Indian banks, reeling under a mammoth pile of bad loans, are turning down students seeking loans.

Between 2015 and 2017, growth in education loans slipped from 17% to 2%, according to Care Ratings.

“The education loan portfolio growth has been low despite opportunities in the education segment. One major factor could be higher delinquencies experienced by banks,” the research and rating agency said in the March 29 report.

Data: CARE Ratings
Data: CARE Ratings

Still, the bad apples are piling up. Non-performing assets in education loans increased from 5.7% to 7.7% between 2015 and 2017. In value terms, soured education loans amounted to Rs 5,192 crore ($798.5 million) in March 2017.

In total, students across India had borrowed around Rs 72,336 crore as of December 2016, according to data from the Reserve Bank of India, out of which 95% is owed to public sector banks. “The delinquencies are likely to be higher in undergraduate courses vis-à-vis post-graduate courses as employment opportunities are commensurate with the financial costs on account of lower competition in those segments,” the report said. Most state-run banks fund undergraduate courses.

Most educational loans are of less than Rs 4 lakh, for which no collateral or third-party guarantee is needed – a key reason for the non-performing assets in the segment. Unpaid dues are higher when the loan is being repaid by students and not jointly by the parents, said the report.

Geographically, southern India accounts for about 56% of the outstanding loans and non-performing assets. Kerala and Tamil Nadu showed the highest level of gross non-performing assets – over 10% – compared to the national average of 7.67%.

Others chip in

As banks shun students, non-banking financial companies are wooing them.

“The overall portfolio of NBFCs [non-banking financial companies] in this segment was around Rs 5,000 crore as on March 31, 2017. They have grown their portfolio at a good pace in the segment along with maintaining a healthy asset quality,” Care Ratings noted.

The non-banking financial companies seem to have learnt from banks’ mistakes. They focus more on post-graduate courses – engineering, management, and master of science – which account for about 80% of their portfolio. These non-bank organisations mostly cater to metros and not the hinterland, keeping bad loans in check. The non-banking financial companies also focus on higher-value loans where collateral is required.

All this significantly reduces defaults in a sector where there’s lots of headroom for growth.

“The penetration in education loan market is only 20% compared with the higher education expenditure,” the report added. “Hence, there is still a large untapped segment which can lead to significant growth for lenders and creation of sustainable model for the players in this segment.”

This article first appeared on Quartz.