Petitioners' plea against loan denials rejected; court affirms creditworthiness checks under IBA Model Scheme as legitimate grounds for refusal.
In a significant ruling, the Kerala High Court has upheld the refusal by banks to grant educational loans based on the unsatisfactory credit score of the co-borrower, typically a parent. The judgment, delivered by Justice M.A. Abdul Hakhim, addresses multiple writ petitions filed by students challenging the denial of educational loans solely due to their co-borrower's poor credit history.
The petitioners argued that the denial of loans based on the co-borrower's credit score is unjust, as the repayment responsibility lies with the students who benefit from the loans. They contended that such denials defeat the purpose of the Indian Banks' Association (IBA) Model Educational Loan Scheme, intended to support meritorious students financially, irrespective of their family's financial background.
The court, however, emphasized that applicants do not have a fundamental right to educational loans, affirming the banks' discretion to assess creditworthiness as per the IBA Model Scheme and extant guidelines. The judgment noted that the IBA Model Educational Loan Scheme and Master Circulars mandate an assessment of the credit score of co-borrowers to reduce defaults and non-performing assets (NPAs). It concluded that rejecting loan applications on these grounds does not violate constitutional rights under Articles 14 and 41.
Furthermore, the court clarified the role of the Credit Guarantee Fund Scheme for Educational Loans (CGFSEL), asserting it as a guarantee mechanism for banks in case of borrower default, rather than a loan-granting scheme. The judgment stated that CGFSEL does not dilute the provisions requiring satisfactory credit scores under the IBA Model Scheme.
The judgment also highlighted the role of the Credit Information Companies (Regulation) Act, 2005, in ensuring financial institutions can assess borrower creditworthiness to mitigate default risks, aligning with the objectives of reducing NPAs.
In dismissing the petitions, the court noted that the IBA Model Educational Loan Scheme has evolved to incorporate credit score assessments due to increased defaults in educational loans. It reiterated that the rejection of applications was consistent with these provisions, thus legally sustainable.
The court allowed for reconsideration of loan applications if petitioners could provide an eligible co-borrower with a satisfactory credit score and report, offering a potential route for students to secure financial assistance for their education.
Bottom line:-
Educational Loans - Credit Score of co-borrower - Banks can reject applications for educational loans based on the lower credit score or unsatisfactory credit report of the co-borrower/parent. Applicants have no inherent or fundamental right to educational loans. Banks are within their rights to assess creditworthiness under the IBA Model Educational Loan Scheme and extant guidelines.
Statutory provision(s): Articles 14 and 41 of the Constitution of India, Credit Information Companies (Regulation) Act, 2005, IBA Model Educational Loan Scheme, Credit Guarantee Fund Scheme for Educational Loans (CGFSEL).
Dilha Jan Govindan v. State Bank of India, (Kerala) : Law Finder Doc id # 2940160
