Education loans likely to be capped at 2% above base rate

NEW DELHI: The government plans to cap the spread on student education loans, crimping banks’ profitability that may force some to reduce lending, said a person familiar with the development.

The interest rates on education loans by banks may be capped at 2% above their respective base rates, which is aimed at lowering the cost of funds for students, said an official at the finance ministry.

“The move is aimed to continue the support towards the education loan segment, which is a priority area for the government," said the official who did not want to be identified. "If banks have access to low cost deposits, the students should also benefit from the same."

Prime Minister Manmohan Singh’s government has been focussing on improving social infrastructure with investments in education, health care and generating income for poor through rural employment schemes. While some appreciate the measures helping rural incomes, others point out to pilferage and distortion of the labour market with agriculture finding it hard to get labourers.

The move could reduce the cost of funds further for students who were set to benefit from the move to the base rate concept from July. Under the new regime, the rate arrived at by every bank is based on their cost of funds below which they cannot lend. Loans under the previous prime lending rate regime were well above 11%. Now, with the base rate between 7 and 8.5% for most banks, the outgo for students may be lower. But the banks may not be willing to go with the government’s diktat.

“Most banks are already giving a concession of around 50 basis points for select students, or those who get selected in top colleges in their respective streams,” said a senior official of a leading public sector bank who did not want to be identified. He was not in favour of a cap on rate of interest.

If the cap comes into force, it would be above the Indian Banks Association announced concession of 50 basis points in interest rates for girl students.

Banks fear that their bad loans may rise further who already are handicapped because of lending without collateral for loans up to Rs 4 lakhs. The 21 public sector banks have a total outstanding education loan of Rs 34,192 crore on March 31, 2010, up 24% from a year earlier.

Furthermore, the new norms for student loans will also prohibit banks from discriminating based on geographies.
“We have also directed banks to process the loan application within a stipulated period of time and not to reject any application on the basis of geographical area of operation,” the official said, meaning a person from Lucknow can apply for a loan in Ahmedabad if his educational institution is located there.