The Union Government's proposal of setting up of a credit-guarantee fund will help boost banks' confidence and enhance credit flow to the education sector.
Creation of a credit-guarantee fund was one of the many recommendations of the expert committee on education loan constituted by the Indian Banks' Association last year.
The committee was set up under the chairmanship of Mr T.M. Bhasin, Chairman and Managing Director, Indian Bank, to modify the education-loan scheme launched in 2001-02.
The rise in non-performing assets in education loans, particularly in the sub-Rs 4-lakh category where no collateral is required, necessitated the need for a relook into the scheme.
Extension of the tenure of repayment and moratorium period were some of the other recommendations of the committee. The draft proposals were recently submitted to the Government.
The fund for education loans will be similar to that created for the micro- and small enterprises by the Government and Small Industries Development Bank of India, senior bank officials said.
Though the exact details on the fund are yet to be announced, the committee has recommended guarantee coverage of 90 per cent for loans up to Rs 4 lakh, and 80 per cent for loans between Rs 4 lakh and Rs 7.5 lakh, Mr Bhasin said.
A portion of the funds in the corpus will come from the Government and another from banks. A certain portion of the premium on loans could also be set aside in the corpus, he said.
The last resort only
In case of default, banks will initially try to recover the loan. However, if they fail, then they could lodge a claim against the guarantee provided.
According to Mr V.P. Iswardas, chief executive, Catholic Syrian Bank, the whereabouts of the student is sometimes not known once he completes his programme for which he had availed the loan. “The proposed fund will address the cases of educational loan defaults,” he said.
Mr K.R. Kamath, Chairman And Managing Director, Punjab National Bank, said that the fund should be like a last resort and should not lead to dilution in lending norms.