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Business News/ Education / News/  Govt sets up fund to prevent student loan defaults
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Govt sets up fund to prevent student loan defaults

The fund will provide credit guarantee for a maximum loan amount of Rs7.5 lakh, all loans to be linked to Aadhaar

As per the new initiative, banks won’t be able to charge more than 2% of their base rate for education loans; else they won’t be eligible for credit guarantee. Photo: MintPremium
As per the new initiative, banks won’t be able to charge more than 2% of their base rate for education loans; else they won’t be eligible for credit guarantee. Photo: Mint

New Delhi: After over two years of deliberations, the government has set up a higher education credit guarantee fund that will guard against default of education loans, giving bankers confidence to lend to students.

The Credit Guarantee Fund For Education Loans will provide credit guarantee for a maximum loan amount of 750,000 without any collateral or third-party guarantee, according to two government officials, who spoke on condition of anonymity, and official documents reviewed by Mint.

As a guard against possible default, all education loans will be linked to Aadhaar number of the borrower and will be tracked by a credit information bureau like Credit Information Bureau Ltd (CIBIL).

“The lending institution shall ensure linkage of every education loan with the Aadhaar number and register borrower’s/co-borrower’s name with an appropriate credit information bureau," the official documents stated.

A borrower seeking a loan up to 450,000 will not be required to give any margin money.

For loan amount more than 450,000 and up to 750,000, the margin money will be 10%. For all loans for overseas study, the margin money will be 15%.

As per the new initiative, banks won’t be able to charge more than 2% of their base rate for education loans; else they won’t be eligible for credit guarantee, according to documents.

The human resource development ministry is yet to announce the fund.

The fund will guarantee 75% of the total study loan. Every April, the lender will have to deposit 0.5% of the outstanding loan amount with the fund. If a bank defaults on the contribution, then its education loans will not be covered under the credit guarantee.

“For availing coverage, the member lending institution shall pay an annual guarantee fee (AGF) of 0.5% of the outstanding amount as on date of application of guarantee cover upfront to the fund, and within 30 days from the date of credit guarantee demand advice note... All subsequent AGFs will be calculated on the basis of the outstanding loan amount at the beginning of the financial year," the documents stated.

However, the fund will be free to change the AGF for different educational loans, depending on the risk rating or profile.

The fund, with an initial corpus of 500 crore, will operate via the HRD ministry. It will be governed by the National Credit Guarantee Trustee Co. Ltd set up by the central government in March 2014, one of the government officials said.

In case an education borrower defaults, the concerned bank needs to inform the fund. Within 30 days of the intimation, the fund shall give 75% of the sum guaranteed; after which the bank will take necessary legal action against the borrower. After the legal proceedings, the credit guarantee fund will pay the balance 25% of the default amount.

The second government official cited above said that successive governments have wanted to provide relief to banks and students while dealing with study loans. As per data available up to February, the total outstanding education loans stand at 59,256 crore, as compared with 57,129 crore a year ago, according to data with Reserve Bank of India (RBI).

The fund will give a cushion to banks to lend, said K. Srinivasan, convenor of Educational Loan Task Force, a Chennai-based organization working in the field of education loans.

“The ultimate benefit will now go to students as, at present, less than 10% of those pursuing higher education have availed of education loans due to poor awareness as well as hesitation of banks," said Srinivasan.

“Finally, it has been established and now it will be up to the authorities as well as banks to create awareness to make education loans a popular product," he added.

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Published: 19 Nov 2015, 01:18 AM IST
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