Diplomatic tensions between India and Canada have stirred concerns regarding potential ramifications on Non-Banking Financial Companies (NBFCs) that have been at the forefront of financing Indian students’ education in Canada. Indian students have been a driving force behind the growth of education loans, contributing significantly to specialised NBFCs that cater to their needs. However, recent diplomatic actions, including the suspension of visa services for Canadian nationals by India, have raised questions about the future of this flourishing sector.
As of December 31, 2022, Indian students comprised a substantial 39.5% of Canada’s international student population, marking them as a crucial factor in the surge of education loans in specialised NBFCs. Over the period from March 31, 2021, to June 30, 2023, these institutions witnessed an impressive compounded annual growth rate of 77.5%, leading to a surge in assets under management (AUM) from Rs. 1,426 crore to Rs. 5,183 crore, constituting 19.8% of their total AUM.
The key concern for NBFCs specialising in education loans is the potential impact on the asset quality of the loans they have extended to Indian students pursuing education in Canada. While the asset quality has remained sound as of June 30, 2023, with a Days Past Due (DPD) exceeding 90 days standing at less than 0.10% for retail education loans, a significant portion of outstanding loans lacks seasoning due to the rapid expansion of the loan book witnessed post-FY21, according to CareEdge Ratings.
“In the short term, there may be some impact on the incremental volume of applications to Canada due to the ongoing tensions in the bilateral relations between India and Canada. However, given that Indian students represent 40% of international students in Canadian universities and significantly
contribute to their tuition fees, it is expected that these issues will be resolved. Given that the Indian students have alternative destinations for their education, the AUM growth of education loan NBFCs is unlikely to be significantly affected,” it said.
In the near term, the asset quality of the Canada portfolio will largely hinge on any government actions taken against Indian students that could lead to employment challenges. Considering that Indian students studying in Canada contribute nearly CAD10 billion annually and with this figure expected to increase over the long term, it does not anticipate any adverse actions by the Canadian government and does not foresee any significant impact on asset quality.
Immediate concerns
The immediate concern in the education loan sector revolves around the short-term uncertainties arising from the diplomatic tensions. However, the long-term outlook remains relatively positive. Indian students are significant contributors to the Canadian economy, covering tuition fees, living expenses, and filling labour shortages in critical sectors. In 2022, they contributed CAD 10.2 billion to the Canadian economy and filled over 170,000 jobs.
Moreover, the diversified choices available to Indian students for their education, should the tensions persist, reduce the likelihood of NBFCs specializing in education loans experiencing a significant and lasting negative impact on their portfolios. The students have alternative destinations for their education, which mitigates the risk associated with dependency on a single country, it said.
The education loan sector has maintained its robust nature despite the ongoing diplomatic tensions. Specialised NBFCs in this domain have cultivated domain expertise and efficient loan processing systems. They factor in various parameters, including the country of study and employment prospects. A notable portion of their financing is directed toward postgraduate courses known for their high employment opportunities.
