Banks are concerned as non-performing assets in education loans are as high as 6%. Meanwhile, SBI, largest public sector lender, announced an interest rates cut on education loans up to 1%
The committee constituted by the Reserve Bank of India (RBI) to re-examine the existing classification and suggest revised guidelines for the lending to the priority sector, has recommended an increase in lending limit for education loan by Rs5 lakh.
The committee headed by MV Nair, chairman, Union Bank of India, in a report suggested to that limit under priority sector for loans for studies in India may be increased to Rs15 lakh and Rs25 lakh in case of studies abroad, from existing limit of Rs10 lakh and Rs20 lakh, respectively.
The RBI has sought comments on the report of the Committee.
Redefining the scope of education loans by removing the limits and fixing it on the basis of parents’ income, covering vocational and skill development under its ambit and establishing a credit fund to cover the risk of defaults were some of the suggestions received by the committee.
There is no suggestion on the lending up to Rs4 lakh, given without any security or collateral. Experts say that this category also has highest number of repayment defaults.
Non-performing assets (NPAs) in education loans are as high as 6%. To bring down NPAs in education loans, the government is considering the option of setting up a credit guarantee trust.
Last year, the Indian Banks’ Association (IBA), which has formulated the model education loan policy, had recommended of creating a credit guarantee fund to tackle the problem of rising defaults in the loan category of up to Rs4 lakh. The committee has said that it is under consideration.
Recently, IBA asked lenders to impose stricter terms on loans given to students getting admission under the management quota. “Any loan considered by banks for students getting admission under the management quota would be outside the model scheme. Banks may fix appropriate terms and conditions for such loans,” IBA said in a guidance note.
Experts, say that there is need to address the issue of lending to students under management quota as it might impact large number of students opting admission through this route.
According to Prashant Bhonsale, country head of Credila Financial Services, a private lender specializing in education loans, “Though the move is in the right direction considering the risk factors from the point of view of the lender, there is a need for risk-management framework for lending to these average students.”
An official of Mumbai-based public sector bank, which has seen 16%-17% growth in the education loan portfolio, confirmed that, “It is left to each bank to decide on the lending to students under the management quota. It won’t come under the IBA policy. We are looking into it. I cannot commit anything right now.”
According to the current guidelines, banks lend up to Rs4 lakh without any security. But for loans between Rs4 lakh and Rs7.5 lakh, they can ask for personal guarantees, and for a loan above Rs7.5 lakh, a collateral is required.
After the apex bank eased its monetary policy, State Bank of India, largest public sector lender, announced an interest rates cut on education loans up to 1%.