A bill will be brought in Parliament for setting up a finance corporation to provide low-interest loans to higher educational institutions.

The HRD Ministry has already prepared a concept note on creation of National Higher Education Finance Corporation (NHEFC). It has started drafting the NHEFC bill, official sources said.

Earlier, the government was undecided whether to set up this body under an act of Parliament or register it under Section 25 of the Companies Act.

“It has been decided that the proposed NHEFC will be created by an act of Parliament, not under the Companies Act, 1956,” sources said.

As per the HRD Ministry’s plan, the proposed NHEFC will be an institutional mechanism to address the investment needs in higher education sector.

The proposed corporation will nurture philanthropic tradition in education by providing loans at concessional rates on interest to such agencies for establishment of higher and vocational institutions in educationally backward areas.

“It will be a NABARD like institution in higher education. It will raise debt by issue or sale of bonds for augmenting resource from the market. It will finance creation of universities. It will grant low—interest loans to philanthropic bodies to come forward in opening institutes,” a senior official said.

The step assumes significance as the requirement of funds for expansion of higher education in 2009—10 is expected to be to tune of Rs 60,000 crore.

The allocation for higher education for the 11th Plan is Rs 84,000 crore. The proposed NHEFC may have to lend Rs 38,000 crore in 2009—10 to meet the additional requirement.

It will also grant loans and advances to any scheduled public sector bank or other financial institutions approved by the corporation. It will provide concessional rates of interest on loans for establishment of higher education which has at least 25 per cent of its project cost raised through donations or contributions.

The new agency is supposed to provide venture capital to an university to incubate any scientific or technological idea or product that has emerged as an outcome of any research undertaken in the university that has commercial potential.

The corporation will set up an endowment or corpus management fund in universities.

The NHEFC may have power to raise debts by issue of bonds for augmenting resources from the market. The subscription to the bonds by person may be exempt from the levy tax or corporate tax. The proposed body may also be given the facility of borrowing from the Reserve Bank of India against security.

The proposed corporation can have an authorised share capital of Rs 10,000 crore with 25 per cent of it earmarked in the form of redeemable preference shares.

The corporation will have a board of directors with representation from the central, state governments, public sector banks, insurance companies and statutory regulatory bodies in higher education sector.

At present the funding in higher education is done through University Grants Commission. However, the nature of funding fails to provide an effective channel for the need of all higher educational institutions.

The banking sector gives loans to educational institutions in the same manner as that for trade, industry or commerce sector.

Under this procedure, an institution can get funds from the bank with the same terms and conditions as applicable to for-profit organisations even as education is essentially a non-profit sector. This pattern of funding dissuades philanthropic organisations from sourcing funds from the banks to establish and run educational institutions.

That is why there is need to devise an institutional mechanism to provide institutions a means to access comparatively low-cost funds, sources said.