Lenders have been treading cautiously on education loan disbursal for the past few quarters and as a result, growth in education loans has slipped to single digits.

Credit to the education sector — one of the key focus areas during the previous United Progressive Alliance government — increased only by 1.9 per cent in the March-July period this year. March-July is seen as a crucial period as several students seek education loans during this month to study abroad.

Overall, between July this year and last, the growth was 8 per cent.

“There have been lots of cases where students have disappeared after taking loans or have not been able to pay back. Now that we are trying to keep a tight check on NPAs, we have to be very careful with education loans as well,” said a banker with a private sector lender.

Due to growing non-performing assets (NPAs) in education loans, banks had approached the government for  a credit guarantee fund of at least Rs 2,500 crore.

In the educational loan scheme, it is possible to borrow up to Rs 10 lakh for domestic education and Rs 20 lakh for studying in foreign colleges. Borrowers need not pay during the tenure of the course plus a year after. The repayment period is five to seven years.

In addition, for loans up to Rs 4 lakh, banks cannot ask for any collateral. This particular clause is thought by bankers to have made loans more prone to turning sour.

With the banks slowing down on education loans, several students are now going for other options such as Loan against Property (LAP) or loan against other collateral.

“Education loan is an unsecured loan and therefore, banks are cautious in disbursing it. Even people are more willing to go for a LAP or such similar secured loans as the interest rates are also comparatively lower. Therefore, going ahead, it is likely that several students who can afford this will exercise this option instead of going in for education loans,” said another banker.

In case if one is borrowing from a private sector lender, then the difference in interest rate can be up to 400 basis points. While the rate of interest for education loans for private sector lenders varies between 14-18 per cent, for LAP, it is generally up to 14-16 per cent.

Another banker explains that there have been certain legal cases regarding education loans and that is why, most banks have been choosing to stay clear of them.

Meanwhile, NBFCs have also started getting aggressive in the education loan space and as a result, due to less documentation and comparatively easy accessibility of finance, several students have been seeking loans from these lenders instead of banks.

The previous government had also been planning to set up a separate education credit guarantee fund in order to tackle the loan default. However, no progress has been made on that fund so far, said another industry official.