High NPAs in the education loan segment make banks cautious

High defaults of around 8% in the education loan portfolio made banks cautious and slow to sanction this type of credit.

Non-performing assets (NPA) in the education lending category, including public sector banks (PSBs), were 7.82% at the end of the June quarter of the current fiscal year. Education loans outstanding were around Rs 80,000 crore at the end of June. A cautious approach is being taken to end branches while sanctioning education loans due to high NPAs, a senior official at a public sector bank has said. As a result, some genuine cases are being overlooked and there are delays, the official said.

Recently, the Ministry of Finance had convened a meeting of PSBs to review the education loan portfolio and reduce backlogs. The ministry has urged banks to publicize the central sector interest subsidy scheme among field formations.

The sharp rise in non-performing assets (NPAs) in education loans from commercial banks in India in recent years is of concern, as it could hamper the growth of bank credit for higher education in the country, according to a occasional item. published by RBI.

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In India, around 90% of education loans are disbursed by PSOs. Private sector banks and Regional Rural Banks (RRBs) accounted for about 7% and 3% of total outstanding education loans, respectively, as of end-March 2020, according to the document released in June 2022.

Outstanding education loans of all banks were Rs 79,056 crore at the end of March 2020 and Rs 78,823 crore in March 2021, according to the Banking Sector Trends and Progress Report in India 2020-21 by RBI. However, outstanding loans increased to Rs 82,723 crore as of March 25, 2022.

According to the managing director of Resurgent India, Jyoti Prakash Gadia, the creation of new jobs has not kept pace with the number of graduates coming out of colleges, which has a negative impact on the timely repayment of student loans.

As a result, NPAs have increased and banks are reluctant to issue new education advances, especially loans up to Rs 7.50 lakh which are unsecured or guaranteed by third parties, he said.

The effective implementation of the new education policy, which emphasizes the development of basic skills and employability, will create a win-win situation for all stakeholders, he added.

Most of the banks offer an education loan scheme under the Association of Indian Banks (IBA) education loan model to students pursuing higher education in India and abroad.

Under this loan model, education loans up to Rs 4 lakh do not require any collateral from the borrower, education loans up to Rs 7.5 lakh can be obtained with collateral under the form of an appropriate third-party guarantee, while student loans above Rs 7.5 lakh require tangible collateral. In all the above cases, the co-obligation of the parents is necessary.

The second category of student loans is sanctioned for students who gain college/university admissions by management quota, provided they meet the minimum grade criteria in the previous exam.

The third category of education loans includes programs for needy students to attend vocational training courses provided by industrial training institutes (ITIs), polytechnics, training partners affiliated with the National Skill Development Corporation (NSDC )/sector skills councils, a state skills mission/corporation, preferably leading to a certificate/diploma/diploma issued by such an organization in accordance with the National Skill Qualification Framework (NSQF) and any other institution recognized by the central or state boards of education or the university.

The fourth category of programs caters specifically to the needs of students studying at top institutions such as IITs/IIMs/NITs/IIScs or courses abroad, with a demand for a higher loan amount. All student loans up to Rs 10 lakh (increased to Rs 20 lakh in September 2020) have been included in the priority sector definition by the Reserve Bank of India.

In most of these programs, the moratorium period includes the course period plus six months to one year, and there is a nil/negligible processing fee for programs with high-value student loans.

The interest rate under the different schemes is a mark-up of 2-3% above the marginal cost of funds-based lending rate (MCLR)/external benchmark rate, based on course reputation/ The establishments. The repayment period is around 10 to 15 years.

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