Interest rates on education loans may soon go down and students seeking such loans will not be turned away by banks for lack of collateral or a guarantor. The finance ministry will set up a Credit Guarantee Fund by December to allow banks to extend advances of about Rs 10,000 crore on loans up to Rs 7.5 lakh. Private sector banks will also be part of the scheme which aims to bring down the risk for banks.
A Cabinet note is being prepared for setting up the fund on the lines of funds set up for the housing sector and Small & Medium Enterprises (SMEs). The government is looking at appointing a technical body above all the three funds to ensure that their processes are streamlined.
“It is an irony that car loans and housing loans today are cheaper than education loans. Many banks are reluctant to give education loans as there is no collateral for loans below Rs 7.5 lakh. For this reason interest rates on education loans are high. When the guarantee is provided, banks should be willing to lower the interest rates by about 50-100 basis points initially,” said a finance ministry official.
All banks will have to contribute one per cent of the sanctioned loan amount to the fund every year. For example, if the loan is extended to a student at 12 per cent, another one per cent will be charged as fee towards the guarantee fund. This may neutralise the gains from reduction in interest rates initially, but the finance ministry is confident that going forward education loans would become cheaper.
The finance ministry will put Rs 500 crore in the fund initially. Banks will be able to extend loans up to 20 times of the fund size, which means Rs 10,000 crore. As on March 31, 2012, banks have outstanding education loans to the tune of Rs 49,069 crore.
The government will guarantee only 75 per cent of the loan amount, which means in case of a default the bank will have to take a hit on 25 per cent of the loan. This has been done to ensure banks give the loans after proper assessment.
At present, no guarantor or collateral is required for loans up to Rs 4 lakh. Banks approve such loans after doing due diligence at their level. For loans up to Rs 7.5 lakh banks insist on a guarantor though collateral is still not required. Many banks, especially in the private sector, don’t give education loans easily fearing if the loan turns bad they cannot recover it in the absence of a security.
To ensure better flow of credit to deserving students, the fund was announced by the government in the last Budget. It was first recommended last year by an Indian Banks' Association expert committee. Even some of the existing loans may be allowed to shift to the guarantee fund, the official said.
Gross non-performing assets of banks for education loans had risen to six per cent last year. Sometimes banks find it difficult to recover advances when the student goes abroad after completion of the course. Now in case of default, the bank can get the claim from the credit guarantee fund.