There has been a series of discussions in recent weeks between banks and finance ministry officials on setting up a Rs. 1000 crore credit guarantee fund, sources in the banking sector said. The plan is to give cover against default to 65 percent of the loan amount, they said. Another proposal to set up a similar fund had been making the rounds for two years, but it didn't take off due to lack of clarity on its possible structure. The proposal to create the fund follows a request from state-owned banks after the government pressurized them to provide education loans even if it is not very lucrative. The government's stand is that no child should miss out on an opportunity to pursue studies due to lack of financial resources.
As on February 20, banks' outstanding education loans totalled Rs. 63,500 crore, Reserve Bank of India data showed. Banks have witnessed 5-10 per cent of their education loan portfolios turning bad. Most defaults in this space are related to loans of up to Rs. 4 lakh wherein, as per the government's mandate, banks aren't allowed to seek any collateral. The government fears banks may shy away from giving loans to students if the rate increases. This has prompted it to consider creating a credit guarantee fund. As of now, the Indian Banks Association has listed 1,100 accredited education institutes for banks to extend education loans. The list doesn't include skill development training institutions. Bankers say such institutions are mostly run by private entities and NGOs.
