Government sets up two funds to underwrite education loans

The government has finally set up a pair of credit guarantee funds that will underwrite up to 75% of the value of loans extended to students—a move it expects will make banks shed their reluctance to offer educational loans. The education credit guarantee fund has a corpus of Rs. 35 billion and the skill education credit guarantee fund has been endowed with Rs. 10 billion, three government officials said on condition of anonymity. They will start offering guarantees for student loans starting in January 2014.

There is also a stipulation that the interest rate charged by banks for education loan cannot be more than 2% over the existing base rate of the bank. A plan to set up such funds was announced by then Finance Minister Pranab Mukherjee in his 2012-13 budget speech to improve the comfort level of banks in extending student loans that are perceived as risky and potentially contributing to non-performing assets (NPAs).

The Department of Financial Services of the Ministry of Finance and the Ministry of Human Resource Development (MHRD) have been discussing the proposal for almost two years. “With a guarantee in place, banks will now be more forthcoming to lend to students. The initial corpus will be Rs. 35 billion,” said a government official, one of the three cited above.

The size of the twin funds has been pared from an originally planned Rs. 50 billion. The MHRD will soon set up a panel to chalk out details of implementing the plan, the official said. For underwriting a loan, the credit guarantee fund can charge the banks a fee up to a maximum of 1% of the loan amount, said a second government official. While all higher education loans of up to Rs. 750,000 will be eligible for the guarantee, skill education loans up to Rs. 150,000 will be underwritten.

“The Cabinet approved both the funds two weeks back but it has not been announced yet, as it was election time,” said the first official, referring to just concluded elections in five states. “We have been getting several complaints from needy students about banks’ lukewarm response towards education loans but we believe from now on this will change.”

Although education loans have grown significantly over the years, slowing economic growth and a poor jobs scenario since 2008-09 have fuelled concerns among bankers about the repayment capability of fresh graduates. Over 5% of student loans outstanding had turned bad by March-end, up from 2% in 2008, according to government data.

“Any student taking a loan for higher studies does not plan to default by choice. It’s the circumstance or job scenario that forces some to delay the repayment, but banks always hesitate to lend to students,” said Ashok Sarangi, a student in Delhi preparing for an MBA course. “I don’t know much about the credit guarantee fund but what many students like me wish is cooperation from banks. The cost of education has gone up and loan has become almost a necessity for many,” he said.

Educational loans grew by 8.5% in the last one year, half the pace at which the overall priority sector loans grew. The priority sector comprises of several segments including education, housing, agriculture, and micro and small scale industries. As of March 2013, banks had 2.51 million education loan accounts, with a total outstanding of Rs. 535.20 billion.

The funds will be set up under a national credit-guarantee trustee company, an umbrella vehicle that will be responsible for the operations of both. However, both funds will have their own managing committees to decide on their policies. While the managing committee for education loans will be headed by the MHRD with representatives from the ministry of finance, banks and a sector expert, the committee at the skill development fund will be headed by the Ministry of Finance with representatives from the Ministry of Labour, the second official said.

Of the Rs. 35 billion approved for the educational loans guaranteed fund, the government will spend Rs. 5 billion in the remaining months of this fiscal and the remaining Rs. 30 billion will be progressively used over next few years. Similarly, the skill education fund will use Rs. 5 billion in this fiscal year and the rest in the next.

Source: Mint, December 11, 2013