This seemed like a very good idea. The HRD Minister, Kapil Sibal, proposed the idea for a National Education Finance Corporation in early 2010, and expanded on it in the Rajya Sabha by making a persuasive case for it.
Under the present policy framework if you want to set up an institution there is no Government agency that can finance you. So, there is no access to finance to setting up a new educational institution. So, he will have to go to the bank to actually get financing from the bank at the lending commercial rate. Now, human resource development is not considered as an infrastructure development and the Supreme Court has said that this is charity, this is for public service. So, an activity which is for public service has to borrow if he wants to set up an educational institution at commercial rates. But, an activity which is in the infrastructure sector, namely physical infrastructure, you can borrow at softer rates because that is priority sector. So, what the policy framework within which we are working is, that anybody who wants to set up an educational institution should have access to finance. That is the first purpose. This has nothing to do with UGC. Secondly, if you set up an educational institution, under the present guidelines you will get grants from the UGC or from the Government or under schemes of the Government only when you have achieved certain milestones. Now, in the meantime if you want to enhance your infrastructure -- and nowadays, with research and development expanding exponentially -- you need new capital investment. There is no way that you can get finance. You have to cross many milestones. So, when you want to set up an educational finance corporation, our objective is that anybody who wants to set up an educational institution should have free access to finance as a priority lending sector. What happens is, when you call it charity, State Government control fees. Once it is charity, State Government control fees and they cannot increase fees in their institutions. Many of them do the kind of practices that they are doing and that is the root cause of the problem. When they will have free access to finance and every child has free access to loan why will he need to sell the family silver to enter into an educational institution? So, I think it is the need of the hour and I would require you to give me suggestions as to how we must move forward because unless we build that infrastructure and capital we will not be able to move forward.
Kapil Sibal's proposal was welcomed by a few other MPs during the discussion in the Rajya Sabha.
But the Planning Commission apparently raised some objections and the MHRD seems to have given up on the idea.
"Proposal for setting up of National Educational Finance Corporation (NEFC) was prepared and sent to Planning Commission for concurrence. Planning Commission has raised certain objections to the proposal. Therefore the proposal was not taken forward." Source: Lok Sabha UnStarred Question No. 4410 Answered on 21.12.2011
I wish the MP, Rajaogpal Lagadapati, who asked the question had raised a supplementary question about what the Planning Commission objected to and whether the MHRD is pursuing any alternatives, or has given up the idea for good.
A report in The Hindu (May 10, 2010) throws some light on the Planning Commission's thinking on the NEFC as well as the idea of providing loan guarantees:
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.
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.
The Planning Commission doesn't seem to have objected to the idea of the NEFC per se - it has only provided constructive suggestions on how the NEFC could also look at providing student loan guarantees. The report in The Hindu had indicated that the MHRD was open to the Planning Commission's idea and was working on incorporating it into the scope of the NEFC.
Why then is the MHRD claiming now that the Planning Commission objected to the idea of the NEFC and citing that as the reason for abandoning the idea of the NEFC altogether? An eminently sensible idea seems to have been buried quietly. The MHRD needs to explain its thinking instead of providing bland statements.