Daybreak - Best of 2023: Why banks are now lining up to finance your study abroad

Episode Date: December 27, 2023

For the last week of December, we are taking you back to some of the most popular Daybreak episodes of 2023. We'll be back with regular programming from January 3, 2024.For the longest time public sector banks, as we know them, have been very reluctant about study abroad loans. And it was for good reason. They’ve suffered greatly because of education loans going bad.Meanwhile, its a whole different story that was going on with non-banks. Study abroad loans accounted for about US$4 billion in the year ended March 2023. These were almost fully funded by non-banks like Credila and Avanse Financial. Their staregy was simple—sanction collateral-free as fast as possible. Over time they gained experience and most importantly, years worth of data.Guess who is using all that data and experience gathered by non-banks to offer overseas education loans now?The banks!Tune in.Daybreak is produced from the newsroom of The Ken, India’s first subscriber-only business news platform. Subscribe for more exclusive, deeply-reported, and analytical business stories.

Hi, this is Rohan Dharma Kumar. If you've heard any of the Ken's podcast, you've probably heard me. My interruptions, my analogies and my contrarian takes on most topics. And you might rightly be wondering why am I interrupting this episode too. It's for a special announcement. For the last few months, I and Sita Raman Ganeshan, my colleague and the Ken's deputy editor have been working on an ambitious new podcast. It's called Intermission.

We want to tell the Sita Ramancahans, my colleague. secret-source stories of India's greatest companies. Stories of how they were born, how they fought to survive, how they build their organizations and culture, how they manage to innovate and thrive over decades, and most importantly, how they're poised today. To do that, Sita and I have been reading books, poring over reports, going through financial statements, digging up archives, and talking to dozens of people. And if that wasn't enough, we also decided to throw in video into the mix. Yes, you heard that right. Intermission has also had to find its footing in the world of

multi-camera shoots in professional studios, laborious editing and extensive post-production. Sita and I are still reeling from the intensity of our first studio recording. Intermission launches on March 23rd. To get an alert as soon as we release our first episode, please follow Intermission on Spotify and Apple podcast or subscribe to the Ken's YouTube channel. You can find all of the links at the ken.com slash I am. With that, back to your episode. One million students from India are going to leave the country this year to study abroad. Last year, the number was around 750,000.

One of them was a friend of mine who got admission into an American college. It is no secret how expensive it is. So, she applied for a loan from a loan. a public sector bank. Since it was a big amount, she had to provide a collateral. The documentation took so long and it was so tedious that her visa application was affected. The whole affair was full of suspense right till the end. It was only days before her course actually began that everything fell into place. Thankfully, she got lucky. But no one wants to go through that kind of anxiety, right? For the longest time, public sector banks in India,

as we know them, have been very reluctant about these study abroad loans. And for good reason, banks in India have suffered greatly because of education loans going bad. So they've mostly just kind of stayed away from funding overseas studies. Meanwhile, it is a whole different story that's been going on with non-banks. Study Abroad loans accounted for about $4 billion US dollars in the year that ended in March 2023. and they were almost fully funded by non-banks like credula and advanced financial. And their MO was simple, offer collateral-free loans with quick sanctions. Over time, they gained years of experience and most importantly, data.

And now, guess who's using all that data and experience gathered by these non-banks to offer overseas education loans? Banks. Welcome to Daybreak, a business podcast from the Ken. I'm your host, Nidda Sharma, and I don't chase the news cycle. Instead, thrice a week on Mondays, Wednesdays and Fridays, I will come to you with one business story that is worth understanding and worth your time. My colleague Arundati Ramanathan, the Ken's deputy editor,

spoke to a 24-year-old student, Janvi Jen. Janvi was looking to finance her master's degree course at the University of Warwick in the UK. And she had three options. Number one, Access Bank, which is a private bank. Number two, Credela, which is a non-bank that focuses on giving out education loans. And number three, Union Bank of India, which is a public sector bank. Which one do you think she chose?

