The Planning Commission has suggested that the Human Resource Development Ministry examine the option of setting up a loan guarantee authority as a separate division within the purview of the proposed National Education Finance Corporation (NEFC).

The proposed NEFC aims at refinancing student education loans and institutional loans at concessional rates with longer repayment, which will help expansion and new investments in the higher education sector, particularly universities.

While putting the NEFC on a “fast track”, Planning Commission Deputy Chairman Montek Singh Ahluwalia reportedly told the Ministry to also look into the possibility of creating an authority that would stand guarantee for education loans to students or institutions who borrow money for investment in the higher education sector, instead of only refinancing.

Mr. Ahluwalia is said to have suggested to the Ministry that both the options of refinancing and standing guarantee could be brought under the purview of the NEFC. The proposed NEFC would have two divisions, one as a loan guarantee authority and the other to deal with infrastructure loans.

To be entrusted with the task of managing the corpus fund for educational institutions, the NEFC would refinance the institutional loans available to colleges, institutions in higher educations for capacity expansion and new investment, and universities for expansion at the prime lending rate (PLR) of banks.

It will also provide concessional funding for philanthropic institutions at below-PLR rates. The repayment period will be 15-20 years, with a five year moratorium on principal repayment.

If the NEFC stands as a guarantor, it will have to pay only for defaulters, who would be few. The Ministry, open to the new suggestion, is working out mechanisms to cut down on defaulters before approving the loans.

The refinancing of loans for investment is also expected to curb capitation fees, since, at present, investment for infrastructure has to be borrowed at commercial rates where the interest is high and the repayment period short. To avoid this, institutions often borrow money from the market, and in order to repay it quickly, charge capitation fees from students. Once the loan is repaid, the capitation fee turns into profit. With the availability of soft loans, this is expected to come to an end.

The NEFC will refinance to the bank at a lower rate the sanctioned loan that it releases to the student or an institution. The bank makes its margin from the difference in interest rates, while the NEFC will use the educational cess released by the government, which is free of cost and also borrows from the market, so that the average cost of funds advanced as loans is lower than the rate at which it lends to banks. This differential rate will be the NEFC's margin or profit.