The government is planning to reduce public sector banks worries against any default on education loans. The PSBs are often not willing to give these loans as such loans do not have enough guarantees. Therefore the government is proposed to provide cover to education loan under a new credit guarantee scheme, following this government has asked the Indian Banks’ Association (IBA) to prepare a draft proposal, informed a senior official with the finance ministry. It is expected this will make easy to take education loan.
There have been sharp increase in education loan offtake of up to Rs 32,460 crore which is mainly a unsecured loan (without any collateral), thus senior officials of PSBs have expressed their worries as such a large loan amount can impact the strength of the banks, especially in case of default as no collateral security is attached to such loans.
IBA chairman MV Nair, who is also the chairman and managing director of Union Bank, informed that body is preparing the draft of the scheme. He added, “The IBA will form a committee of experts that will formulate such schemes. We are in the initial stages”.
The government is thinking of working out a similar mechanism as of the credit guarantee scheme for micro and small enterprises (MSEs), stated a government official.
Under credit guarantee schemes, the Small Industries Development Bank of India (SIDBI) provides protection to the credit worthiness of borrower in case of default.
By charging a marginal fee, SIDBI gives guarantee up to 85% for loan up to Rs 5 lakh and 75% for Rs 5 to Rs 50 lakh. In the case of Rs 50 lakh to Rs 1 crore loans, the cover provided is at the rate of 75% for the first Rs 50 lakh and 50% for the balance amount.
The education loan scheme under which financial support is provided from the banking system to deserving meritorious students for pursuing higher education in India and abroad, was introduced in 2001.
Under this scheme banks do take any collateral or guarantee from the borrower for loan up to Rs 4 lakh, but for loan between Rs 4-7.5 lakh, banks can ask for guarantee or collateral and beyond this, banks definitely take collateral. In consultation with the government, IBA has suggested its member banks that they should not reject education loan application or pass on to the other PSU bank on flimsy grounds.
A top banker pointed out, “In February, following IBA’s directive, some banks have started giving 50% concession in interest rates on education loans to girl students for pursuing higher education in India or abroad but most banks are still reluctant”.
The banker said as the average size of the education loan is less than Rs 2 lakh, therefore it effectively means that these loans do not have enough collateral or guarantees.
As PSBs or individual banks together have major exposures in education loan therefore some protective mechanism is required.
As on March 2009 the total outstanding education loans of public sector banks amounted to Rs 27,646 crore, a 39.51% increase from Rs 19,817 crore. Banks such as Punjab National Bank and Oriental Bank of commerce were having exposures of Rs 1,901.56 crore and Rs 910 crore, respectively, by the end of September 2009.
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