In a bid to improve enrolment rate in higher education, the HRD ministry has proposed an Education Bank to help financial institutions willing to pay loan to students at four per cent interest rate.
Finance Minister P Chidambaram is expected to announce education loans at four per cent interest rates in the budget. This is an outcome of a meeting with industry bodies like CII and private banks chaired by Principal Secretary to PM TKA Nair in December. The banks were willing to disburse education loan at four per cent interest rate, provided the government was willing to share the burden. At present, the interest rate on education loan hovers between 11 to 14 per cent.
In advent of the lower interest rate, the HRD ministry has worked out a mechanism to provide government assistance for the education loan. Under the plan, a bank would be set up to provide funds to the private financial institutions, a government official said.
According to officials, the bank will ensure that the students from economically weaker sections get benefited from the lower interest rate, rather than students from affluent background eating all the cake. At present, the share of the students from weaker sections seeking education loans is abysmally low. “We want to reverse this trend,” an official said.
Officials also said that most private banks prefer sanctioning education loans to students with a good paying capacity. Primarily, because the default rate in education loans is high, resulting in private banks not very keen on education loans. But, with the government chipping in, the banks are willing to reverse its policy on education loans.
The government funding for loans will not only improve the gross enrolment ratio in higher education, which is about 11 percent for all and 4-5 per cent for Scheduled Castes and Scheduled Tribes, it will also provide access to institutions like IITs and IIMs to students from the weaker section.
Working on this principle, the Planning Commission has allocated Rs one crore for setting up the bank in the financial year 2007-08. But, the main source of money for the bank is likely to be Prambhik Siksha Kosh, the account for the two per cent education cess. “Various options are being looked into including financial support from other institutions like NABARD,” a commission official said, adding that working out the modalities may take some time.