Education loans advanced by banks have grown by a measly 2.7% in FY17-half as much as the average growth rate of all loans. But that is only half the story. Specialist lenders are growing rapidly and other private players are looking at this segment.
Education loan specialists like HDFC Credila and Avanse have seen growth rates ranging from 40% to 70% in disbursements even as new age lenders like InCred Finance are eyeing the sector. Ajay Bohora, co-founder and CEO of HDFC Credila, says that it's clear there is great demand. The shift in government focus to primary schooling has resulted in private institutions filling the gap in tertiary education.
Secondly, in India and globally, cost of attendance (fees and other expenses) for tertiary education has been rising faster than inflation which is taking it out of reach of the middle class. HDFC Credila has disbursed Rs 1,300 crore of loans in FY17, which is slightly lower than the Rs 1,800 crore increase in the education loan portfolio of banks.
Bankers say they have pulled back from education loans because bad loans are high-in the 7-8% range. This is particularly true for the sub-Rs 4 lakh category where banks do not demand any security.
According to a senior PSU bank official, the reasons for the defaults are two-fold. One, engineering and management institutions have mushroomed but the quality of education has not been up to the mark. Two, many students get under the radar of lenders as they relocate after graduation and their loans turn into NPAs.
"A lot of education loans are probably camouflaged as personal loans or loans against property," said Prashant Bhonsle who heads the education loan vertical at InCred Finance. According to Bhonsle, students are rushed for time and at many banks it is faster to get a personal loan or a loan against property. The downside is that the interest paid cannot be claimed as deduction under Section 80E of the Income Tax Act. Also, repayment of such loans begins immediately, unlike education loans where there is a repayment holiday. Also, education loans have tenures ranging from one to 12 years depending on the duration of the course.
According to Rajnish Kumar, MD, State Bank of India, the outlook for education loans has improved with the government introducing a credit guarantee scheme for borrowings up to Rs 7.5 lakh in 2015. "The recovery problems that we faced in the south are now behind us and we will be growing the portfolio," said Kumar.
While the government objective is to have universal access to financing, the ground reality is that unsecured education loans are a viable business only in segments where employment is certain. As a result, only those who qualify for the top management or engineering institutes can expect to cover fees through bank financing without collateral. For others, a loan above Rs 7 lakh would invariably require property as collateral from parents who are made co-borrowers.
Private lenders are positive on education as they have the skills and they can be selective. "Appraising a loan application is not easy because there are over 700 universities in India-some, like the University of Pune, have over 600 affiliated colleges, with each having 20-30 courses—and for credit assessment it's important to know the employment opportunities for each course," said Bohora. He adds that his company has mapped one lakh courses worldwide by college and universities.
It is not just finance companies, even lenders like Axis Bank, which was earlier a small player in education loans, has now created a new vertical for this product and is planning to grow. "We have grown 100%, although on a small base, and we see potential in this business," said Rajiv Anand, head of retail at Axis Bank. However, the bank is focusing on higher education in premier institutions like IIMs where both employment opportunities and fees are high. "The advantage for us is that we have good banking relationships with several trusts and educational institutions which makes it easier to partner with them for education loans," said Anand.
Source : Times Of India