State-owned Indian Overseas Bank (IOB), which is under the RBI’s prompt corrective action (PCA) list, has put its education loans worth Rs 400 crore up for sale to the Asset Reconstruction Companies (ARCs) as part of its move to clean up its balance sheet. 

IOB is one of the few banks to have education loans accounting for such a large component of their retail assets portfolio. As of June 30, 2021, education loans comprised 13.06% of the bank’s total retail loan book.

“We are out in the market to sell a part of our education loans. These are legacy loans that we have decided to get rid of. There is no new loan in the pool,” IOB chief executive officer Pratha Pratim Sinha told Indianbankingnews.com. He, however, did not reveal the quantum of education loans which the bank has put up for sale.

Education loans, particularly those which are up to Rs 4 lakh without a guarantee, have been a drag on the public sector banks.

IOB’s retail loan book stood at Rs 33,577 crore as of 30 June, which amounted to 26.02% of the bank’s total advances. While home loans constituted 53.17% of the bank’s retail advances, education loans formed the next big credit chunk. It stayed larger than the bank’s vehicle loan outstanding, which was at Rs 3,249 crore.

IOB’s student loan, ‘Vidya Jyoti’, is given to meet education expense such as tuition fees, hostel fees, cost of books, examination fees, and airfare (for studies abroad) for pursuing any graduation, post-graduation, or diploma course in an institution recognised by the state or central government university. It can also be availed for job-oriented professional and technical courses from reputed universities abroad. An individual can also take a loan to undertake a training programme to acquire skills needed to join as a pilot.

So how do education loans turn into non-performing assets (NPAs) for banks? “Sometimes students get jobs and move elsewhere and the bank is unable to keep track of them. In other cases, the loan is taken but students are unable to service them as they have not been able to find employment,” said a senior banker who works in a leading public sector bank.

IOB, which is still under the Reserve Bank of India’s PCA framework, has been consistently bringing down its NPAs. The Chennai-headquartered bank’s gross NPAs fell to 11.48% (Rs 15,952 crore) of the gross advances as of June 30,2021, as against 13.90% (Rs 18,291 crore) a year ago. Net NPAs fell to 3.15% (Rs 3,998 crore) from 5.10% (Rs 6,081 crore) during the same period.

The provision coverage ratio of the bank improved 359 basis points to 91.56% at the end of the first quarter ended June 30, 2021. During the first quarter, the bank wrote off Rs 793 crore worth of soured loans and sold Rs 23 crore of non-performing loans to ARCs.

IOB was placed under the PCA framework in 2015 as bad loans swelled and the public sector lender reported losses of Rs 2,897 crore in FY16 and Rs 3,417 crore in FY17. The bank swung into profit in Q4 of FY20 and since then it has been a turnaround story.

IOB plans to come out of PCA by focussing on recovery, low-cost deposits and less capital-consuming advances.