Student loans becoming NPAs: is the system failing in getting back the loan

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Becoming an engineer is still the biggest dream in India. Therefore, engineering enjoys the lion’s share in the education loan category. A four-year engineering course costs around Rs 5 to 10 lakh depending upon the institute that you choose. With the easy availability of collateral-free education loans, it’s easy to get financing. But are these loans coming back? From April to December 2020, the outstanding education loans were Rs 84,965 crore, of which 9.7% is classified as non-performing assets (NPAs). According to the data of the State Level Bankers Committee, 9.7% of the education loan i.e. Rs 8,263 crore will not be returned. The biggest defaulters are in the nursing and engineering categories.

How much is the loan outstanding?

The eastern and southern states performed the worst in repaying the education loan. In eastern states like Bihar and Bengal, NPA stood at 14.2% and in southern states like Tamil Nadu and Karnataka, it was 11.9%. NPAs remained at 3.3% in Northern states and 3.9% in Western states of India.

After industry and agriculture, education is the sector that battles with the issue of non-payment of loans. The share of NPA in the consumer borrowing category like home loan and auto loan NPA came down by 2% but it rose in education. Previous figures from the Indian Bank Association show that in 2016 education loans stood at 7.29% NPA, it was 8.1% in 2018 and 8.3% in 2019. The figures of the State Level Bankers Committee tell us that for just the 9 months of 2020 i.e. April-December 2020 only, this figure is at 9.7%.

Why is education loan turning into NPA ?

According to Sunil Goel, MD of Globalhunt, a placement company, NPAs in education loans continue to grow by 1-2% every year. Corona should not be alone blamed for this. There is also a mismatch between the expenses of studies and salary that are being rolled out. Education loans need to be made financially inclusive in which they are not only borrowers and lender’s responsibility, but educational institutions that are taking a fee and the organization giving job must also be linked to the loan repayment process.

Ashwani Rana, former banker and founder of Voice of Banking, says that the recovery of education loans has been a headache for banks. Because collateral does not have to be given in loans below Rs 7.5 lakh. In such a situation, people easily get away without paying the loan. Either they move out of the country or find a job with low salary. The unsecured loans are difficult to be traced and easy to default. Ashwini Rana says that if institutes/universities start mentioning in student’s certificate that they have yet to return the education loan, then those who do not return the loan intentionally can be nabbed.

Lack of jobs, salary cuts and slowing of economy have led to the increase in the number of people who are not being able to repay the education loan. But the stark differnce between the high education loan and low beginner salary is also playing a big spoilsport.