Dr. Manasvi M Kamat
Outstanding education debt in the US has tripled over the last decade and now exceeds $1.5 trillion, states a recent study. Though the woes of education loan defaults in India is similar but not as scary in the US, the issue is whether we can afford to let this happen any further?
The educational loan defaults in India are continuously rising. Student loans are offered in India at an interest rate ranging from 8.50 to 10.30% per annum. Banks allows a moratorium period to start education loan repayment of about 6 months from getting a job or 1 year of completion of a course, whichever is earlier and the loan is repayable in average 5 to 10 years, stretchable up to 15 years.
The number of students availing educational loans in India has increased. In 2015-16, 7,86,279 students took loans amounting to Rs 13,435 crore, as per RBI. In 2016-17 the corresponding figures were 6,80,286 students and Rs 12,227 crore worth of loans while in the year 2017-18, and 8,98,545 students took loans worth Rs 14,734 crore.
Higher number of students preferring to study abroad and increased cost of education are the two prime reasons for higher appetite for educational loans in India. Indian students make up the second largest pool of international students globally after China.
As of 2016, over five million international students studied abroad out of which 300,000 were Indians, which increased exponentially to 553,000 in 2017 as per the UNESCO data. With more Indian students flying abroad for studies, many have relied on hefty education loans they have been unable to repay.
Increasing costs of higher education has partly driven more students to avail education loans to finance their education. As per the RBI, spending on tuition and accommodation has increased by a whopping 44 percent during 2013 and 2018 and this has proportionately raised the average size of new loans given each year. The average loan size for new loans was Rs 503,000 in 2015 and increased to Rs708,000 at the end of the year 2018.
As the number of loan takers increased, the increasing average size of the loan has led an increasing number of students defaulting in loan repayment. In 2015-16 for instance, Rs 4,777 crore of the total loans taken turned into non-performing assets (NPAs) while in 2016-17 and 2017-18, the corresponding figures were Rs 5,191 crore and Rs 6,434 crore.
According to the RBI data, gross NPA to advances ratio in the education segment has increased to 8.15 per cent in March 2018 as against 7.33 per cent in the previous year. On the other hand, gross non-performing assets (NPAs) rose by Rs 600 crore to Rs 5,939 crore in March 2018 from Rs 5,339 crore in the previous year, 2017.
Ease in securing loans without elaborate scrutiny and shrinking job markets are the reasons for increasing default in educational loan repayments. Now since the education loans are within the ambit of the NPA list, banks and financial institutions are also strict on loan accounts to ensure its timely recovery.
Securing an education loan has become easier than before as banks do not ask for any collateral or third-party guarantee for educational loan up to Rs 4 lakh. For loan of Rs 4-7.5 lakh a third party guarantee is required while collateral is asked only for loan exceeding Rs 7.5 lakh. Borrowers too are not enlightened about responsible borrowing and the consequence of defaulting.
Repaying educational loans seemingly become difficult because of a shrinking job market in India. There is excess supply of fresh graduates in many career streams relating to engineering, pharma and management giving graduates low to moderate employability and stagnating income levels for entry-level jobs.
The growing gap between the increased fees and the salary offered during campus placement is also one of the prominent reasons leading to delayed payment and defaulting for that matter.
Government data discloses that the percentage of campus placement of students was only 35-40 percent in the last few years.
Additionally, tighter visa rules for working overseas in the West has forced many Indian students to return home without jobs after their studies. The US, for instance, has a cap on the H1B visas for people including students who have studied there. Off late the students who took educational loans for their studies find it difficult to find satisfactory work and are left with huge debts they are unable to repay.
States like Kerala and Tamil Nadu show educational NPAs above 10 percent as compared with the overall delinquencies at 7.67% at the pan-India level. This is also because Southern India forms around 56% of total education loan portfolio of the banks. Other states like Andhra Pradesh, Telangana and MP, gross NPAs are around 5%.
In India it is found that as much as 94.68% of education loans outstanding are accounted by Public Sector Banks and the delinquencies are likely to be higher in undergraduate courses vis-Ã -vis post graduate courses as employment opportunities are commensurate with the financial costs on account of lower competition in those segments
In India the defaults are higher in cases where repayments are supposed to be done by students, and for loans of amounts less than Rs. 4 lakh. Absence of collateral or guarantee for smaller loans raises the tendency of default. US too shares similar trends.
In the US, the average defaulter resides in an area where the median income is around $50,000, compared with around $60,000 for non-defaulters. Almost 1 in 3 people who owe less than $5,000 for their education default within four years, compared with just 15 percent of borrowers who owed more than $35,000, and ironically, those with smallest loan balances are the most likely to be unable to pay off their debt.
Whatever may be the broader reasons, the very fact that educational loans are often disbursed without adequate due diligence results in a high level of defaults. The interest rates in India are also seemingly high. The student being defaulter is as bad as a student being denied loan with a fear that she/he will be a defaulter. A middle path is what the situation demands.
