Kerala HC Allows Banks To Consider Co-Borrower’s Credit History For Education Loans

The Kerala High Court has allowed banks to reject education loan applications where the parent or guardian joining as a co-borrower has an unsatisfactory CIBIL score or an adverse credit history. This decision was delivered while dismissing petitions filed by six students whose education loan applications had been rejected because of the credit history of their parents, who were listed as co-borrowers.

Repayment Capacity Matters

The students have contended that a borrower’s ability to repay an education loan after completing the course and securing employment should have been the primary consideration for approving the loan. They have argued that denying education loans to meritorious students who lack adequate financial resources would defeat the purpose of government-backed education loan schemes.

The petitioners have also relied on the Credit Guarantee Fund Scheme for Educational Loans (CGFSEL), under which eligible education loans have been covered by a guarantee in case of default. They have maintained that the guarantee has protected banks against the risk of non-repayment. On this basis, they have argued that the credit score or credit report of the student and co-borrower should not have been treated as relevant to the loan decision.

Banks Can Rely On Credit Assessment Rules

The State Bank of India (SBI) and the Indian Bank have maintained that education loans can be sanctioned only when applicants meet the eligibility conditions under the Indian Banks’ Association's Model Educational Loan Scheme and the respective rules of the banks. The banks have explained that applicants without a credit history can be considered creditworthy. However, where an adverse credit history exists, banks have been entitled to apply suitable criteria based on their risk assessment.

The banks have also referred to the Credit Information Companies (Regulation) Act, 2005. They have argued that assessing the credit discipline of loan applicants has been necessary to reduce the risk of loans becoming non-performing assets.

CGFSEL Guarantee Does Not Remove Eligibility Conditions

The High Court has held that banks have not been barred from examining the credit score or credit report of a co-borrower while processing an education loan application. The court has also found that the CGFSEL guarantee does not override the eligibility requirements under the IBA Model Educational Loan Scheme. Instead, eligibility under the IBA scheme has been a prerequisite for availing the credit guarantee.

The court has therefore held that requiring applicants and co-applicants to have a satisfactory credit score or credit report cannot be considered unwarranted merely because the loan has been covered by the CGFSEL guarantee.

The petitions have consequently been dismissed. However, the court has directed the respondent’s banks to reconsider the students’ applications if they furnish an eligible co-borrower with a satisfactory credit score or credit report.