The pandemic led to an increase in demand for education loans, reaching a record high in 2020, despite most educational institutions switching to online classes . This period saw over 3 lakh new borrowers between March and October 2020 . Financial institutions, however, became cautious due to the rising NPAs, which were high at around 8% industry-wide, compelling them to adopt more prudent lending practices . Banks and NBFCs continued disbursing loans, albeit cautiously, under tighter eligibility criteria to mitigate future risks associated with NPAs .

Lenders face multiple challenges due to the increase in NPAs within the student loan sector. The rising NPAs, which grew from 7.3% in 2016 to 8.97% in 2018, increase financial risk for lenders, compelling them to tighten lending criteria, which can reduce the number of eligible applicants . This trend affects profitability as lenders need to allocate more resources for managing bad debts, and they might increase interest rates to offset potential losses, impacting the affordability of education loans for students . Increased NPAs also strain lender's portfolios, necessitating more stringent loan recovery mechanisms, which can tarnish the lender's image if not handled delicately .

NPAs in the education loan segment have consistently increased over the years. From Rs 2,615 crore in March 2013, NPAs rose to Rs 6,336 crore by December 2016 . The percentage of NPAs grew from 7.3% in March 2016 to 8.97% in March 2018, with further increments observed into the June 2021 quarter, where NPAs in Indian Bank increased about 17.2% . This increase in NPAs indicates lenders are facing higher risks in education lending, compelling them to reassess strategies and potentially increase interest rates or tighten creditworthiness assessments, thereby making it costlier or harder for students to secure loans .

NBFCs have evolved by targeting niche markets within the education loan sector, such as loans for postgraduate courses abroad, as done by HDFC Credila . This specialization allows NBFCs to cater to specific needs, offering more customized services compared to traditional banks . They often provide faster processing and flexible terms, which appeal to students . Additionally, their ability to focus on specific demographic segments and adapt quickly to changing market conditions gives them a competitive edge over larger, less flexible banking institutions .

Indian Bank's portfolio concerning NPAs in the education loan segment shows a worrying trend, with NPAs increasing about 17.2% from ₹1,021.1 crore in September 2020 to ₹1,197.51 crore as of June 2021 . This indicates an increasing burden of bad loans in their books, reflecting broader challenges faced by Indian lenders in managing student loans. This increase can impact the bank's financial health and might necessitate stringent measures for loan recovery or risk management .

The Credit Guarantee Fund Scheme for Education Loans (CGFSEL) provides a 75% guarantee for loans up to Rs 7.5 lakh, significantly reducing the credit risk for lenders and encouraging them to provide loans to students . This scheme supports students who might otherwise struggle to secure loans due to lack of collateral. However, its limitation lies in the cap of Rs 7.5 lakh, which may not fully cover the costs for higher education, especially for international studies, necessitating students to seek additional funding . Additionally, the reliance on this scheme could lead lenders to become complacent about credit assessments, potentially increasing defaults .

In 2018, public sector banks dominated the Indian education loan market with a market share of nearly 83%, reflecting their significant role in providing financial support for educational pursuits . This large market share indicates the trust and reliance public sector banks have built over time with consumers in the education finance sector, making them a crucial component of educational financing in India .

NBFCs have increasingly played a role in the education loan sector, focusing on specific segments such as postgraduate courses abroad, as seen with providers like HDFC Credila . Their total income jumped from Rs 488 crore to Rs 664 crore from 2018-19, with net profits also increasing, showcasing their profitability despite economic downturns . This signifies a trend of NBFCs capitalizing on niche markets within education finance, suggesting flexibility and targeted approaches that differentiate them from traditional banks. Additionally, they have seen growth in loan sizes and scope, accommodating the rise in education costs .

The fluctuation in student loan disbursements for Indian students studying abroad from 2019 to 2022 can be attributed to several factors. In 2019, there was a high number of applications, with 69,183 students applying for loans . The pandemic in 2020 caused a slight increase in loan disbursements compared to the previous year, despite a global downturn, indicating a sustained interest in studying abroad. However, in 2021, there was a significant decrease in applications (56,930 students), which can be linked to uncertainties and restrictions due to COVID-19 . By 2022, there was a marked rise in the number of students taking out loans from specific providers like UniCreds, with an increase of about 400% compared to 2021, reflecting a recovery in the demand for international education .

The 69,183 student applications for study abroad loans in 2019 indicate a strong demand and aspirational trend among Indian students seeking education opportunities overseas . This high number contrasts with the following year's data, where there was an increase in overall loan disbursements but specific applications for studying abroad dropped to 56,930 in 2021. This decrease can primarily be attributed to the impact of the COVID-19 pandemic, which resulted in travel restrictions and uncertainty, affecting students' decisions to pursue studies abroad .