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Moneylife » Personal Finance » Loans » Banks lending more money to students for higher education

Banks lending more money to students for higher education

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Moneylife Digital Team | 08/04/2011 05:16 PM | 

Education loans through banks have grown by 20% in the past couple of years. That’s the fastest ever, and banks want to push that further to 30%-40% going ahead

The season of college admissions has begun and banks are gearing up to facilitate maximum education loans to students. Going by the comments of banking experts, the education loan portfolio has gained momentum and is set to grow multi-fold.

As per the latest report of the Reserve Bank of India (RBI), education loans have increased to Rs43,801 crore in the year to February 2011, from Rs36,522 crore in the previous corresponding period, which is a significant growth of 19.93%.

According to a senior official of the Punjab National Bank (PNB), "Our education loan disbursal has been showing significant growth. As of 31 December 2010, we disbursed around Rs2,750 crore towards education from our Rs21,700 crore retail loan portfolio. Going ahead we are optimistic about the growth of this sector." He added, "Last year we posted a growth of 46% in our education loan portfolio; the current growth is 24%. Though, our volumes are increasing."

Efforts by banks to create awareness and promote education loans are evident. "The sector has grown at 30%-40%.  Large numbers of students going for higher education are approaching banks for loans to fund their studies," said K Unnikrishnan, deputy chief executive, Indian Banks' Association.

However, post the global recession of 2008, the education loan portfolio which has the lowest default rate has witnessed increasing cases of defaults. But banks are not too worried as the non-performing loans have come back to earlier levels.

Vivek Mhatre, general manager, retail, at Union Bank of India, told Moneylife, "Our NPAs on the education loan portfolio are minimal. Since 2008-09, our portfolio has doubled to Rs1,600 crore and we want to increase it by 30-40%. When a student opts for higher education from a premier institute like Indian Business School or IIM, the default risk is almost zero as these institutes have good placement facilities. Now the season of education loans has begun and we are already receiving a steady stream of proposals." Mr Mhatre explained that "as per RBI guidelines there is no collateral required for loans up to Rs4 lakh, so this category has some default rate, but we have a monitoring mechanism in place and there is nothing to worry about."

The government's interest subvention scheme for students from families that have an income of less than Rs4.5 lakh, will also help the default rate to come down. "The interest subvention scheme will significantly bring down the credit default risk involved in education loans," Mr Unnikrishnan said.

Explaining the low NPAs on PNB's education loans portfolio, a bank official said, "Our loan portfolio has picked up in the last 3-4 years and the repayment of those loans is yet to begin, so currently there is no worry of any NPA. Also, there is not much debt on our books pertaining to this portfolio."

State Bank of India (SBI) is the leading player in the education loans segment with 25% of the market share. As per its March 2010 annual report, education loans grew by 34.61% in the year to March 2010.

Mr Unnikrishnan explains, "Banks today, have realised the potential of education loans and lot of effort has been put by them. The loan processing has become faster and going further the growth rate is expected to be consistent. SBI has 25% market share in this portfolio and others like Indian Bank also have a significant amount of education loan portfolio."

Currently, as per RBI guidelines, banks can provide a maximum loan of Rs10 lakh for studies in India and Rs20 lakh for studies abroad.

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