Global credit rating agency CRISIL forecasts that non-banking financial companies (NBFC) education loans will grow 40 per cent to Rs. 35,000 crore in fiscal 2023-24. “Education loan assets under management of NBFCs are projected to grow around 35-40 per cent,” it said.
CRISIL believes that specialised business models and the increasing number of students travelling abroad have raised the demand for education loans. Over 90 per cent of the education loans are for studying abroad, with India-based courses accounting for the rest, CRISIL said. A total of 7.5 lakh students travelled abroad for studies in FY 22-23.
"While the number of Indian students travelling abroad to pursue higher studies is expected to continue to rise, growth rates may moderate due to the higher base effect and subdued global economic growth landscape and the attendant layoffs, particularly in the technology sector," CRISIL added.
An increase in the demand for educational credit can raise interest rates. When bank educational loans have floating interest rates, the rate is calculated by adding a variable index and a fixed spread. But the NBFCs are free to increase their floating rates within a rate band. The probability of hikes would be moderate because the growth rate of NBFC's educational loan pool is in line with existing growth.
In fiscal 22-23, educational loans with NBFCs have doubled to over Rs 25,000 crore from Rs 13,000 crore in the previous year. Amidst the high growth, NBFCs maintained a low level of non-performing assets (NPAs), CRISIL said.
The growth had flat-lined in fiscal 2021 as the Covid-19 pandemic stalled international travel. In fact, the number of students travelling abroad dropped to 2.6 lakh, falling over 50 per cent from the previous year. On the other hand, the number rose to 4.5 lakh and further to 7.5 lakh in successive fiscals. Last year, CRISIL reported a modest fee hike in higher education institutes in India.
NBFC Educational Loan Data
Students pursuing academic courses in the United States account for more than half of the education loan AUM of these NBFCs, followed by Canada at 20-25 per cent.
CRISIL commended the structural features NBFCs have laid out for educational loans that reduced the number of defaulters.
Says Ajit Velonie, senior director, CRISIL Ratings, “Inherent structural features of the business model include compulsory co-borrower (a parent in most cases), focus on science, technology, engineering and mathematics (STEM) courses that have a better track record of employability."
The gross NPA remained below 0.5 per cent even during the pandemic. In addition, the structured repayment terms with loans typically moving to total equated monthly instalments (EMI) towards the end of the course tenure and coinciding with job placements also helped keep the NPAs low, Velonie adds.
Also, the prepayment rate for education loans is high within 4-6 years of loan disbursement on average, which comes from the salaries of the students after they get employed. "The portfolios lack seasoning as they have been scaled up only in recent fiscals. CRISIL Ratings estimates that only 20 per cent of the education loans portfolio of NBFCs falls under the full-EMI payment mode," the CRISIL report said.
"The rest is under contractual moratorium or has lower EMI offered to students during the initial years of the loan. That means 80 per cent of the AUM is either under principal moratorium or subject to only partial interest payment. In the milieu, any prolonged downturn in employment rate and job losses as the portfolios move to a full-EMI structure and their impact on asset quality remains monitorable. In addition, the levels at which delinquencies will stabilise with higher seasoning will also bear watching," the report added.
