The government’s efforts to boost education loans in 2004-05 via several schemes may have been a laudable act back then, but it seems to have come with unforeseen and unintended consequences. Education loans, which grew at a CAGR of 35% in FY04-12, have been behind a sharp rise in PSU bank NPAs over the last few years. According to Espirito Santo Securities, the gross non-performing assets (NPAs) for the education loan segment for PSU banks grew to 6% in 2012 from 2% in 2008, with the State Bank of Travancore and Indian Bank being exposed most to the risk—education loans account for 4.1% and 3.6%, respectively, of their total loans. What has increasingly been happening is that, following the financial crisis, students with education loans have been finding it very hard to repay them as companies are hiring much less, and are paying much less when they are. This trend has been exacerbated in South India especially due to a burgeoning of educational institutes that target the education loan market. These institutes reportedly run without adequate infrastructure and without placement records. This lack of quality education results in graduates unable to secure a job that is remunerative enough to repay the loans. Some PSU banks operating in Tamil Nadu and Kerala recorded NPA percentages as high as 15%.
While the Espirito Santo report acknowledges the government’s efforts to try to limit this risk—in the 2012 Budget, the government announced the creation of the education loan credit guarantee fund, and the Kerala government announced an interest subvention scheme to compensate banks for students below the poverty line—there is something to be said for adopting technology to deal with the problem as well. As Kapil Sibal suggested when he was education minister, one way out is to make degrees/diplomas available online and link them to individuals’ Aadhar numbers, which is also tied to their bank details. An employer can then, say, enter into an agreement with the employee and the bank to ensure the repayment of the loan.