they do not have much of a physical presence in India," says Garg’s father Sanjiv.

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After a covid lull, thousands of students like Garg have again been making a beeline for banks, non-banking financial companies (NBFCs) and new-age lenders seeking loans to fund their higher education pursuits. Thanks to this resumption in demand, lenders have begun disbursing more education loans, with the banking segment alone recording 12.3% annual growth till October, according to RBI data.

This is in the wake of almost flat growth of 0.9% a year earlier amid continued covid restrictions worldwide. Institutions in India and abroad closed or operated remotely. In-person classes have now resumed, and countries have reopened their borders to international students.

Besides traditional banks and non-banking private lenders such as Credila and Avanse, the pent-up demand is being served by several new-age technology-enabled firms focusing on this niche. Other than Prodigy Finance and Mpower, there is Gyandhan and Eduvanz.

While education loans are a minor play for state-owned banks, data shows they have been struggling with non performing asset (NPA) levels as high as 10%. Meanwhile, private lenders have kept their NPAs under 1%, say industry experts, thanks to a singular focus on the segment, and innovative lending practices backed by data, technology and strong due diligence.

Indeed, private lenders in this segment are coming of age. According to a report by rating agency Care, the total NBFC education loan portfolio stood at just 5,000 crore on 31 March 2017. As of 30 September this year, that amount had shot up to 20,000 crore, accounting for 18-20% of total education loan disbursals of 1–1.10 trillion; commercial banks disbursed the rest.

State-owned SBI continues to be the leader in this segment with 30% market share. India’s biggest lender had total outstanding education loans of 26,000 crore as of October, having recorded 18% growth over the previous 12 months.

On the private side, Credila is the biggest lender. Its disbursals grew to 4,309 crore in FY22, surging 173% over the previous financial year, according to its annual report.

Anatomy of an ed loan

Banks generally tend to be partial towards engineering and management courses when it comes to extending education loans. Typically, these loans are offered at an interest rate of 8-16%. Private sector banks and NBFCs usually charge higher rates of interest, while state-owned lenders offer lower rates on such loans.

“Traditionally the tenure of an education loan is 10-12 years with a repayment moratorium (course period + 1 year)," says Varun Chopra, co-founder & CEO of Eduvanz.

Small loans of up to 4 lakh do not require collateral while loans up to 7.5 lakh can be obtained with collateral in the form of a suitable third-party guarantee. Loans above 7.5 lakh require tangible collateral. And co-obligation by the student’s parents is necessary in all cases. The recent spurt in growth has been led by demand for large-sized loans of 15 lakh and above.

An SBI executive attributes the demand for large-sized loans to the rising trend of studying abroad. The country’s overall international education loan market is worth around 20,000 crore, he said.

An independent analyst tracking this segment confirmed that SBI has increased its focus on loans for overseas education, noting that the segment has lower risks and high-value returns.

The opportunity

At over 255 milIion, India has the largest student population in the world. It also ranks among the top five countries sending students to study abroad. Demand for educational loans, therefore, emanates from courses both within India and overseas.

Underlining the growth opportunity within India alone, SBI, in a written response to Mint, stated, “The number of colleges in India increased from approximately 42,000 (as of FY20) to approximately 45,000 (as of FY22). … India had 38.5 million students enrolled in higher education in 2019-20, with 19.6 million male and 18.9 million female students."

Despite these numbers, however, commercial banks, wary of NPAs, have not gone out of their way to tap this segment. “Traditionally, only one in seven-eight education loan applications gets approved. NBFCs have limited distribution reach but banks have the reach. However, banks have not been able to innovate given the high NPAs, complexities and relatively small ticket sizes," says Credila co-founder Ajay Bohora, explaining why NBFCs have made deep inroads in this segment. He launched Credila with his brother Anil in 2006. It has now been acquired by HDFC.

Fuelling overseas dreams

In the study-abroad category, while offbeat and vocational courses are seeing increasing interest, the demand for science, technology, engineering and math (STEM) courses continues to grow.

India is second only to China in terms of students pursuing international courses. Currently, there are more than 1.2 million students from India studying abroad, says Amit Gainda, MD & CEO of Avanse Financial Services.

“The number of Indian students going abroad last year came back to pre-covid 2019 levels. This year, it is likely to see a record high—2022 has been the best year so far for the industry across geographies and top destinations," says Vaibhav Singh, co-founder of end-to-end study abroad service platform Leap, the parent of LeapFinance. Post-Brexit in 2020, Singh adds, the UK has become the fastest-growing market, with 400% growth in student intake from India last year.

According to the Bureau of Immigration, in the first three months of 2022 alone, 133,135 students left India for academic pursuits, against 444,553 students in all of 2021 and 259,655 in 2020.

Leap’s Singh says one of the reasons loans for education overseas are rising is because borrowers are less likely to default. The loss rate is a miniscule 0.1% compared to around 8% for domestic education loans. “So, the risk is clearly less in the international portfolio. They have performed well historically, even through covid."

