Education loans as a sector is becoming increasingly popular, with lenders and borrowers. In fact, being a part of the priority lending, its also getting support through Reserve Bank of India’s (RBI) initiatives.
The RBI has taken measures to encourage the students to borrow and to facilitate the growth of the sector. The central bank cut down the risk weightage on education loans from 125 percent to 75 percent. This has been done to make it easier for potential loan applicants to get loans.
Also, since education loans above Rs. 4 lakh are backed by security, it is safe to assume that education loans will have a low ratio of non-performing assets.
Some media reports also spoke of a Higher Education Loan Guarantee Authority (HELGA). This proposed entity will aid needy students in getting easy loans. HELGA may also take care of the interest rate payments during the ‘moratorium period’ of the education loans.
The Finance Ministry is also promoting the sector. In media reports, the Finance ministry urged bankers to adopt a flexible approach to extending educational loans to students.
In another attempt to make things easier, the Indian Banks’ Association (IBA) set up a working group to study how education loans can become a lucrative business. The recommendations of the group were taken into account and the banks revised their norms.
The IBA also proposed the establishment of a Rs 2.5 billion Credit Guarantee Fund. The entity is to be formed on the lines of that of the Guarantee Trust Scheme for small-scale industries. The proposed fund will cushion loan defaults and will also serve as a group insurance product.
The IBA recommended that half of the corpus be funded by the Centre while the rest could be shared by the banks and the borrower. The student-borrower will pay a premium for the amount borrowed and the bank can claim the insurance, if the student defaults. The proposal is being considered by both the RBI and the Union Finance ministry.
At a ‘loan mela’ organised by Indian Overseas Bank (IOB) in September 2008, Finance Minister, Mr. P. Chidambaram said that banks should clear loan applications on a case by case basis. He was quoted in a media report in saying, “Don’t follow strict rules. Bankers should apply the humanitarian angle while processing the loan applications.”
