Education loans see a sharp spurt amid debate on rising household liabilities

An increase in the number of Indian students opting to study abroad amid rising costs of living and growing demand for higher education from Tier 2 and 3 cities has led to a sharp spurt in the demand for education loans.

So far, growth in education loans had remained subdued against the backdrop of higher bad loans in the segment. “The education loans of SCBs had been decelerating since March 2016 against the backdrop of high NPAs in this sector. The share of education loans in total retail lending has fallen,” RBI had noted in its last Report on Trends and Progress of Banking in India.

However, credit to this sector has revived in the last couple of years. The outstanding bank loans to the education sector increased to Rs 96,847 crore in FY23, registering a 17 percent plus growth over the previous year. As of the first 4 months of the current financial year, the outstanding education loans from banks had crossed Rs 1.03 lakh crore in July, recording a near 20 percent rise over the same period last year. This compares with a much lower 7.4 percent YoY growth seen in FY22, and a (minus) 0.3 percentage decline in FY21.

So, what has led to this sharp rise? Apart from the low base, demand for offline courses both domestic and overseas has been rising post Covid, but especially so for overseas courses.

Data shared by Bhagwat Karad, minister of state for finance with the Lok Sabha earlier this year showed that the number of students availing education loans to study abroad has increased 215 percent over last 10 years. Around 4.61 lakh students availed educational loans for studying abroad from 2012 to 2022, Karad informed parliament. The number of borrowers trebled over the same period, from 22,200 in 2012-13 to 69,898 in 2021-22.

According to the data shared in parliament, student loans worth Rs 39,268.82 crores were disbursed in the last 10 years. This forms more than a third of the total outstanding loans in the education segment.

Apart from this, there is also growing demand for higher education coming from tier 2 and 3 citites- which is driving the growth. A report by Care Ratings showed that the education loan segment in India which has been primarily dominated by public sector banks- is now seeing specialised NBFCs focussing on overseas-education-loan segment steadily increase their market share over the past five years.

Gross bad loans or non-performing assets for this segment stood at 5.8 percent of outstanding loans for banks as of March 2023, RBI data showed. This was higher for public sector banks at 6.1 percent, than for private banks, at 3.5 percent. Compared to other categories within personal loans, this is far higher when compared with housing loans (1.3 percent), credit cards (2 percent) or auto loans (1.4 percent), NPAs in education are higher.

But is that a big reason to worry? Bankers we spoke to don’t think so, because it is still small in absolute terms. The share of education loans in overall personal loans has remained stagnant, and low at just around 2 percent in the last few years.

However, in a recent statement, Rathin Roy, Managing Director of the Overseas Development Institute, voiced his apprehensions about the increasing trend of education loans. While talking to CNBC-TV18, he emphasised that borrowing for education is a worrisome indicator, highlighting that even affluent families find themselves compelled to finance their children's education, such as pursuing an MBA in a reputable institution.