March 25, 2023

Education Loans: Rising Default

By Linus Garg
First publised on 2022-12-22 09:51:52

About the Author

Linus tackles things head-on. He takes sides in his analysis and it fits excellently with our editorial policy. No 'maybe's' and 'allegedly' for him, only things in black and white.

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Even in the recent past, education loans were the safest products in the loan portfolio of banks. Backed as they were by the salaries borrowing students were expected to draw on getting a job after completing their studies and guarantees by parents, the default rate was very low. This had much to do with the fact that students got placed and their salaries were more than enough to pay the EMIs as also the fact that the youngsters were wary of starting their careers on the wrong foot by defaulting on education loans and spoiling their credit rating. Not anymore. A report in the Indian Express has highlighted the fact that the default rate in education loans has reached a worrisome 8% in PSBs. This rate is higher than the overall NPA rate of PSBs.

Analysis shows that the rate of default in four main PSBs at 4.7% is much higher in secondary or non-premier institutes. Only 0.45% borrowers who secure admission in premier institutes (like IIT, IIM etc.) defaulted on their loans. It also shows that the default rate is much higher in loans below Rs 7.5 lakh. This clearly shows that students from secondary institutes are either not getting jobs or even if they are getting jobs, the salary is not sufficient to cover expenses and EMIs both. The direct fallout of the spike in default rate is that banks are becoming wary of providing education loans. As it is, the government had set a lower target for education loans by PSBs in FY23. But it seems that even that target will not be fulfilled due the reluctance on part of the banks. This will work to the disadvantage of poorer students and those who are seeking loans less than Rs 7.5 lakh and have not got admission in premier institutes.

The government must commission a deeper study to further analyse the reasons for the spike in default. It also needs to advise banks not to refuse small ticket loans to poor students who have got admissions in secondary institutes provided they satisfy other criteria.