Education loans give the wings to youth and help them in access to higher and specialized Education. There is no doubt that the education Loan is facilitator of improvement of skill set, however, these very loans have seen an increasing trend in the default rate over past few years.

As per IBA (Indian Banking Association) with over 9% of default rate the public sector banks own about 95% of the education loans portfolio in the country. The report from IBA also confirms the following:

• Education loans disbursed in 2017 – 2018 for nursing courses amount to ₹2,263.74 crore. While these stand at ₹3,048.79 crore for engineering courses, an amount of ₹1,366.30 crore was disbursed for MBA courses
• The NPAs stand at 21.28%, 9.76% and 5.59% respectively for loans given for nursing, engineering and MBA studies

This is indeed a scary situation. Let us look at some of the prominent reasons why such a large default is being experienced on the portfolio that logically should be performing well because it promotes employability.

Ineffective education

The purpose of higher education is to churn out employable students. It is rather unfortunate that despite attaining higher degrees, a large number of students are unable to seek desired employment. A large number of colleges while are AIECT approved and publish this quite aggressively, the fact is that the said body only accredits the universities on meeting the basic infrastructure norms and has nothing to do with the courses being offered. This gap leaves the students with ineffective course material with gaps even in delivery methodology. Obsolete course material and teaching standards leave the students without gaining the required abilities to fast changing job demands.

Low salaries and high interest rates

The fact also remains that the engineers, management graduates that pass out from institutes that are unable to provide effective education, leaves them with little option but to accept any job that comes their way. In a lot of cases these jobs are picked up in sectors other than the ones that they aspired to work in. Even the ones who are fortunate to get employed in desired sector, do not get enough salaries to sustain their living and loan obligations together. On the other hand the education loan attracts fairly high interest rate and this escalates the cost of funds and in turn adds to repayment woes.

Loan evaluation process

While the lending institutions boast of an extensive evaluation process but the fact remains that even they need to have a more robust underwriting method. Majority of loans average below 5 lakh and hence do not require any collateral. In the absence of security the default rate is bound to be higher. Even the courses that the loan is extended for does not help in generating the employment and a larger population goes without a job after completion of the education that further fuels the NPA. The banks would need to take into account the employability factor on each and every advance extended to the student irrespective of the amount.

Casual approach towards repayment

The casual approach towards repayment of the obligations, on account of unawareness and other socio economic factors also contribute towards non payment of the instalments. The banks would also need to guide the loan seekers on importance of timely repayment. They must be made to understand that default would lead to their names reflecting in the loan defaulter list which in turn would impact their ability to raise funds in future for any purpose.

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