Educational loan lenders State Bank of India, Bank of Maharashtra, Axis Bank have dropped interests on loans by about 0.25% over the past weeks, just in time for the new academic season, bringing rates to 2008 levels. The new rack rates for loans are between 10.8%-12.2% at public sector banks depending on tenure and loan size. Lenders charged rack rates higher than 13% last year.
Rising non-performing assets (NPAs) in the educational loan portfolio of banks are forcing banks to take a step back. For SBI the NPAs are nearly 28%, while private lender Lakshmi Vilas Bank has brought down its NPA to 22%. The credit guarantee fund created by the Union finance ministry to protect banks from the bad loan deluge is yet to see traction. "We have lowered rates to 10.3% now from 11% last year," said M Palaniappan, CFO of private lender Lakshmi Vilas Bank (LVB).
Earlier, banks pegged their educational loans to the benchmark prime lending rate (BPLR) and later moved to the base rate system. Since April 2016, however banks have started calculating auto, home, personal loans based on their marginal cost of funds-based lending rate (MCLR). With many banks now lowering their MCLR rates, educational loans have become a lot cheaper. Almost all banks have dropped MCLR rates by 0.25% to 0.75% over the past few weeks.
Top private lenders like ICICI Bank and HDFC Bank have reduced their interest rate on educational loans by nearly 200 basis points (100 basis points =1%) since June 1, to between 13%-17%; with loans being half a percent less for girl students. The rates vary by 1%-1.2% depending on whether the loans are secured or unsecured by collateral.
Axis Bank, which given student loans at 16.5% interest rates for less than Rs 4 lakh loans and 17.5% for Rs 4-7 lakh loans, currently has no plans to actively expand its educational loan portfolio. Other private lenders are also shying away from student loans fearing high delinquency ratio. While there is no mandate to provide collateral for loans less than Rs 4 lakh, banks agree to lower rates when collaterals are furnished to support the loan, sources said. The biggest defaults are in the sub Rs 4 lakh and above Rs 7 lakh category for banks, while the sweet spot is in the Rs 4 to Rs 7 lakh category.
"There are plentiful intentional defaulters, who are earning a lot of money and don`t pay back. Many of them despite being in high-earning jobs in India or abroad, expect their financially stressed parents to pay off their student loans. So we are not looking at expanding this portfolio," said an official at private lender, whose educational loan portfolio is within 2% of their overall book.
So despite lower rates on educational loans, students might not necessarily be able to avail of them. "NPAs can be steep in this segment. We`ve seen anywhere between 20%-25% losses. Students shift cities even countries. They are not in touch with us and it becomes very difficult for us to contact them as they are not at the address they took the loan at," says LVB`s CFO.
However, some public-sector banks are still keen on growth of their educational loan portfolio. At Bank of Maharashtra, the total outstanding in education loans is Rs 814 crore. "We have been consistently focused on growth in this direction. Our educational loans disbursed have increased to Rs 196.33 crore in FY16 from Rs 100.19 in FY14," says R K Gupta, executive director, Bank of Maharashtra.
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