Education loans will continue to be one of the fastest growing segments for NBFCs: Crisil

New Delhi: Education loans, primarily those for funding courses abroad, will continue to be among the fastest-growing segments for non-banking financial companies (NBFCs) due to rising demand for higher education, Crisil Ratings said.

Its assets under management (AUM) are expected to grow at a healthy pace of 40-45 per cent to cross Rs 60,000 crore this fiscal, according to the rating agency.

By definition, assets under management (AUM) are the market value of investments managed by entities.

After a robust growth of over 80 percent and 70 percent in fiscal years 2023 and 2024, respectively, NBFCs educational loan Assets under management (AUM) increased to Rs 43,000 crore as of March 31, 2024.

As far as asset quality is concerned, metrics are expected to remain stable despite country-specific concerns, an analysis by CRISIL Ratings indicates, the report added.

“The number of Indian students studying abroad is estimated to have doubled in the last five years to around 13.4 lakh in the last fiscal. Only a tenth of them are funded by these NBFCs, and even if education loans from banks are included, the amount funded is not much higher. What this indicates is that a large part of overseas education is funded through alternative means – informal financing, self-financing or perhaps other forms of borrowing,” said Ajit Velonie, Senior Director, CRISIL Ratings. “This shows that education is not a good option for the future.” loan Businesses have considerable scope for growth. Rising loan prices due to rising tuition fees, inflation and living expenses are also favourable factors. Strong micro-market intelligence and quick turnaround times have enabled NBFCs to carve out a niche in the education lending space. “Their specialised business model, backed by a strong understanding of geographies, courses, universities, tenures and relevant profiles of students and their families, enables customisation of products, allowing for better assessment of employability and risk-adjusted pricing,” he added. As noted in the report, the portfolio performance of these NBFCs has been resilient so far based on strong credit underwriting. Their 90+ days non-performing loans (dpd), for education loans, stood at 0.2 per cent as on March 31, 2024, while for private and public sector banks, gross non-performing assets were 2.0 per cent and 3.9 per cent, respectively. The maximum quarterly non-performing loans in the 90+ dpd fund for NBFCs was also less than 1 per cent.

Malvika Bhotika, Director, CRISIL Ratings, noted the trends: “Also, prepayment and foreclosure rates are high – 35-45 per cent of loans are prepaid during the initial moratorium period, which is typically three years. And most loans are repaid within five to seven years, even when the contractual tenor is longer. However, given the recent high growth, around 90 per cent of the portfolio is currently under moratorium. So, how asset quality will perform in the long term remains to be seen.”

However, these NBFCs have shown agility in addressing country-specific concerns. For instance, while the US, UK and Canada are preferred destinations, NBFCs have reduced exposure to Indian students studying in Canada to 15% as of March 31, 2024, from 21% two years ago. This has been in response to changes in the regulatory and operational environment there.

Strong capitalisation backed by investor interest has supported the credit risk profile and growth of these NBFCs. Their ability to continue growing while maintaining asset quality even as a larger portion of the portfolio comes out of moratorium amid evolving global macroeconomic environment will be under special focus, the report added.