It has been a tepid student placements season so far at India’s engineering colleges, and a similar lull is expected in business schools, particularly in the small cities. But for some, there’s a bigger worry: without a job straight out of college, or jobs at lower salaries than expected, students who’ve borrowed lakhs of rupees to fund their expensive education might struggle to repay.

While banks and non-banks—the ones who should be concerned—do not seem perturbed, faculty members Mint spoke with fear that the number of students defaulting on their loans could rise on the back of an estimated drop in median salaries.

“The fees (at the Indian Institutes of Management) can range from 25 lakh to a little over 30 lakh. If the hiring sentiment remains muted then the number of students defaulting on their loans will increase, and this will specially be a concern for students from the newer IIMs and the second-rung colleges,” said a faculty member at IIM-Calcutta, asking not to be identified.

Campus placements at both engineering and B-schools, irrespective of their hierarchy, have been a cause of concern. At India’s premier engineering college—Indian Institutes of Technology—the number of offers rolled out by consulting, core engineering, and trading companies has dipped compared with the previous year. 

B-schools will start their campus placements from February.

Recruiters Mint spoke with said they had over-hired earlier and did not have enough vacant profiles to justify visiting campuses in large numbers this year.

Backed by government funding, IITs can charge 8 lakh for a four-year course; fees at an IIM can range between 20 lakh and 30 lakh for a two-year course. Fees at private engineering and management institutes could be higher.

“The larger chunk of the batch will not face any challenges but it will be the tail-enders who will find it tough to get a placement of their choice,” said an IIM-Lucknow professor, speaking on condition of anonymity. “Lenders queue up to offer loans but they bank upon the top lot. When you put the entire batch together, low placements will be a concern.”

The median salary for graduating students of IIM-Lucknow’s batch of 2023 was 30 lakh.

A senior executive with a private bank said education loan default rates were in control, and that loans above 7.5 lakh are anyway backed by collateral. About 5.8% of education loans had turned sour as on 31 March, down from 6.7% as on 31 March 2022, as per Reserve Bank of India data.

“If placements are poor this time round there could be defaults, but most loans are backed by guarantees from parents,” the banker said on condition of anonymity, adding that lenders expect parents to step in if their children find it difficult to repay in time.

“Suppose there is a delay in placements, parents can make interim payments and moratoriums can also be availed. That said, economic revival is underway and the job market is expected to improve; I am not quite worried right now,” the banker said.

Sectoral experts said repayments are never a concern for students from the top institutes.

“While placements may not be as good as before, there are no general concerns on students from the top colleges being able to repay their loans,” said Sanjay Agarwal, senior director, Care Ratings. 

“Rating agencies largely cover lenders focussed on overseas education. The local education loan market is dominated by banks for whom education loan is a very small portion of their book.”

Education loans from banks stood at 1.1 trillion at the end of October, 20.6% higher than in the same period last year, RBI data show. Education loans accounted for 2.2% of aggregate retail bank loans in the same period.

One of the IIM faculty members cited above said that while banks are eager to give loans, they often come to the campuses with enquiries on a couple of defaulters from earlier batches. “The numbers on that list will increase,” the professor cautioned.

Banks use the Indian Banks’ Association Model Educational Loan scheme for deciding the eligibility criteria, quantum of loan, security and margin, rate of interest, among other things.

Under RBI regulations, education loans of up to 4 lakh do not require any collateral. The government has also launched a credit guarantee fund scheme for educational loans, under which lenders can give collateral-free loans of up to 7.5 lakh, as per information submitted in the Lok Sabha on 19 December 2022.