Education loans come back to haunt banks

The surge in education loans offered by state-run banks in the last decade is coming back to haunt the lenders. Some public sector banks have recorded gross non-performing assets as high as 15 per cent in their education loan portfolios, in states like Kerala and Tamil Nadu.

"Having grown at a 35 per cent compound annual growth rate during 2003-04 to 2011-12, education loans are now causing asset quality troubles for public sector banks," Saikiran Pulavarthi, analyst with Espirito Santo Securities, wrote in his note to clients.

During this period, the sector's loan growth is estimated around 23 per cent.

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Education loans are typically unsecured. Besides, as starting salaries of students are generally low, the problem is compounded for banks as they face cash flow mismatches.

The gross non-performing asset ratio for the education loan segment increased to six per cent in 2011-2012 from two per cent in 2007-08. Banks started offering education loan aggressively in 2004-05, when the then finance minister, P Chidambaram, announced several incentives in his Budget speech to promote study loans.

Four southern states - Tamil Nadu, Kerala, Andhra Pradesh, and Karnataka - had close to 56 per cent of the total education loan dues at the end of March 2012.

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Most of the south India-based public sector banks have a higher share of education loans in their total credit portfolio. Education loans accounted for 2.55 per cent of the total credit in the four southern states, compared to the India average of 1.17 per cent in 2011-12.

"Over the last few months, there have been several instances where bankers have expressed concerns on the asset quality of education loan portfolios. Also, according to the Reserve Bank of India, there has been a sharp increase in the number of consumer grievances regarding denial of education loans in the recent months.

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"The RBI, along with the central and state governments, is working to address both consumers' and bankers' concerns regarding education loans," Pulavarthi noted.

The Centre and state governments have taken steps like interest rate subvention and credit guarantee schemes to ensure better flow of credit to students.

"In our opinion, South-based banks - Indian Bank, Indian Overseas Bank, State Bank of Travancore, Andhra Bank, Canara Bank and State Bank of Mysore - will be the biggest beneficiaries owing to the remedial measures initiated by the government," the analyst said.