Be careful, students! Education loan default means losing access to credit

If you are a student planning to fund your higher education through an education loan, be warned. Many who have taken this path before you have defaulted. Non-performing assets (NPAs) within the education loan segment have been rising. According to data from the Indian Banks Association (IBA), NPAs in this segment rose from 7.3 per cent in March 2016 to 7.67 per cent in March 2017, and further to 8.97 per cent in March 2018. Clearly, repaying an education loan is proving to be more difficult than many students and parents imagine.

Culture of loan melas and waivers to blame: In states like Tamil Nadu, which tops the chart in terms of education loan NPAs, the political cultural has contributed to a high percentage of loans going bad. “Prior to 2014, education loan melas were held and immense pressure was put on public sector banks (PSBs) to disburse loans on a mass scale. 

Such loans were often disbursed without adequate due diligence, resulting in a high level of defaults,” says a highly placed PSB source, who spoke on condition of anonymity. He further adds: “Prior to elections, either the interest or the entire loan is often waived. This has spoiled the attitude of borrowers. If elections are round the corner, they stop paying and instead wait for a waiver.”

Banks don’t take a security or collateral up to Rs 400,000. This is the segment where the NPAs are highest. Students who have taken such low-value loans take up jobs in another city, do not inform the bank, and hence become hard to trace. Sometimes, students become untraceable because they move abroad. Loan repayment is much better in the segment above Rs 750,000, where banks demand a collateral. 

Excess supply, stagnating salaries: The demand-supply scenario in the job market is also leading to higher NPAs. “The cost of higher education is rising. At the same time, there is excess supply of fresh graduates in certain career streams.  Many graduates also have only low to moderate employability. Income levels for entry-level jobs are also stagnating,” says Gaurav Aggarwal, associate director, unsecured loans, 

Consequences of not repaying can be harsh: Not repaying the education loan is no longer an option with the advent of credit bureaus. If a student defaults, the records of all the four credit bureaus will reflect it. “The default will affect the person’s credit report and credit score. Access to any sort of credit will be denied. He will have difficulty in getting even a credit card or a personal loan, let alone bigger loans like a car or home loan,” says Manu Sehgal, business development leader, emerging markets, Equifax, a credit bureau.