The Reserve Bank of India has asked all banks to speed-up disposal of applications for education loans of up to Rs 400,000 without insisting on collateral.

This direction comes in the wake of the central bank receiving complaints from various quarters, including the government, on the difficulties faced by the public in obtaining bank finance for higher education.

The complaints received by the RBI pertain to the inordinate delays in the processing of loans for higher education and insistence on collateral security against the extant guidelines, thereby causing hardship to the students.

In the wake of difficulties faced by the students in getting education loans, the central bank has asked banks to issue necessary instructions to all their branches to ensure the smooth and expeditious disposal of education loan applications without insisting on collateral security for loans up to Rs 400,000.

"There can be no misuse of education loans as the bank draws a draft/ cheque for meeting tuition fees only in favour of the educational institution. Though collateral is not insisted on for education loans of up to Rs 400,000, at times banks rope in the father of the student as a co-borrower and even suggest that the student take a life insurance," said a senior official with a public sector bank.

The education loan scheme offered by banks covers all types of courses in schools and colleges in India and abroad. The scheme envisages loans up to Rs 750,000 for studies in India and up to Rs 15 lakh (Rs 1.5 million) for studies abroad.

For loans up to Rs 400,000, no collateral or margin is required and the interest rate is not more than the prime lending rate. For loans above Rs 400,000, the interest rate will not exceed PLR plus 1 per cent.

The loans are to be repaid over a period of 5 to 7 years with the provision of a grace period of one year.

"Repayment of the loan could be an area of concern. Once a student leaves a top-notch professional institute to pursue higher education abroad it may be difficult for banks to make recoveries," said a bank official.

In 2002-03, disbursals of educational loans increased by Rs 1,283 crore (Rs 12.83 billion) to Rs 2,941 crore (Rs 29.41 billion) [Rs 1,658 crore (Rs 16.58 billion) in FY 2001-02].

In 2000-01, when the comprehensive educational loan scheme was launched, PSBs collectively disbursed Rs 799 crore (Rs 7.99 billion).