High Prepayment Rates and Current Moratorium Levels Impact Long-Term Asset Quality Assessment.

Rising Costs and Inflation Boost Expansion Opportunities for Education Loan Providers

The forecast for education loan Assets Under Management (AUM) for non-banking financing firms (NBFCs) is at a solid 40–45% growth rate, after strong over 80% and 70% growth rates in fiscal years 2023 and 2024, respectively. According to Crisil research, this rise is anticipated to boost AUM past Rs 60,000 crore in the current fiscal year, up from Rs 43,000 crore in FY 2023–24. The increased demand for higher education is expected to keep education loans especially those that finance studies abroad as one of the fastest-growing categories for NBFCs. Crisil Ratings states that asset quality measures should stay steady despite worries about individual countries.

As of July 2024, the outstanding balance of bank education loans was Rs 123,066 crore, as per RBI data. It is projected that the number of Indian students enrolled in international programs has doubled over the last five years, to over 13.4 lakh as of the most recent fiscal year. Just around a tenth of these students, according to Crisil, are funded by NBFCs. The total financed amount stays low even when bank education loans are included.

According to Crisil, this implies that a sizable amount of the costs associated with attending school abroad are being paid for by non-traditional means such as unofficial funding, self-funding, or other loans. According to Ajit Velonie, Senior Director at CRISIL Ratings, there is much room for expansion for education lending firms in this scenario. He emphasized that this growth opportunity is being facilitated by growing living expenses, inflation, and education prices.

According to Crisil, strong micro-market information and quick turnaround times have allowed NBFCs to carve out a distinct niche for themselves in the student loan industry. Their specific business approach enables improved employability evaluation, risk-adjusted pricing, and product customization. It is bolstered by a thorough grasp of pertinent regions, courses, universities, loan tenures, and the profiles of students and their families.

These NBFCs' portfolio performance has stayed stable because of their strict credit underwriting procedures. The education loan 90-plus days past due (dpd) rate was 0.2% as of March 31, 2024. On the other hand, the gross non-performing assets of banks in the public and private sectors were 3.9% and 2.0%, respectively. In addition, the vintage pool of 90 plus dpd for NBFCs had a peak quarterly delinquency rate that was less than 1%.

According to Crisil, 35–45% of school loans are returned during the first three-year moratorium period, which is when prepayment and foreclosure rates are highest. In addition, although the contractual term is longer, the majority of loans are paid back within 5-7 years. Crisil did, however, also note that 90% of the present portfolios are still subject to a ban owing to recent rapid expansion. Consequently, a complete evaluation of asset quality's long-term performance remains to be done.

Editor's Note:

The education loan sector, particularly for non-banking finance companies (NBFCs), is witnessing significant growth. With a projected increase of 40-45% in assets under management (AUM) this fiscal year, driven by a surge in demand for higher education, NBFCs are cementing their position in this expanding market. Despite strong performance and low delinquency rates, the long-term stability of asset quality remains to be fully seen, given the current high level of loans under moratorium. 

Skoobuzz finds that these growth opportunities are promising, fueled by rising education costs and inflation, but continued vigilance is necessary as the sector evolves.