Opinion High rate of defaults in education loans: A worrying sign for poor students

Data obtained under the Right to Information Act has thrown up some worrying trends about education loans in the country. As this newspaper reported on Wednesday, about 8 per cent of all education loans disbursed by 12 public sector banks (PSBs), where repayments have started, have turned into non-performing assets (NPAs or loans that never get repaid). This level of NPAs is higher than the overall NPAs in the banking system. Worse, still, is the revelation that a bulk of the defaults in the education loan portfolio of banks comprises low-value education loans (that is, loans up to Rs 7.5 lakh). There is a glaring gap between the default rate for loans disbursed to students in premier institutes — such as the IITs, IIMs, NITs and AIIMS — as compared to those in secondary institutes. If one takes into consideration just four PSBs — State Bank of India, Canara Bank, Union Bank of India and Indian Overseas Bank — that account for 65 per cent of the total loan portfolio among PSBs, the default rate for education loans to students in premier institutes is 0.45 per cent, while the overall average of defaults is more than ten-times of that at 4.7 per cent.

Far from being a mere statistic that is only of academic interest, this trend is already beginning to have real-world implications. Faced with a high rate of defaults in low-value education loans of PSBs, banks have started shying away from extending such loans. In November, this paper reported that the education loan disbursal target for public-sector banks during the current financial year has been set at about 13.5 per cent lower than total disbursal by all scheduled commercial banks in FY22. PSBs typically account for 90 per cent of all study loans and data shows that the target for the country’s 12 PSBs for the current year is Rs 20,450 crore while loans worth a total Rs 23,640 crore were disbursed in the last financial year.

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Simply put, the poorer students in India who need a loan the most are at risk of being excluded because it doesn’t make as much business sense for banks, even in the public sector, to provide education loans. For its part, the government has expressed concern over the slowdown in disbursal of education loans and asked the banks to expedite loan distribution. However, the key point to understand is the reason why students from secondary institutes fail to pay back: The lack of adequate jobs, or at any rate, well-paying jobs. Unless the economy is enabled to create more and better jobs, forcing banks to disburse more loans will only result in higher NPAs, which, in turn, will require more taxes from the general public.