Eduvanz’s Chopra says that many students are also looking to specialize to improve their job prospects. “They are looking beyond MBAs and engineering courses to pursue hotel management, social media and digital marketing, public relations and wine tasting to name a few courses," he says.

Growth at home

Domestic education loans, too, are witnessing an uptick. In FY22, for instance, Credila’s disbursements to students pursuing their studies in India increased 107% year-on-year to 301 crore. This year, it has also launched an MBA-focused product, targeted at students pursuing their studies at the top 118 MBA colleges in India.

Eduvanz, which provides financing products for K12, test prep, skilling and upskilling courses, said its loan disbursals have shot up to 1,600 crore as on date, from 600 crore last year.

“Qualitatively, ticket sizes of education loans are increasing given the fee hikes for higher education. Also, India’s demographics have been changing in a way that the proportion of students going for higher education is increasing," says Krishnan Sitaraman, senior director & deputy chief ratings officer, Crisil Ratings.

Eduvanz’s Chopra concurs. India has 300-400 million people in the 21-35 age group looking to pursue higher education or skill building courses, he says. Chopra’s company mostly offers financing to learners studying in India.

Bad loan overhang

Despite this growth, the education loan sector has always proved a challenge for public sector banks (PSB), with NPAs in the segment at 8-10%. These loans constitute less than 1% of the total lending for PSBs and the low volume, lower value and high default risks have made them wary of the segment.

The government subsidizes small domestic loans under its credit guarantee fund. Meanwhile, commercial banks are required to extend education loans as part of the RBI’s priority sector lending guidelines. Under this programme, banks have to disburse 40% of their loans to the agriculture, small and micro enterprises, renewables and education sectors, among others. Here, education loans that do not exceed 20 lakh are eligible for priority sector classification.

Priority sector lending comes under the Central Sector Interest Subsidy (CSIS) scheme, where full interest subsidy is provided for the moratorium period on education loans of up to 7.5 lakh taken from scheduled banks. The benefits are applicable to students from economically weaker sections with parental income of up to 4.5 lakh per annum.

Incidentally, the 12.3% growth recorded in October 2022 is only in education loans under the non-priority sector, which accounts for 60% of all loans in this category. Indeed, the priority sector category contracted 0.1% between October 2021 and October 2022. However, this is an improvement over the 4.8% contraction a year earlier, RBI data showed.

To be sure, this is not the full picture as RBI data shows figures only for scheduled commercial banks, and not for NBFCs, which are part of the private sector. Nevertheless, the extent of the contraction has been narrowing since 2018.

The private sector way

The commercial banks’ pain has been NBFCs’ and new-age lenders’ gain. The private players’ NPAs in the education loans space have historically been less than 1% as compared to around 8% for banks.

Underwriting by new-age lenders has become quite efficient with the use of technology and due diligence. Leap’s Singh says companies like his fintech make use of data and technology to understand customers, their needs and preferences better and deeper.

“One of the reasons NBFC NPAs are low is because they insist on co-borrowers, typically the parents of students, and they are in close contact with the borrowers. They also look at, among other things, the track record of placements at educational institutes, their rankings, and so on," says Crisil’s Sitaraman.

“They also are more flexible on repayment structures and, in many cases, the bulk of the repayment happens after the student gets a job and starts earning. These, I believe, are the reasons NBFCs have been able to manage asset quality better," Krishnan added.

NBFCs, he says, also have specialized skill sets and a niche focus on this space, unlike banks, which have very wide interests.

Supply crunch

While the flow of credit has resumed, it is still an uphill task for many students to get a loan to fund their education, with eight out of 10 applications getting rejected. Private players see a huge opportunity here given the mismatch in demand and supply and believe it is a market waiting to explode.

“There is a supply crunch and lenders are not able to structure education loan products to meet the demand. India needs at least 20-30 lenders focused on education loans," says Bohora, adding that an MBA postgraduate course in an IIM alone costs more than 20 lakh. A mid-income Indian family’s savings are unlikely to be enough to fund this education.

Sunny Patel can attest to how difficult it is to get an education loan. Three years ago, he had applied for a global management course in Canada after job rejections by at least 50 companies in India. But the commerce graduate, who also has a MBA degree from Mumbai University, was unable to get an education loan. “I had to take my father’s help to pay for my course. He had to take a top-up personal loan on his home loan," says Patel, who has now settled in Canada and is a business analyst there.

Were he to apply for that education loan today, he may well find those same lenders falling over themselves to accommodate him. Rahul Garg, who is now in Colorado, can testify to that.

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ABOUT THE AUTHOR
Beena Parmar
Been Parmar is a financial journalist based in Mumbai. She has reported on the banking and finance sector for over 10 years. She now writes on the alternative investment ecosystem from India - private equity, venture capital and especially startups. She loves to read about politics, society and humane stories.
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