The Kerala High Court has ruled that banks are legally entitled to consider the credit score and credit history of a student's co-borrower, usually a parent, while deciding applications for education loans. Rejecting a batch of petitions filed by students whose loan requests had been turned down due to their parents' low CIBIL scores, the court held that such decisions were consistent with the prevailing educational loan guidelines and banking regulations.
Background of the Case
The common judgment dealt with six writ petitions filed by students pursuing higher education in different professional courses. They approached the High Court after banks, including the State Bank of India and Indian Bank, refused to sanction education loans because the credit reports of their parents, who were co-borrowers, reflected poor repayment history or low credit scores.
The students argued that education loans are ultimately repaid by the students after completing their studies and securing employment. They contended that denying loans solely because of a parent's adverse credit history defeated the very objective of the education loan scheme, which is intended to assist deserving students lacking financial resources. One petitioner also relied on the Credit Guarantee Fund Scheme for Educational Loans (CGFSEL), claiming that since the government provides a guarantee against loan defaults, banks should not insist on satisfactory credit scores of co-borrowers.
The banks opposed the petitions, arguing that the Indian Banks' Association (IBA) Model Educational Loan Scheme and their internal circulars expressly permit consideration of the credit history of borrowers and co-borrowers. They also submitted that the petitioners had not challenged these policy documents themselves.
Court's Observations
Justice M.A. Abdul Hakhim examined earlier decisions of the High Court as well as the latest IBA Model Educational Loan Scheme and banking circulars.
The court noted that while some earlier judgments had directed banks to overlook poor credit scores of parents, those decisions were based on older versions of the education loan guidelines. The present scheme, however, specifically allows banks to assess the creditworthiness of borrowers and co-borrowers through CIBIL reports and other credit information.
Rejecting the argument based on the CGFSEL, the court clarified that the guarantee scheme is meant to compensate lending institutions in the event of default and does not relax the eligibility conditions for obtaining an education loan.
As the bench observed,
"The CGFSEL does not in any way dilute provisions in the IBA Model Educational Loan Scheme."
The court further observed that the objective of the Credit Information Companies (Regulation) Act, 2005 is to enable banks to evaluate the financial discipline of borrowers before extending credit. Therefore, considering the co-borrower's credit history cannot be regarded as arbitrary.
Court's Decision
Holding that the banks had acted in accordance with the applicable IBA Model Educational Loan Scheme and banking circulars, the High Court found no illegality in rejecting the loan applications because of the co-borrowers' unsatisfactory credit scores.
At the same time, the court directed that the banks should reconsider the applications if the students produce another eligible co-borrower having a satisfactory credit score and credit history.
Accordingly, all the writ petitions were dismissed.
