M A I N   N E W S

Soon, Rs 7.5 lakh education loan for poor students
Third party guarantee won’t be required as government finalises credit fund
Aditi Tandon/TNS

New Delhi, January 29
Lakhs of students who fail to access higher education for want of money will soon have an insurer to fall back on. The government has finalised the first-ever credit guarantee fund to pool the risk of banks, currently hesitant to extend educational loans to students fearing non-recovery of the loan amount.

The percentage of non-performing assets of banks is the highest in the education sector, a fact that is discouraging banks from lending to students. That explains why barely 7 per cent of the nearly 1.5 crore students enrolled in higher education courses currently avail educational loans from banks.

The Ministry of Finance has finalised the modalities of the Credit Guarantee Fund Trust (CGFT) for Higher and Vocational Education to be set up with a corpus of Rs 2,500 crore. Cabinet clearance for the trust is expected soon.

The trust will ensure better flow of credit to deserving students and will guarantee education loans sanctioned under the Model Educational Loan Scheme developed by the Indian Banks Association. The scheme has been in operation since 2001, but has not picked up due to banks’ reluctance to lend.

But soon this cause of reluctance will stand addressed. The high point of the credit guarantee trust initiative is that students (with annual family income below Rs 4.5 lakh) will be able to avail education loans up to Rs 7.5 lakh without giving any collateral security or third party guarantee.

The credit guarantee trust will cover the said loan extended by the bank to the extent of 75 per cent of the amount defaulted by the student. Banks can also approach the credit guarantee trust to cover education loans above Rs 7.5 lakh without taking any collateral security or third party guarantee in special cases involving deserving students. All the bank needs to do to avail of the credit guarantee is pay a nominal guarantee fee of 1 per cent per annum of the loan amount sanctioned by it.

“The trust will act as the risk pooling and risk minimising body for banks so that they don’t have to worry about generating NPAs through loan non-recovery. By paying a nominal annual fee, banks can become eligible for credit guarantee. As much as 75 per cent of the defaulted loan amount will be returned as per the plan,” top HRD Ministry sources told The Tribune.

In case of default, the trust fund will pay 75 per cent of the guaranteed amount as the first installment to the bank concerned and the balance will be paid after the conclusion of loan recovery proceedings by the lending banking institution. Currently, under the Model Loan Scheme, loans up to Rs 4 lakh are disbursed by banks without taking collateral security (residential property etc) and third party guarantee, though the parent must sign up as a co-borrower.

However, loans above Rs 4 lakh and up to Rs 7.50 lakh are currently secured by way of third party guarantee, which is very difficult for most students to give. That discourages students from seeking loans.

Encouraging education

• The percentage of non-performing assets of banks is the highest in the education sector, a fact that discourages them from lending to students
• The credit guarantee trust will ensure better flow of credit to deserving students and will guarantee education loans
• Students with annual family income below Rs 4.5 lakh will be able to avail education loans up to Rs 7.5 lakh without third party guarantee