Edelweiss ARC to acquire education loan portfolio of Indian Overseas Bank at 60% discount

Industry:    2022-01-10

Edelweiss Asset Reconstruction Company won a distressed education loan portfolio at a 60% discount from Indian Overseas Bank (IOB) at an auction last week, said people aware of the matter. Lenders are blaming the surge in unemployment caused by Covid-19 for the rise in defaults in the education loans, one of the persons said.

Edelweiss ARC’s Rs 237.5 crore offer for the education loan portfolio of Rs 594 crore triggered a Swiss auction held on January 6 by the bank. Since no other bidder made a counteroffer, IOB declared Edelweiss ARC as a successful bidder, the people said. The portfolio had 21,125 education loans that were auctioned under the 20:80 structure. Here 20% of the consideration amount would be paid upfront and for the remaining amount, the ARC would issue security receipts that would be redeemed as and when they recover the overdue.

Bankers say their ability to recover loans from defaulting students is hampered as many have dropped out after colleges started online education in the last two years, while some of them failed to secure jobs as companies are not hiring due to uncertainties about the outlook due to Covid-19. In March 2021 IoB sold Rs 304 crore distressed education loan portfolio to Reliance ARC at a discount of 65%, a third person with knowledge said.

The education loan portfolio in March was also sold under the 20:80 structure, the same person said. IoB and Edelweiss ARC did not respond to requests for comment. Defaults in education loans have been rising in the last few years. Data compiled by all state-level bankers committees showed 9.7% of the highest share of NPA was from nursing students at 14% followed by engineering at 12%, MBA (7%) and medical (6.2%), the same data shows. Nearly 3.5 lakh students who had availed Rs 8,263 crore education loans have failed to make timely payments as of December 31, 2020.

Banks are encouraged to provide education loans as it is classified as priority sector loans that they are mandated to provide each year. Education loan portfolio as of December 31, 2020, has turned sour. This is significantly higher than 7.61% for FY 2020.

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