Banks Can Consider Co-Borrower's Credit Score While Deciding Educational Loan Application: Kerala High Court
The Court dismissed a batch of petitions challenging loan rejections, held that banks' denial on basis of parent co-borrower's poor credit score is sustainable.
Justice M.A. Abdul Hakhim, Kerala High Court
The Kerala High Court has held that a bank is entitled to consider the credit score and credit report of a co-borrower while deciding an application for an educational loan, rejecting the contention that only the student-applicant's future repayment capacity is relevant to such assessment.
The Court dismissed a batch of writ petitions filed by students challenging the rejection of their educational loan applications on the ground of poor credit scores of their parents acting as co-borrowers, holding that the banks' stand denying such loans was sustainable, while directing that the applications be reconsidered if the students furnish an eligible co-borrower with a satisfactory credit history.
A Bench of Justice M.A. Abdul Hakhim in a batch of petitions, observed, “Considering the objectives of the Credit Information Companies (Regulation) Act, 2005, it could not be said that the Bank shall not consider the Credit Score/Credit Report of the co-borrower when the Bank considers an Application for Educational Loan”.
Advocate K. Jaishankar appeared for the petitioner and Advocate B.S. Suresh Kumar appeared for the respondents.
The petitioners were students from various parts of Kerala, pursuing courses ranging from nursing to management studies, whose applications for educational loans were rejected by their respective banks, State Bank of India in most cases, and Indian Bank in one, on the ground that the credit score or credit history of the parent acting as co-borrower was unsatisfactory.
The petitioners contended that repayment capacity ought to be assessed with reference to the student's own future earning potential rather than the parent's credit history, that denying loans to meritorious but economically disadvantaged students defeated the purpose of the Model Educational Loan Scheme, and, in one petition, that the Credit Guarantee Fund Scheme for Educational Loans (CGFSEL) rendered the co-borrower's credit score irrelevant since the Central Government guaranteed repayment in case of default.
The petitioners relied on a series of Single Bench decisions of the Kerala High Court, holding that the credit score of a co-borrower parent was not relevant to loan eligibility. They also relied on Aleena Another v. Union of India and Others [2024:KER:27888], which held that the CGFSEL obviated the need to examine the co-borrower's credit score.
The banks, in response, relied on the Division Bench ruling in Arya v. Reserve Bank of India [2015 (4) KLT 478], holding that there is no fundamental right to an educational loan or to higher education, and on the more recent Single Bench decision in Haritheeth P. v. The Branch Manager, State Bank of India and Another [2024:KER:78076], which had examined the 2021 IBA Model Educational Loan Scheme in detail and held that banks were bound to reject or return loan applications where the co-borrower's credit score and report were unsatisfactory.
The Court held that the earlier line of decisions favouring petitioners had either been rendered under the outdated 2001 Scheme, which contained no specific provision on credit scores, or had effectively undercut their own reasoning by directing substitution of the co-borrower rather than disregarding credit scores altogether.
It found that Haritheeth P. correctly reflected the current legal position under the 2021 Scheme, and that since none of the petitioners had challenged the validity of the Scheme or the banks' Master Circulars, they could succeed only by demonstrating a violation of those very provisions, which none had done.
On the CGFSEL argument, the Court held, following its earlier decisions in Nizamudheen P. v. Union of India (affirmed in appeal), that the CGFSEL is a guarantee mechanism protecting lending institutions in the event of borrower default, and not an independent scheme for grant of loans, and therefore could not override the eligibility criteria under the IBA Scheme.
The Court accordingly dismissed all the writ petitions, while directing that the respondent banks reconsider the applications if the petitioners furnish an eligible co-borrower with a satisfactory credit score and credit report.
Cause Title: Dilha Jan Govindan v. State Bank of India & Ors (Neutral Citation: 2026:KER:51085)
Appearances:
Petitioners: K. Jaishankar,, Advocates.
Respondents: B.S. Suresh Kumar, Ashley John, Ranjana V., Anusree C.S., Nemi P.N., Advocates.
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