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Education loans have been growing at a notable pace in recent years and a further boost is expected with the newly launched ‘Pradhan Mantri Vidyalaxmi scheme’.
Given the RBI report that education loan growth touched 17.6 per cent year-on-year (yoy) for the fortnight ending September 20, Bibekananda Panda, Senior Economist, State Bank of India (SBI), points out that it has outpaced the overall credit growth of 13 per cent and personal credit growth of 13.4 per cent.
The PM Vidyalaxmi scheme is designed to offer collateral-free, guarantor-free education loans through a simple, transparent, student-friendly and fully digital application process, backed by a credit guarantee from the government. Panda expects such a loan structure to incentivise banks to expand their coverage.
By reaching financial support to nearly 22 lakh meritorious students annually, the scheme will directly benefit those who gain admission to the nation’s top 860 higher educational institutions, he says.
In addition to the government’s credit guarantee, the scheme includes an interest subvention of 3 per cent on loans up to ₹10 lakh for students with annual family income of up to ₹8 lakh and full interest subvention for students with annual family income of up to ₹4.5 lakh.
“The new initiative aims to brighten the future of meritorious students from lower income strata. This approach is expected to encourage banks to expand in this segment and contribute to building human capital for a Viksit Bharat,” the SBI economist says.
Role of NBFCs
The push from non-banking financial companies (NBFCs) is also driving the growth in education loans. For NBFCs, education loans, especially for overseas study, will remain one of the fastest-growing segments, given the rising demand for higher education, according to analysts.
“After robust growth of over 80 per cent and 70 per cent in fiscals 2023 and 2024 respectively, NBFCs’ education loan assets under management (AUM) rose to about ₹43,000 crore as on March 31, 2024. Their AUM is expected to grow at a healthy clip of 40-45 per cent to cross ₹60,000 crore this fiscal,” says Ajit Velonie, Senior Director, CRISIL Ratings.
In terms of asset quality, the metrics are expected to remain stable despite country-specific concerns. The number of Indian students studying abroad is estimated to have doubled in the past five years to around 13.4 lakh. Only a tenth is funded by NBFCs, and even after including education loans from banks, the financed quantum is not much higher, according to Velonie.
“What that indicates is that a large portion of overseas education is being funded through alternative means — informal financing, self-funding or perhaps other forms of loans. That shows that education loan companies have significant headroom for growth. Rising ticket sizes — due to ascending tuition fees, inflation and living expenses — are also tailwinds,” he adds.
Drivers for growth
Demand for education loans is driven by a range of factors. The growing interest in pursuing higher studies in the US or Europe, especially for science, technology, engineering and mathematics (STEM) courses, is generating big-ticket loans of ₹30-74 lakh, and leading to a growth in the total portfolio outstanding.
Apart from loans with collateral, which is the norm at public sector banks, students have access to collateral-free education loans from private sector banks and NBFCs based on their academic record, parents’ financial standing and credit bureau score. HDFC Bank, for example, offers such collateral-free education loans up to ₹50 lakh.
Lenders’ caution
Amid the robust growth in the education loan segment, banks are also turning cautious owing to the recessionary trend in the US and Europe, and the attendent challenges in the job market in these geographies.
“We are watching the situation and our insights show there have been concerns in the US and the UK regarding internships and jobs over the last two quarters. There is a need to keep vigil over non-performing assets (NPAs). We also expect some dip in demand for overseas education loans if the current downward trend in the global economy continues,” says an Executive Director of a public sector bank.
RBI data also flags worries over potential NPAs. According to its Financial Stability Report (June 2024), NPAs in education loans stood at 3.6 per cent, which is on the higher side in comparison with other personal credit segments such as auto loans and housing loans at 1.3 per cent and 1.1 per cent respectively.
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