While both the Union government and Reserve Bank of India (RBI) emphasise providing education loans to every needy and deserving student, a much more prudent question is: Are the loans reaching the poor, as per the mandate of the education-loan policy to benefit poor students, that has been in place since 2001? Over the past two financial years, prominent public sector banks (PSBs) are falling short of their targets; when the need for the educational loan has increased, the Lok Sabha was informed.
As per the reply given in Lok Sabha, PSBs are allocated educational loan disbursement targets at the bank level, not state-wise or district-wise. SBI (State Bank of India), Canara Bank and PNB (Punjab National Bank) have been leading lenders in this category. However, they are successively falling short of their targets, especially in the past two financial years, when the need for educational loans has increased.
In this regard, Naleen Kumar Kateel, a member of Parliament (MP) has raised questions in Lok Sabha about targets fixed by the government for educational loans and whether the economically weaker sections of society are getting these loans from the banks.
The leading states in sanctioning educational loans in India are: Tamil Nadu (Rs16,302 crore), Kerala (Rs11,051 crore), Maharashtra (Rs8,882 crore), Karnataka (Rs7,965 crore) and Andhra Pradesh (Rs6,190 crore). Together, these five states constitute 55% of outstanding educational loans as of 31 December 2021.
We try to address these questions, some through the answers in the Lok Sabha and some through our research and analysis. According to CRIF High Mark Credit Information Services Pvt Ltd, 90% of education loans are from PSBs by value and volume.
Under the education loan scheme, banks can lend up to Rs7.5 lakh for studies in India and up to Rs15 lakh for studies abroad. For education loans up to Rs4 lakh, no collateral or margin is required, while for loans above that limit, the borrower is required to provide collateral, however, banks are reluctant to lend to this category so the social purpose of helping those students, who are struggling to finance their higher education costs, is lacking.
The Indian Banks’ Association (IBA) formulated a Model Education Loan Scheme for its member banks in 2015. The RBI’s circular
on model education loan scheme in 2001 stated that “No deserving student is denied an opportunity to pursue higher education for want of financial support.”
Rising costs of education is making it difficult for parents to finance children’s education. An MBA from a leading private business school costs upwards of Rs20 lakh. The cost of education in a top Ivy League College is more than US$75,000.
According to a study by management consulting group RedSeer, the spending on overseas education is expected to increase to US$80bn (billion) by 2024.
The increasing cost situation has been exacerbated by the pay cuts and job losses associated with the pandemic. It is estimated that one in five of the students found it difficult to cover their fees, even after being in college for a year. Education being a key concern for Indians, education loans are critical in terms of skill formation and enhancing productivity and efficiency of the economy and people. However, the education loan portfolio forms only a tiny fraction of the retail loan portfolio of all commercial banks in India at about 3.3%.
In August 2015, the IBA released Revised Guidance Notes
on the education loan scheme. “The student borrower has no credit history and as such he is assumed to be creditworthy as this is a futuristic loan,” it stated.
As per the RBI circular, “The main emphasis is that every meritorious student though poor is provided with an opportunity to pursue education with the financial support from the banking system with affordable terms and conditions.”
Yet, students from economically disadvantaged backgrounds who apply for an education loan are commonly rejected by PSBs, citing their parent’s low credit score. Banks are expected to sanction loans to students who belong to economically weaker sections, keeping their respective board-approved loan policies in view. However, this is not implemented in practice.
As per RBI data and answer to another question raised by MP DK Suresh and Mr Kateel again, the following figures show an outstanding amount of educational loans in India.
Outstanding Amount of Education Loans in India (In Rs Crore)
The other side of this story is high NPAs (non-performing assets or bad loans) in the education loan segment. The NPA figure for education loans stood at 8.1%, 8.3% and 7.6%, respectively, for FY17-18, FY18-19 and FY19-20, next only to the industrial and agriculture sector. This figure stood at 9.17% in September 2021, down from 10.32% in the June 2021 quarter. In absolute terms, the NPA in September 2021 stood at Rs1,023 crore.
However, there were benefits given to the borrowers to deal with the impact of COVID-19 pandemic on their income. RBI allowed a moratorium of six months on payment of all instalments falling due between 1 March 2020 and 31 August 2020 without an asset classification downgrade. Further, in its monetary policy in August 2020, RBI introduced measures to restructure the debt if the loans were classified as ‘standard’ as of 1 March 2020.
This included rescheduling of payments, conversion of any interest accrued, or to be accrued, into another credit facility, or granting moratorium based on assessment of income stream of the borrowers, subject to a maximum of two years. Correspondingly, the overall tenor of the loan may also get modified commensurately.
The borrowers did get the required help for tiding over pandemic-induced difficulties; however, we have a long way to achieve educational equity through loans even after these loans being available in India for over two decades now!