New Delhi: The government will soon set up a fund that will provide surety to banks against loans given to students for higher education.

Called the higher education credit guarantee fund, it is likely to improve the credit flow to needy and meritorious students.

The fund will have a corpus of ₹ 3,500 crore but will start operations with ₹ 500 crore in this fiscal year. A notification to this effect shall be made next month, said two government officials who did not want to be named.

“There is a lot of delay in setting up of the fund but finally it’s going to be established in next few weeks. The human resource development (HRD) and the finance ministries have finished the homework," the first government official said.

Both ministries believe that education loans, a priority sector, have been a sticky point for both banks and students. While students complain of reluctant banks, banks talk about the risky nature of such loans. The credit guarantee fund is expected to take care of the banks’ concern.

“It will guarantee up to 75% of the education loan amount. Successive finance ministers have spoken about handholding this sector and credit guarantee to banks will improve the confidence of banks and help needy and meritorious students get loans," the official said, adding that less than 10% of students pursuing higher education have availed of study loans.

The fund will provide guarantees to unsecured education loans of up to ₹ 7,50,000. Banks will deposit 1% of every student loan amount in this fund.

The first official said that after the moratorium period—one year after the end of studies or six months after getting a job, whichever is earlier—banks may have to give 15-18 months to the student borrower.

If, after this lock-in period, the student does not start repayment, then 50% of the credit amount will be given at one go to the bank. The remaining 25% will be paid after a certain period of time, during which the concerned bank may initiate legal action against the borrower.

As of February 2015, banks had a total outstanding of ₹ 59,256 crore as education loans, compared to ₹ 57,129 crore a year ago, according to data with the Reserve Bank of India. The first official cited earlier said the loan portfolio growth is not very encouraging.

The official said the HRD ministry will be the key driver of the fund. Earlier, the finance ministry had contended that such funds should be administered by it since bank loans are tied up with the scheme. The plan to start such a fund was first mooted in 2012 by then finance minister Pranab Mukherjee.

“We have told the HRD ministry that they should take over the education fund since they understand the requirements of students better," said a finance ministry official, who did not wish to be identified.

K. Srinivasan, convenor of the Educational Loan Task Force, a Chennai-based organization working in the field of education loans, said the study loan portfolio currently is too small and it can easily double if banks become supportive.

He said that only around 2.6 million students have opted for student loans and that this number can go up if the credit guarantee fund is set up soon. India has around 30 million students in higher educational institutions.

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