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A recent news item said that public sector banks are turning cautious about sanctioning fresh education loans as non-performing assets (NPAs) are at a high of 8 per cent. Outstanding education loans stood at around Rs 80,000 crore on June 30, 2022.
Education loans are inherently risky for lenders. The typical borrower takes two-five years to complete the course. She hopes to pay the loan (usually large-sized) along with interest back after completing her course. This is contingent on her ability to get a job that pays a salary which is adequate to allow repayment.
No collateral is required for loans below Rs 7.5 lakh. While parents stand guarantee, their income is generally not enough to repay the loan if the student is unable to find a well-paid job. If she fails, drops out, or is unable to complete the course for any reason, or having completed it is unable to find a job with an adequate salary, the loan will turn into an NPA.
In some cases, the student may have the ability to repay but may deliberately not do so. However, with the advent of credit bureaus, such intentional defaults are becoming rare.
Loans for vocational courses (skill loans) are for shorter duration and smaller amounts. But they are normally taken by the more vulnerable sections and hence are prone to default.
As many of us can testify personally, higher education enables families to escape poverty. It also adds to the country’s human capital. Hence, the government provides a 75 per cent loan guarantee for eligible education and skill loans through the National Credit Guarantee Trust Company (NCGTC). The NCGTC reimburses banks up to 75 per cent of the defaulted loan amount. Banks are also incentivised to provide these loans by classifying them as priority sector loans.
Owing to their higher risk, educational loans are priced higher than several other retail loans.
Besides the risk related to the borrower, education loans carry risks related to the course. The course may not be attuned to the industry’s needs, its selection process may be faulty, or its evaluation process may be inappropriate. All these factors eventually get reflected in the defaults arising from a specific course or institution.
The default information on borrowers is available to lenders via the credit information bureaus. But it is not clear whether the bureaus also share aggregated information with lenders on defaults across specific courses. This information could include details of performing as well as defaulted loans, period after which the loan defaulted, comparison with peer group, and other useful parameters. This will enable lenders to provide faster processing and lower interest rates for courses having lower default rates.
In fact, such information should be made available to the public as well. Students will then opt for courses and institutes having lower default rates. Educational institutions will strive to select appropriate students, tailor course material for the industry they serve, set appropriate evaluation criteria, and facilitate placements in a bid to have lower default rates.
The media could then use this information to provide ratings for various courses and institutions, which students and parents could use. In fact, this will be most useful for the skill loans taken by the vulnerable sections of the society. This information could eventually become a parameter in the National Institutional Ranking Framework maintained by the Ministry of Education.
Truth be told, data is increasingly being viewed by regulators as a public good. Making aggregate information on education loans public will be a fit application of that principle.
The writer heads Fee-Only Investment Advisors LLP, a Sebi-registered investment advisor; Twitter: @harshroongta
(A slightly different version of this column first appeared in the Business Standard on October 10, 2022)