Kerala High Court Upholds Rejection Of Education Loans Over Parents' Or Co-Borrowers' Poor Credit Scores

The Kerala High Court has upheld the rejection of educational loan applications filed by a batch of students after finding that their parents or co-borrowers had unsatisfactory credit scores or adverse credit histories.

"In view of the aforesaid discussion, I find that the stand of the Respondents/Banks that the Applicants are not eligible for Educational Loan on account of the lower Credit Score/unsatisfactory Credit Report of the co-borrower/parent is sustainable.", the court ruled.

Justice M.A. Abdul Hakhim delivered the judgment while deciding a batch of petitions filed by students who challenged the rejection of their educational loan applications by different banks.

The students contended that educational loans are intended to enable meritorious students to pursue higher education and that repayment should be assessed on the basis of a student's future earning capacity after securing employment, rather than the financial standing of the parent or co-borrower.

One of the petitioners further argued that, in view of the Credit Guarantee Fund Scheme for Educational Loans (CGFSEL), banks need not consider the credit scores of co-borrowers while deciding educational loan applications.

The banks opposed the petitions, contending that educational loans cannot be claimed as a matter of right. They argued that every application must meet the requirements of the prevailing Indian Banks' Association (IBA) Model Educational Loan Scheme and the relevant bank circulars, under which the credit score and credit history of the parent or co-borrower are relevant factors

They also pointed out that the petitioners had not challenged either the IBA Model Educational Loan Scheme or the applicable circulars.

Referring to the Division Bench decision in Arya v. Reserve Bank of India, the court reiterated that while the Constitution recognises the right to education, there is no inherent or fundamental right to obtain an educational loan.

"In view of this decision, it could not be held that the denial of Educational Loan by the Banks affects the fundamental rights of the Petitioners."

The court then examined whether the rejection of the loan applications was contrary to the prevailing IBA Model Educational Loan Scheme or the applicable bank circulars. It found that the petitioners had failed to establish any violation of either.

The court noted that an earlier decision in Haritheeth P. v. The Branch Manager, State Bank of India had interpreted the prevailing IBA Model Educational Loan Scheme and held that banks are bound to reject or return educational loan applications where the parent or co-borrower has an unsatisfactory credit score or adverse credit history.

Since the petitioners had not challenged the scheme or the applicable bank circulars, the court held that it was bound to follow that decision.

It, therefore, declined to direct the banks to ignore the credit scores or credit histories of parents or co-borrowers while considering the loan applications.

The court also rejected the contention that the CGFSEL meant banks need not consider the credit score or credit history of co-borrowers while deciding educational loan applications as it has already been decided in Nizamudheen P. v. Union of India.

"With regard to the contention raised by the Petitioner in W.P.(C) No.4667/2026 relying on the CGFSEL, it is seen that the claim raised by an Applicant for Educational Loan on the strength of the said Scheme was elaborately considered and rejected by this Court in Nizamudheen P. (supra).", the court ruled.

Examining the scheme, the court observed that the CGFSEL is not a scheme for granting educational loans. Instead, it guarantees educational loans already disbursed by lending institutions in the event of a borrower's default.

Explaining why the scheme did not assist the petitioners, the court observed:

"It is clear from these provisions that the Applicant has to satisfy the eligibility conditions as per the IBA Model Educational Loan Scheme to get an Educational Loan. The provisions of the CGFSEL could not be considered for the grant of Educational Loan under the IBA Model Educational Loan Scheme."

The court further observed that considering the credit score and credit history of borrowers and co-borrowers is consistent with the object of the Credit Information Companies (Regulation) Act, 2005, which was enacted to enable banks and financial institutions to obtain borrowers' credit information and reduce loan defaults.

Holding that the banks' stand was sustainable, the court dismissed the writ petitions. It, however, observed that the banks should reconsider the applications if the students furnish eligible co-borrowers with satisfactory credit scores and credit reports.

For Petitioners: Advocates K Jaishankar, Sabu Francis, Varughese M Easo, Vivek Varghese P.J, Benny P, L. Ram Mohan, M Aubrey Abraham Isaac, T.U Sujith Kumar, Saju J Panicker and Kurian K Jose

For Respondents: Senior Advocate K.K Chandran Pillai, Advocates S Ambily, SC, Rupa R Nair, B.S Suresh Kumar, Ashley John, Ranjana V, Anusree C.S, Nemi P.N, P Sajeev (Perumpalam), CGC and Arjun Santhosh