Although recent spending on tuition and accommodation by Indian students overseas has been on the rise (up from $1.9 billion USD in 2013-2014 to $2.8 billion USD in 2017-2018), the COVID-19 pandemic is putting significant strain on students trying to study abroad. Many students are opting for in-country programmes as it becomes more difficult to travel and finance an education abroad. It will be important for higher education institutions seeking to enter and thrive in an Indian market to understand how it functions and what impact the pandemic will have. To this end, Sannam S4 has compiled the following information to provide context regarding the education loan market in India.
The Dominance of Government-Owned Banks
Public sector banks dominate the education lending market: according to the Reserve Bank of India (RBI), government-owned banks lend over 90 percent of education loans in India. As of 31 March, 2019, the education loans portfolio of commercial banks and non-banking financial companies (NBFCs) stood at nearly $9.53 billion USD (₹720 billion), of which the banks accounted for 95 percent. 
The dominance of government-owned banks stems from the lower rate of interest they charge. The private sector banks have shifted focus to higher-sized loans and prudent lending to contain the piling non-performing assets (NPA) level, as they are answerable to shareholders on profitability.
Education Loan Offering of Select Banks in India
Sannam S4’s analysis of the education loan offering of select banks and NBFCs uncovered the following:
- Interest rate depended on the value of borrowing. For the most part, government-owned banks charged lower interest than private sector banks and NBFCs.
- Except for the State Bank of India and the Bank of Maharashtra, banks processed loans within two weeks of application and correct documentation.
- Documentation is standard across all banks. In addition to the personal identification of the applicant, the documentation seeks to ascertain academic achievements, cost, and repayment (and recovery) capacity based on income and creditworthiness. The required documents are listed in the following tables.
Private Sector Banks and NBFCs
- Eligibility criteria are identical across all banks to simplify and encourage application, as seen in the following tables.
Private Sector Banks and NBFCs
While these observations are based on the general education loan portfolio, research shows the following to be the key lenders for overseas education loans:
- State Bank of India
- Bank of Baroda
- Panjab National Bank
- ICICI Bank
- Axis Bank
- HDFC Bank’s Credila
The Dynamics of Loans for Overseas Education
Loans for education overseas are high-value and secured by a sizeable collateral, usually real estate property. This encourages both the government-owned and private sector banks (including NBFCs) to lend actively within this segment. Maintaining prudence in their approval process, banks have adopted some practices to safeguard the loans from default.
A shrinking job market, restrictive stay-back option, and unfavourable immigration policies have forced many Indian overseas-educated graduates to return home in recent years. Upon their return, these graduates have to compete in an overcrowded job market. Competition compromises the graduates’ bargaining power and many agree to salaries lower than those in the study destination. This impacts their loan repaying capacity in the initial years.
Sannam S4’s employability study in 2019 confirms that more than half of returning graduates (61 percent) are not happy with their starting salary. With experience and an overseas degree to give them an advantage, 65 percent eventually land better paying and more satisfying jobs.
Mindful of this, banks use a combination of factors for decision-making during the loan approval process. This means it is more likely for an applicant with admission to a highly-ranked institution (particularly in the US, UK, or Canada) for courses in STEM, Management/Business (PG), or PG Diploma in Canada to be prioritised. The admission details, the applicant’s academic track record, and collateral value are all fed into the sophisticated AI-powered tools to enable a well-founded decision guided by machine learning and data sciences.
One such tool is GyanDhan’s proprietary Employability-Prediction tool. GyanDhan has developed an in-house proprietary AI-powered algorithm to assist banks in their loan underwriting process for overseas education. The tool predicts the likelihood of an applicant to secure a job and thus be capable to repay the loan based on the applicant’s education history and admission (overseas HEI and choice of course). The tool sources data from online sources to feed its algorithm continuously and bolster its predictive capability. The tool’s results have been tested for veracity in a live practical environment and it came through with near accurate results. Currently the tool currently covers US and Canada. Encouraged by the success and based on demand UK version is in the making. The tool is being used by two leading banks in the private sector on the Indian Banking Industry.
The Current Situation
Spending on overseas education in April 2020 was the lowest in the last four years due to immigration rules, the impact of COVID-19 (international travel bans and international university closures), and the overall financial hardship in funding education overseas. India’s outward study abroad remittances have dropped dramatically as a result of the pandemic: in a few months, India’s outward study abroad remittances have dropped by nearly 85 percent, from $510 million USD in January 2020 to $78.76 million USD in April, according to RBI reports.
In an attempt to boost the standstill economy following a lengthy COVID-19 lockdown, the RBI’s recent monetary measures have reduced the cost of borrowing. Infused with better liquidity, the government-owned banks are likely to continue with their pace of lending, however the private sector banks are more likely to adopt a conservative approval process. The risk estimation is likely to be based on more stringent mitigation factors, reducing private sector banks’ approval rate for education loans as interest rates are lowered.
The Way Forward
What does all of this mean for students and universities?
Students: Approach both public and private sector banks for loans to fulfill your overseas education aspiration. Be prepared to secure the loan with high-value collateral. Have an earning member (preferably high-income) of the immediate family (a parent or sibling) as the guarantor. Your loan application is likely to do well if you have gained admission to a well-ranked academic institution and for courses prioritised by the banks.
Universities: Engage with banks, NBFCs, and FinTech lenders to build your profile and brand by broadcasting the employability prospects of your degrees. Collaborate with lenders for pre-approved, guaranteed education loans to encourage overseas education aspirants. A survey conducted by GyanDhan found that financing hurdles hold back almost a third of students in India from considering education abroad. A university-specific loan product can be designed to ensure students with offers of admission have access to the financing they need. To this end, the university could provide partial loss coverage on a loan product engineered with the lender to mitigate the lender’s default risk. Ultimately, this will lead to a higher loan approval rate.
To know more about how COVID-19 has impacted the issuance of education loan, listen to: