The Reserve Bank of India has reiterated to commercial banks that they should not demand collaterals on education loans for amount less than Rs. 4 lakh.

The RBI had first passed this directive in the year 2001. It has been forced to restate its directive following reports from various quarters that banks are demanding collaterals for loans of smaller amounts upto Rs. 4 lakh.

Banks had foregone the directive set by the apex bank that collaterals should not be sought for education loans for small amounts because they were facing stress in this category of loans.

In the absence of recourse to security, banks are a little apprehensive in granting collateral free education loans. Education loans in the limit of Rs. 4 lakh constitute almost 80% of the total amount of education loans disbursed by banks.

Bankers suggest that this is the accurate time for creating a guarantee fund exclusively for collateral free education loans.

This would act as a back up for bank in a way that if the borrower defaults then the bank would have recourse to the fund.