Faced with growing education loan default, Credit Guarantee Fund Scheme for Education Loans has been finalised and is likely to come before the cabinet in the next few weeks.
The scheme is jointly prepared by the Ministry of Finance, HRD Ministry and Indian Banks' Association, the scheme proposes to set up a Credit Guarantee Fund with the corpus of Rs. 2,500 crore. The fund will provide guarantee to educational loans up to Rs. 7.5 lakh.
It is proposed that loans that loans ranging from Rs. 4 lakh to Rs. 7.5 lakh will be guaranteed up to 75% of the amount outstanding with the interest as on the date the account is declared Non-Performing Asset (NPA). HRD official says, "Earlier, it was proposed that loan up to Rs. 4 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 appropriate collateral.
A HRD official added "The new scheme helps banks with guarantee. It will encourage then to lend more and bring down the interest rate because of the guarantee." It has also been specified that eligibility for guarantee be only for those loans in which interest does not exceed more than 2% of the base lending rate.
Banks giving out education loans will have to pay a one time guarantee at a specified rate upfront to the Credit Guarantee Fund Trust within 30 days from the date of demand advice of guarantee free whichever later or such date as specified by the Trust.