She went with Union Bank of India. But why? Because as surprising as it may sound, it was the most student-friendly option for her. It offered Janvi the most economical, collateral-free loan and it was the fastest in sanctioning it. Five days is all it took. And time is of essence for these students because of the visa process. But before we get to why banks are warming up to giving out study abroad loans now,

let me give you some context about why they were staying away from it all this while. In the quarter that ended in June 2022, the overall NPAs or non-performing assets of banks was close to 3%. and their NPAs towards education loans in the same quarter? Just short of 8%. 3% and 8%. That is quite a big difference. Which is why banks were only giving out these education loans

as a part of the mandatory priority sector lending. And that explains why these loans do not make up a big portfolio for any bank. The total amount of education loans in the year that ended in March 23 was worth nearly $12 billion. And while that does sound like a huge amount, it was less than 1% of the total loans that were given out by all lenders in the same period. This is according to the banking regulator, the Reserve Bank of India, or RBI. Now, just to give you a better sense, home loans made up 14% of the total loans that banks gave out.

Essentially, what was happening was that banks were under the impression that education loans are seasonal. Plus, banks did not really understand the market. very well. And then, fast forward to now, banks want to use the years of experience that non-banks have in funding overseas education to do it themselves. Why? Stay tuned to find out. Arundati spoke to Sasidhar's sister, who is the co-founder of a two-year-old marketplace where lenders bid to finance overseas education for students. It's called grad right. He said, and I'm quoting, the data of repayment gets created over six to seven.

This has created the much-needed feedback and trust for banks to enter. End quote. He gave us the example of how Credula established this and told everyone in the market that the NPA could be low if the lenders were innovative enough. Thanks to this now, a whole bunch of banks, both private and public, from Access Bank, ICICI Bank and IDFC Bank to Yes Bank and Union Bank, are jumping on. on the overseas education loan bandwagon. And the timing is just perfect.

Because this year, study abroad consultants, which are the ones who help students get financing from lenders, are expecting around a million students to go overseas to study, to countries like the UK, Canada, Ireland, Australia, Germany and the US. And it looks like their efforts are already bearing fruits. Aksha Chaturvedi, the founder of a study abroad startup called Leverage EDU and its financial arm called Fly Finance, told Arundati that earlier, 80% of their loans were coming from non-banks. Now, it is only 50%. Another overseas education consultancy, the Institute of

Management and Foreign Studies, or IMFS, told the Ken that about a quarter of its students now prefer banks for their education loans. So what is so attractive that these banks are offering to students. Take the case of Union Bank, for example. It is offering collateral-free loans of up to 40-lac rupees. Earlier, collateral was required for a loan for above 7.5-lac rupees. Private banks, meanwhile, are going a step further. An Access Bank manager told us that the bank has increased the limit for collateral-free loans to 75-lac-rupes this year from the earlier 50-lack rupees. This is for students who get through into the top institutes. Coming up next, what was it that these banks learned from non-banks?

Number one, of course, is offering collateral-free loans. Like Arundati says, collateral-free loans are important, and that is mainly for one reason. Time. The documentation needed to take a collateral loan can take as long as two months. Students who want to go abroad do not have that kind of time once they get through a university. They need to get their visa done and not to forget, not all students can give the kind of collateral that banks ask for for the simple reason that they or their families do not have it.

So banks have now realised the importance of giving out loans without asking for a collateral. Next thing that they learned from non-banks was how to shorten the turnaround time for approving a loan. Non-banks were usually taking only three to four days and banks were taking two to three months. months. Also, while banks looked at the existing relationship that they had with these students who wanted the loans and also the collateral, of course, non-banks were assessing students based on their academic performance, like their GPA, their GRE score and the kind of universities that they were getting into. But what about the problem of bad loans or NPAs? How did non-banks deal with that? By playing it smart. What they did was that they made it compulsory for students

to make a minimum payment of anything between $3,000 to $5,000 a month during the tenure of their course or study, or at least pay their simple interest amount every month. This is exactly the opposite of banks which were offering students a complete moratorium period until they finish their course. But as these loans become more accessible for students, it also means that there are higher chances of things going south. What if students do not find a job

that pays enough. Dear listener, there is a lot more to the story. To find out more details, I highly recommend that you read Arundati's complete report. I've linked it to the show notes of this episode. Thank you for listening to The Ken. Have a great weekend and see you on Monday. Daybreak is produced from the newsroom of the Ken,

India's first subscriber-focused business news platform. What you're listening to is just a small sample of our subscriber-only offerings, A full subscription unlocks daily long-form feature stories, newsletters, subscriber-only apps and podcast extras. Head to the ken.com and click on the red subscribe button on the top of the website. I am Snigda Sharma, your host, and today's episode was edited by my colleague Rajiv Sien.