Education loan growth slows rupee fall may add to woes

The growth in education loan disbursals has slowed, owing to the high base effect and few students opting for foreign education, said bankers.

According to the Reserve Bank of India, the year-on-year rate of disbursals of education loans grew 17 per cent in October, against 24 per cent in October 2010.

The base effect has played out. Education loans, as products, started picking up only three-four years ago, and taking 2008 as the base, loan growth in education loans looks bloated due to a small base. The base is now growing. Hence, in percentage terms, the numbers have come down,” said R K Bansal, executive director (retail banking), IDBI Bank.

The education loan business is in direct corelation with the education sector. How the sector evolves — the potential employability and the courses being launched — has an impact on repayments and risk perception of people who lend to students. As the sector is evolving fast, it makes the domain very challenging for lenders like banks, where research done on the sector is minimal.

“There has been a reduction in the number of students going to Australia for higher education. Also, on the whole, there may be a fall in the number of people seeking loans to study overseas. However, the overall low credit growth scenario has minimal impact on education loans, as more people are seeking education,” said S Govindan, general manager (personal banking), Union Bank of India.

Bankers feel education loans started picking up only after 2008, when the Reserve Bank of India (RBI) relaxed lending norms. These included relaxing collateral clauses. Currently, loans up to Rs 4 lakh do not require any collateral, and loans up to Rs 7 lakh require a third-party guarantee.

Some bankers also said the number of students planning to go abroad for higher education may be declining, which might have led to the reduced growth rate of loan disbursals.

The uncertainty in the global economy has also led to slower growth of education loans. “I think the slow growth is mainly a function of global uncertainty, which has probably played on the minds of risk managers at banks. They may now perceive higher risks for students, as far as job potential is concerned,” said Prashant Bhonsle, country head, Credila Financial Services, an HDFC Ltd venture.

While most bankers said high interest rates may not be a very big reason for the fall in the growth rate of education loans, some said it could be one of the reasons for fewer people opting for the loans. “High interest rates may have led to people using their own savings, rather than taking education loans. With the rupee depreciating, foreign education would become more expensive, which might reduce offtake of education loans further, as people may go for higher education in India,” said M Narendra, chairman and managing director, Indian Overseas Bank.

Also, with the mushrooming of several chapters of foreign universities in India, the demand for education loans for may come down. “The percentage of education loans outstanding has come off, on the back of more foreign educational institutions coming to India. This has resulted in making things easier for people who want a foreign degree,” said Narendra.