Tight spot for students
The ramifications of a shrinking job market will not only aggravate unemployment but also caution huge NPAs on account of education loans
The shrinking job market is becoming a rising concern for the country's millions of students studying at home and abroad with education loans. Also concerned is the unemployed youth who had finished education with the support of bank loans but are unable to return. The equally concerned are the guardians of the students, offering collateral for such loans. Banks are facing huge loan defaults. Interestingly, most of the education loans come from state-owned banks. The collateral is something pledged as security for repayment of a loan, to be forfeited in the event of a default. Banks are increasingly finding it difficult to recover education loans from defaulters, genuine or willful.
Currently, the picture of India's job market looks pretty gloomy, especially in the context of the new trend of a complete makeover of technology and business model under a booming startup environment. The latter seems to be destroying almost all existing business models. New technologies like the cloud, analytics, artificial intelligence (AI), automation, the internet of things (IoT) and startup environment are bringing about a cascading effect on almost every industry, affecting the job market drastically. Education loan takers and givers seem to have caught in a trap under the new environment.
Priority-sector education loan is as politically sensitive as farm loans and MSME sector loans. Banks are often known to under-report bad education loans ever since the government relaxed the repayment terms. Therefore, the government's statement in the last Lok Sabha session on the subject may not have provided the true picture since it skipped the shrinking job market part as a key reason.
According to the Indian Banks' Association (IBA), state-controlled banks have seen a steep rise in defaults on education loans in the last two fiscal years. The non-performing assets (NPAs) or bad loans in the education sector climbed to 8.97 per cent at the end of March 2018 from 7.29 per cent at the end of March 2016. As much as 94.68 per cent of the total outstanding education loans are accounted by public sector banks which are now looking at selling delinquent loans to asset restructuring companies (ARCs). Interestingly, the government stats covered the period only till the end of March 2015. It told Lok Sabha that 5.7 per cent of education loans given out by state-owned banks had not been repaid by then. And, going by subjects, those pursuing nursing formed the largest category that was unable to repay loans – constituting 21.28 per cent of the sector's total bad loan portfolio of banks. Loans disbursed towards nursing courses in 2017-18 stood at Rs 2,263 crore, compared with Rs 1,154 crore in the previous fiscal.
Loans taken for engineering courses formed the third largest defaulting category, accounting for 9.76 per cent of the total bad loan portfolio till March 2018. The amount may look insignificant if compared with the combined bad loans slammed on state-owned banks by some 30-odd big businessmen and their enterprises, running into several lakhs of rupees. However, defaulted education loan – meant for job seekers – can't be compared with stricken industrial loans. Rising defaults have forced banks to go slow in disbursing education loans, threatening a negative impact on both students seeking higher studies and educational institutions.
According to RBI reports, banks have reported a flat growth of 0.02 per cent, or just Rs 21 crore, at Rs 72,839 crore in outstanding education loan growth for the year ended March 2018 as against Rs 72,818 crore in March 2017. The banks' education loan portfolio increased by 6.87 per cent from Rs 68,133 crore in the previous year ended March 2017 and by 9.46 per cent in March 2016. The highest growth was witnessed in 2013-14. It rose by nearly 24 per cent, from Rs 11,452 crore to Rs 59,834 crore. The gross education loans amounted to Rs 48,382 crore in 2012-13. And, bank's NPAs on account of education loans were around Rs 2,615 crore. There is no security and margin requirement for education loans up to Rs 4 lakh. For loans ranging from Rs 4 lakh to Rs 7.5 lakh, banks seek a third party guarantee. And, for loans above Rs 7.5 lakh, tangible collateral security of suitable value, along with the assignment of the future income of the student for payment of instalments, are required to be furnished by the borrower.
Defaults are high in cases where repayments are supposed to be done by students. Their ability to return education loans are linked with their ability to find a job after they finish their education. A report by rating agency CARE points out that "there could also be a pattern of student's delinquencies vis-à-vis level of higher education. The delinquencies are likely to be higher in undergraduate courses vis-à-vis postgraduate courses as employment opportunities (rate of returns/future earnings) are commensurate with the financial costs on account of lower competition in those segments."
The impact of education loan default may fall, sooner or later, on the education industry. Weak job market conditions have become the bane of job-seekers after completing their higher education. Fortunately, the education loan repayment period has been extended from five to 15 years. The possibility of borrowers undergoing periods of unemployment between employment because of weak market conditions has been factored in. The borrowers may not find employment with enough salary to pay the entire EMI amount initially. Therefore, they have been provided with the opportunity to start repayment in smaller amounts. The revised regulations are trying to ease the pressure on both the lenders and the borrowers. However, education loans are not sustainable without the support of the job market. The emergence of new technologies and new business models threaten to further shrink the job market growth. That is a big worry. The job market squeeze has pushed up education loan defaults by 30 per cent in Uttar Pradesh alone.
(The views expressed are strictly personal)