Education loan assets under management (AUM) of non-banking financial companies (NBFCs) is projected to grow 35-40% to ~Rs 35,000 crore this fiscal, riding on specialised business models and increase in number of students travelling abroad.

That would mark a moderation in — but still healthy — growth, compared with fiscal 2023, when AUM is estimated to have doubled¹ to over Rs 25,000 crore from ~Rs 13,000 crore in fiscal 2022.

Amidst the high growth, asset quality in the segment has remained benign so far, with low level of non-performing assets (NPAs) on account of the protective structural features underpinning these loans.

Says Krishnan Sitaraman, Senior Director and Deputy Chief Ratings Officer, CRISIL Ratings, “Speedy loan disbursal, supported by adequate risk classification of foreign universities — both institute-wise and course-wise — and structured loan repayment terms have helped these NBFCs serve the financing requirements of students travelling abroad in an optimal manner.”

To recall, growth had flatlined in fiscal 2021 as the Covid-19 pandemic stalled international travel. In fact, the number of students travelling abroad dropped to a low of 2.6 lakh in the period corresponding to fiscal 2021 (more than 50% fall over previous year). However, as the impact of the pandemic waned, the number rose to 4.5 lakh and further to 7.5 lakh in the periods corresponding to fiscals 2022 and 2023, respectively.

Over 90% of the education loans availed, are for study abroad, with India-based courses accounting for the rest. 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%.

Looking ahead, 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.

On the asset quality front, education loan delinquencies have remained low for NBFCs so far, with the built-in structural features of these loans being a key contributory factor.

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 better track record of employability, and structured repayment terms with loans typically moving to full equated monthly instalment (EMI) towards the end of the course tenure and coinciding with job placements. These have supported asset quality of education loan NBFCs so far, with the gross NPA remaining below 0.5% even during the pandemic.”

Notably, the collection efficiencies for these portfolios remained stable even during fiscal 2023 despite job losses. 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.

That said, the portfolios lack seasoning as they have been scaled up only in recent fiscals. CRISIL Ratings estimates that only ~20% of the education loans portfolio of NBFCs falls under the full-EMI payment mode. The rest is under contractual moratorium or has lower EMI offered to students during the initial years of the loan. That means ~80% 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 remain monitorables. The levels at which delinquencies will stabilise with higher seasoning will also bear watching.

¹ Education loan AUMs pertain to fiscal years while data on students travelling abroad pertain to corresponding calendar years. Fiscal 2021 trends would broadly correspond to that for calendar year 2020