Low-value Loans Fuelling NPAs in Education Sector

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    In Context

    • Recently, the data on Non-Performing Assets (NPAs) in education loans of Public Sector Banks (PSBs) was obtained through the Right to Information Act.

    The data highlights

    • Loans for premier institutes vs secondary institutes:
      • The data shows that the default rate is much lower for loans disbursed to students in premier institutes as compared to those in secondary institutes.
        • About 239 institutes like the IITs, IIMs, NITs and AIIMS are categorised as premier institutes by banks.

    • Low-value education loans:
      • Low-value education loans (up to Rs 7.5 lakh) constitute a bulk of the defaults in the education loan portfolio of bank.
    • Bank specific data:
      • According to the data, 4.7 percent of the total education loans disbursed by the State Bank of India, Canara Bank, Union Bank of India and Indian Overseas Bank have turned into NPAs. 
      • These four banks together constitute about 65 per cent of the total loan portfolio of PSBs.
      • PSBs:
        • Overall, about 8 percent of all education loans disbursed by 12 PSBs, where repayments have started, have turned into NPAs.

    • Lenders in the market:
      • PSBs are the largest lender in the education loan sector and have a market share of about 91 percent. 
      • RRBs (regional rural banks) and private banks constitute the remaining 9 percent of the market.

    More about the education loans

    • Moratorium period & repayment:
      • For education loans, students get a moratorium period of up to 12 months after they complete their studies. 
      • So, for a four-year BTech course, the repayment starts only after the completion of the fifth year if the student fails to get a job. 
      • The repayment starts early if the student starts earning.
    • Model loan scheme:
      • According to the model loan scheme, education loans of up to Rs 4 lakh don’t require any collateral to be provided by the borrower.
      • Eeducation loans of up to Rs 7.5 lakh can be obtained with collateral in the form of suitable third-party guarantee.
      • Education loans above Rs 7.5 lakh require tangible collateral. 
        • In all these cases, co-obligation of parents is necessary.
    • Vidya Lakshmi Portal (VLP):
      • The government has also launched an online portal, the Vidya Lakshmi Portal (VLP) to ensure hassle-free education loans through a single window system to students.
    • Sanction/rejection of Education Loans:
      • Normally, sanction/rejection will be communicated within 15 days of receipt of a duly completed application with supporting documents in the bank.
      • Rejection of loan application, if any, shall be done with the concurrence of the next higher authority and conveyed to the student stating the reason for rejection. 
      • Further, the sanction, as well as rejection (with reasons), should also be reported by the bank concerned on the VLP portal.

    Issues & Challenges

    • Potential Impact on students in secondary institutes:
      • Following the high rate of defaults in low-value education loans of PSBs, banks have slowed such lending, impacting students enrolled in secondary institutes across the country.
    • Low-value loans:
      • High defaults are being reported in low-value loans (up to Rs 7 lakh). 
      • Defaults in the lower band education loans are becoming a concern for banks, which may not be looking to expand their loan portfolio by providing credit to low-value loans.
      • Major cause of defaults:
        • Defaults in the low-end segment may have aggravated post-Covid. 
        • The issue of joblessness among students passing out of medium-level institutes have aggravated post-Covid, leading to such a situation.

    About Non-Performing Asset (NPA)

    • About:
      • NPAs are loans or advances made by a financial institution, on which both principal or interest is unpaid for a specified period of time. 
      • Thus, NPAs are those loans that have ceased to generate income for the bank
      • They are recorded on a bank’s balance sheet after a prolonged period of non-payment by the borrower.
      • NPAs can be classified as a substandard asset, doubtful asset, or loss asset, depending on the length of time overdue and probability of repayment.
    • Types of NPA:
      • Sub Standard:  
        • A sub-standard asset is one that is classified as an NPA for a period not exceeding twelve months.
      • Doubtful: 
        • A doubtful asset is one that has remained as an NPA for a period exceeding twelve months.
      • Loss: 
        • A loss asset is one where loss has already been identified by the bank or an external institution, but it is not yet completely written off, due to its recovery value, however little it may be.
        • Why do banks write off loans?
          • After a loan turns bad, a bank writes it off when chances of recovery are remote. 
          • It helps the bank reduce not only its NPAs but also taxes since the written off amount is allowed to be deducted from the profit before tax.
          • After write-off, banks are supposed to continue their efforts to recover the loan using various options. They have to make provisioning also. 
    • Causes for NPAs:
      • Several factors – including prevailing macroeconomic conditions, sectoral issues, global business environment, delayed recognition of stress by banks, aggressive lending during upturns, improper risk pricing and poor credit underwriting – were attributed towards NPA build-up
      • Poor management and governance issues in such banks stemming from government ownership have been cited as the major causes of the crisis.
      • Most of NPAs arose due to defaults by private sector non-financial firms.
      • A large proportion of NPAs arose because of exogenous shock.

    Source: IE