It is expected that the Government, as a part of its continual efforts to provide more benefits on education loans, would put a cap of 2% above base rate on these loans. This would hurt the profitability of banks and might reduce lending in this segment, sources familiar to the issue said.

"The move is aimed to continue the support towards the education loan segment, which is a priority area for the government," said the official. "If banks have access to low cost deposits, the students should also benefit from the same," he added.

"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.

Banks are not in favor of this capping idea. The Indian Banks' Association has already announced a concession of 50 basis points in interest rates for girl students. This capping, if allowed will be over and above this concession and thus would hit the profitability of banks.

Banks fear rise in bad loans from this segment of loans who are already bound to lend without collaterals to students seeking loans till Rs 4 lakh.