The government has proposed an educational loan scheme wherein banks would make disbursements based on applications screened by "eligible" educational institutions.

The scheme envisages availability of loan to every student irrespective of creditworthiness without any collateral or margin money with repayment tenure ranging from 7-25 years, which the banks want to be shortened to 7-10 years.

An approach paper on student educational loan finance scheme, drafted by the ministry of human resource development, has also suggested, as one of the options for recovery, making prospective employers responsible for deducting installments from salaries.

The paper suggests that any needy student enrolled for a full-time course in an 'eligible' educational institution, can avail of the loan at a fixed rate of interest, without having to present any co-applicant. There would also be no processing of creditworthiness of applicants by banks.

The present education loan scheme, implemented by most public sector banks, provides need-based finance subject to the repayment capacity of students or parents.

It has a cap of Rs 750,000 for studies in India and Rs 15 lakh (Rs 1.5 million) for studies abroad. It is collateral-free and does not require the borrower to submit any margin money for a loan up to Rs 400,000. The amount outstanding under the scheme, increased from Rs 4,550.06 crore (Rs 45.5 billion) in 2003-04 to Rs 10,004.84 crore (Rs 100.05 billion) in 2005-06.

The proposed scheme provides for greater involvement of the educational institutions. Students would not have to apply directly to the bank for a loan, but through the educational institution.

The interest rate during the entire duration of the loan till repayment would remain fixed and is to be determined by the Reserve Bank of India.

The fluctuations, if any, in the interest rate would be met by the government out of a special fund to be created for the purpose.

The government has also proposed a refinancing agency to provide refinance to banks for loans advanced under the scheme.

Refinance would be provided on reimbursement basis at rates to be determined by the agency taking into account the cost of funds and market conditions.

The agency could be an existing refinance bank or a new corporate to be created under a special law. The scheme also provides for sovereign guarantee by the government to banks.

It provides that, "no student shall be denied loans, if the eligible educational institution is satisfied that there is a demonstrated financial need to assist the applicant."

The institution would be responsible for accepting and screening the applications and would forward the applications in bulk to the bank for sanctioning loans.

The educational institution could select and enter into an agreement with more than one bank to provide education loans to its students.

The institution would be required to provide student information, in its possession or available with placement cells and alumni offices to help banks maintain contact with the student for effective debt servicing and repayment.

The paper describes an eligible institution as one, which is duly recognised by the relevant statutory authority such as the University Grants Commission and the All India Council for Technical Education.

A working group of senior executives from select public sector banks, formed under the aegis of the Indian Bank's Association, has sought a clarification from the banking division on the competent authority to decide the eligible educational institution.

The group has also insisted that the know your customer norms be inbuilt into the scheme and accountability for the same determined.

The group has also conveyed to the government that parents of student borrowers should be made co-borrowers and the loan should be sanctioned at the place of residence of the student, for proper identification and tracking post-studies.

While, the maximum amount under the scheme is to be laid out from time to time, the amount would include an absolute minimum necessary to pay for the educational expenses and a small amount for personal expenses.

Linking repayment to employment, the proposed scheme provides for payback to begin only after the student borrower reaches a certain income threshold.

The banks' working group is not in favour of the repayment of loan to be linked to an applicant reaching a certain income threshold after completion of studies.

The interest rate during the entire duration of the loan till repayment would remain fixed and is to be determined by the Reserve Bank of India.