Mumbai, 31 August, 2017: The latest TransUnion CIBIL Market Insights Report on Education Loans captures an emerging trend of sharper deterioration in small ticket loans (Below INR 4 lakh). However, the delinquency rate for education loans above the ticket size of INR 15 lakh have remained stable. These findings may have implications for lenders, some of whom largely focus on small ticket education loans.
“The aggregate credit exposure of education loans in the Indian banking system is around INR 77,000 crore, which is barely 1% of total banking system exposure, and by itself may not present a systemic risk,” said Ms. Harshala Chandorkar, COO of TransUnion CIBIL. “However, the importance of such delinquencies can be seen in two aspects: first, these delinquency trends predict the risk profile of future borrowers who will join the mainstream credit market; and second, they may also be reflective of the potential job opportunities in the Industry.”
TransUnion CIBIL Market Insights also indicate that since 2012, the number of new education loans disbursed annually have been showing flat to negative growth. Conversely, the overall amount of loans disbursed has been showing a steady positive growth. This growth is driven by a marked shift towards loans of ticket size greater than INR 15 lakh, which currently constitute over half the loan amount disbursed. Loans below INR 4 lakh, which used to be almost half of the loan disbursed prior to 2012, have dropped to less than 20% of the total loan amount disbursed in recent years. A possible inclination for this shift to the higher ticket bracket indicates an increasing cost of education over the last five years.
Looking at age trends, high ticket education loans given to borrowers above 23 years age group have a sub 1% default rate. On the other hand, loans below INR 4 lakh given to borrowers of the sub 21 years age-group showed a two to three times higher default rate than the least risky basket. “Interestingly, we observed that from the year 2012 onwards, the default rates on big ticket loans have remained steady while relative delinquency of the low ticket education loans, adjusted for amortisation and tenure, have shot up to four times the delinquency rate of big ticket loans,” said Ms. Chandorkar
As such the coincidental /snapshot delinquency rate of education loan portfolios may not reveal the full extent of the risk given the nature of the product construct. An education loan is drawn down over a period of two to four years depending on the academic course. The payment becomes due only after the borrower completes the course and when a moratorium period of six months to a year has completed. Thus loans disbursed post 2014 have very low absolute delinquency rates. To determine the true risk on these loan cohorts a comparison across time periods based on their amortisation (proportion of loan already paid) level is required.
Text Box: TUCL Market Insights – Education Loans*
• Growth- The growth rate in the number of educational loans have shown a flat to downward trend. Yet, the growth in amount disbursed is driven by an increase in average ticket size from around INR 3.5 lac (in 2012-13) to INR 6.5 lac recently.
• Ticket Size- The loan disbursement has shifted towards big ticket education loans (INR 15 lac plus) which account for close to 60% of the amount disbursed, while amount disbursed for loans below INR 4 lac have fallen to less than 20% of total loan disbursed in the last two years.
• Portfolio size: Public Sector Banks continue to hold the maximum (92%) education loan accounts with an outstanding amount of over 68 thousand crores. Private Banks have an outstanding amount of over 2.7 thousand crores. NBFCs have been gaining foothold gradually over the years, their exposure is over 4.1 thousand crores due to high ticket size of their loan accounts.
• Account Ownership: 60% of education loan accounts were single ownership accounts while 30% were held jointly. Education loans given to standalone liability tend to have almost double the delinquency rate as opposed to joint liability or guaranteed loans.
• NPA and delinquency: Overall delinquency on education loans is around 5% (NPA Rate measured by Outstanding Balance in 90+% (90 to 179) as of Snapshot Date). Default rates for education loans with ticket sizes below INR 4 lac are significantly higher than that of large ticket size loans. Comparative default rates for below INR 4 lac ticket size loans are 8.1%; INR 4-5 lac ticket size defaults are 4.8%, for INR 5-15 lac ticket sizes, the default rate is 2.1%. For large ticket size loans (loan amounts greater than 15 Lac) the long term default rate is under 1%.
• Age wise loan trends- Education loans provided to students in the age group of 17-21 years have fallen to 12% for all education loans disbursed from a high of 23% in 2010-11. Ove rthe long term, the default rate for loans given to 17 to 23 year olds is twice that of borrowers above 23 years. For the below 23 years age group, the least default rate is observed in guaranteed loan accounts vs. single ownership accounts. Similarly for the above 23 years age group least default is observed on jointly held education loan accounts vs. single ownership accounts.
This pattern of defaults raises the hypothesis on whether the market is lagging in creating new job opportunities for the emerging workforce from category II and III academic institutions. This hypotheses is further emphasized with the fact that very low delinquency rates are observed on large ticket size loans of 15 lakhs and above, usually applicable to premiere institutes of professional education. Education loans fall under priority sector lending and Public Sector Banks hold the largest share of Education Loan Portfolios.
Speaking about the need for close monitoring of Education Loans Ms. Chandorkar said, “Our findings indicate that while there is growth in amount of education loans disbursed, the quality of education loan portfolios needs to be monitored closely as over 3.5 lakhs of these 28 lakh accounts are NPAs (Non-Performing Assets) amounting to INR 7 thousand crores. However banks need to focus on sharpening their risk management capabilities while assessing small ticket education loans. Our study finds that in this segment as well a joint loan or a loan guaranteed by a credible guarantor reduces delinquency level significantly. As such steady underwriting practises will ensure profitable loan growth in this very important education loan segment.
“On the other hand, students availing this loan opportunity must understand that it is important to pay back their education loans once they complete studies. Defaults on repayments of education loans will reflect in the borrower’s CIBIL Report and may negatively impact his/her CIBIL Score. As a result, this could hamper the chances of getting a loan for many more important milestones in the future,” Ms. Chandorkar concluded.
With progressive government policies and availability of information for lending through the credit information infrastructure, India’s credit industry is well positioned to accelerate growth in lending and drive access to finance for many more deserving consumers across our country. TransUnion CIBIL is committed to provide content, insights, products and solutions to the Industry to support their business and catalyse credit penetration and financial inclusion.