Public sector bankers are hoping that the government will announce a fund to guarantee education loans up to Rs 7.5 lakh in the Union Budget.

With bad loans in public sector banks' (PSBs) education loan portfolio more than doubling to Rs 1,600 crore in FY2010-11 from Rs 750 crore in FY2009-10, bankers feel the time is ripe for setting up the fund. It will provide guarantee against default in repayment of loans extended by banks.

Considering the size of their education loan portfolio (total outstanding: around Rs 40,500 crore as on March-end 2011), banks' recommendation to the government is that the fund — Credit Guarantee Scheme for Education Loans (CGSEL) — should have an initial corpus of Rs 2,500 crore.

The proposal to the government is that education loans up to Rs 4 lakh (given without any collateral security) could be guaranteed up to 90 per cent of the amount in default, subject to a maximum of Rs 3.60 lakh.

In the case of education loans above Rs 4 lakh and up to Rs 7.5 lakh (secured with or without third party guarantee), the guarantee cover will be restricted to 80 per cent of the amount in default, subject to a maximum of Rs 6 lakh.

A break-up of the education loan portfolio of PSBs shows that loans up to Rs 4 lakh account for 67 per cent of the total portfolio; loans between Rs 4 lakh and up to Rs 7.5 lakh (15 per cent); and above Rs 7.5 lakh (18 per cent).

Provide comfort

The CGSEL, which will be set up as a Trust, will provide comfort to banks in giving collateral free loans to meritorious students from poor families pursuing higher education, said Mr K. Unnikrishnan, Deputy Chief Executive, Indian Banks' Association.

A senior public sector bank official explained, “Though repayments pick up once a young graduate gets a good job, the fact that the account has become non-performing proves a disincentive for further lending to the education loan segment. Hence, the need for the guarantee fund.”

Once a bank receives the guaranteed amount from the fund, the borrower becomes a debtor to the Government of India. However, banks are expected to closely monitor the borrower account, follow-up for repayment of the loan, and share with the Government the recoveries made proportionally.

For availing themselves of the guarantee, banks have to pay a one-time guarantee fee (around 1 per cent of the sanctioned limit) upfront to CGSEL. The amount equivalent to the guarantee fee payable by a bank could be recovered from the eligible borrower.

(This article was published on March 13, 2012)
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