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With education costs spiralling upwards due to rising tuition fees and living expenses, especially for students pursuing higher education abroad, the demand for education loans has been on the rise in the recent past. Estimated to be a $130billion market with an annual inflation rate of 12%, only about 2% of India’s education financing market is being met by private and public sector commercial banks, largely due to the high default rate (~10%) within this loan segment. Facing loan rejection due to weak credit histories or the sheer lack of adequate collateral, students are increasingly opting for education loans offered by Fintech lending service providers (LSPs) and non-banking financial companies (NBFCs), a trend that has been gaining further ground in 2024. As a result, the Indian education financing space is transforming rapidly as these firms leverage advanced technologies to improve credit access for aspiring students, even as the Reserve Bank of India (RBI) implements measures to strengthen governance and consumer protection standards.

Enhanced consumer protection and transparency levels with RBI’s self-regulation push

Towards this end, the RBI introduced its ‘Framework for Self-Regulatory Organisations in the FinTech Sector’ in May 2024, building upon the first loss default guarantee (FLDG) guidelines issued in June 2023 to ensure LSPs collaborate with regulated entities (REs), such as banks and NBFCs, to build high-quality loan books. This framework details both functions and governance standards that need to be met by FinTech firms, while also empowering them to oversee functions associated with partnering lenders to improve transparency and enhance consumer protection. It has also established a more structured and collaborative lending approach that is benefitting students who are now able to avail credit at much more favourable yields than before. Moreover, with the RBI fortifying the ‘Know Your Customer’ (KYC) process by clarifying how customer information needs to be collected, processed and stored; data security standards have been significantly enhanced. Similarly, the increasing use of the Central KYC (CKYC) Registry is facilitating inter-usability of KYC records across the Fintech sector, in turn reducing the burden of producing and verifying KYC documents and making it easier for LSPs to forge new customer relationships.

Strengthening Co-lending ecosystem has boosted priority sector lending

Following the RBI’s November 2023 move to increase risk weights on unsecured retail loans, LSPs have been exploring alternate avenues to raise capital for funding student loans. Matured players are transitioning away from functioning merely as Digital Lending Apps (DLAs) and are incorporating wholly-owned NBFC subsidiaries to expand their reach and range of loan offerings. This has afforded them the freedom to fine-tune the co-lending model and pursue increasing technological integration to create co-lending stacks that can effectively mitigate risk perceptions that may exist amongst larger REs today. Since education loans are part of Priority Sector Lending (PSL), this approach should help LSPs in partnering with larger banks and increase the breadth of education loan products on offer for students looking to pursue higher education in India and abroad.

NBFC education loans to top 60,000 crore in FY24-25; LSPs to support rapid expansion  

Education loan assets under management (AUM) of NBFCs are expected to cross the ?60,000 crore mark in the current fiscal. Consequently, the education loan segment will continue to be among the fastest-growing segments for NBFCs, with Fintech-powered LSPs playing a pivotal role in expanding credit access for students across the country. Additionally, the domestic higher education loan segment should also witness rapid expansion in the new year, thereby supporting students who are looking to pursue higher studies in Tier II & III colleges. The proliferation of tech-enabled centralised underwriting processes should make education loans accessible to previously underserved student categories; in turn improving gender diversity and supporting underrepresented groups in realising their academic aspirations.

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