HRD Ministry and Indian Bank�s Association to set up a new Credit Guarantee Fund for education loan

Getting higher education is not dream for aspirants anymore as now it is very easy to get education loan to fund your studies. But, there is a draw back in this situation as faced with growing education loan default, Credit Guarantee Fund Scheme for Educational Loans has been finalised and is likely to place before the Cabinet in the upcoming weeks.

This new proposal has been designed by the ministry of finance, HRD ministry and Indian Bank’s Associations, proposed to establish a Credit Guarantee Fund with corpus of Rs 2,500 crore. As per this new proposal the fund will offer guarantee to educational loan up to Rs. 7.5 lakh. It is proposed that loans-between Rs. 4 to Rs. 7.5 lakh-will guarantee up to 75% of the amount outstanding with interest as on the date the account is declared non-performing asset. A HRD official said, “Earlier, it was proposed that loan up to Rs 4 lakh may be guaranteed up to 90% of the outstanding amount and loans up to Rs 7.5 lakh may be guaranteed up to 80%. But a uniform guarantee percentage was devised later. It is up to the Cabinet to revise the amount that can be guaranteed.”

The fund will not apply to educational loan amount above Rs. 7.5 lakh as they are given through proper collateral. A HRD official said, “The new scheme helps banks with guarantee. It will encourage them to lend more and bring down the interest rate because of guarantee.” It has been mentioned that eligibility for guarantee will be given only for those loans in which interest rate does not cross the upper limit of lending loan 2% of the base lending rate. Banks giving out education loans will need to pay a one-time guarantee at the above mentioned rate upfront of the base lending rate. Banks offering education loan will need t pay a one-time guarantee at a specified date upfront to the Credit Guarantee Fund Trust within 30 days from the date of first payment of education loan or 30 days from the date of demand advice of guarantee fee whichever is later or such date as specified by the trust.

Once the guaranteed money is paid to the bank, the borrower becomes a debtor of the government. Till the time, the bank will continue to follow up for repayment of the loan and share with the government recoveries proportionally, the government will also track the students and recover their own dues. Loan amounts will be reported to the Credit Information Company. The total outstanding education loan amount at the end of March, 2013, was Rs 53,520 crore. In total, there are more than 25 lakh education loan accounts.