Cap on collateral-free education loans may be raised

With rising cost of higher education causing anxiety to both parents and their wards, the Finance Ministry and banks are jointly weighing the possibility of raising the limit of collateral-free education loans.

A proposal to hike the limit of collateral- (or security) free education loan from ₹4 lakh to around ₹ 7 lakh under the Indian Banks’ Association’s model education loan scheme for pursuing higher education is under consideration.

Bankers clued in to the deliberations on revamping the model education loan scheme say they will agree to the proposal only if the Government operationalises the Credit Guarantee Fund Scheme for Education Loans to cover possible defaults.

The Fund was announced in the Budget for 2012-13 to encourage banks to lend to deserving students. However, it has not yet seen the light of day.

A senior public sector bank official said the Credit Guarantee Fund cover is necessary as within the education loans segment banks have experienced maximum defaults in the collateral-free education loan segment.

According to an Asian Development Bank report ‘Counting the cost: Financing Asian Higher Education for Inclusive Growth’, “…more than 50 per cent of the higher education in India is probably imparted through private institutions, mostly unaided.”

“…Many private higher education institutions charge high fees, which in effect exclude the poor, however bright or able.”

The report observed that in India, the so-called self-financing courses have mushroomed in public universities and colleges, where fees for high-demand courses (undergraduate engineering, medicine, teacher education, graduate management, and computing) at times match those of private higher education institutions.

The banker quoted above said as part of the exercise to overhaul the model education loan scheme, banks are seeking tighter norms for accreditation of education institutions and better monitoring of teducation loans.

In the first six months of the current financial year, public sector banks collectively disbursed education loans aggregating ₹3,707 crore. As at September-end 2014, these banks, numbering 27, collectively had an outstanding education loan portfolio of ₹61,963 crore.

The model education loan scheme was developed by IBA in 2001 to help meritorious students pursue higher education in technical and professional courses. The main emphasis of the scheme is that no deserving student is denied an opportunity to pursue higher education for want of financial support.

As the focus is on development of human capital, repayment of the loan is expected to come from future earnings of the student after completion of education.

Hence, assessment of the loan is based on employability and earning potential of the student upon completion of the course and not the parental income/family wealth.

When the scheme was last revised in 2012, the Association underscored that the cost of education has been going up in recent times and since the student has to bear most of the cost, there is a clear case for institutional funding in this area.

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