Low CIBIL Score Of Co-Borrowers Not A Ground To Deny Education Loans: Kerala High Court

The Kerala High Court on Tuesday reiterated that the CIBIL scores of co-borrowers do not play a role in deciding applications for education loans since the eligibility conditions for sanctioning such priority sector loans should have a nexus with the object sought to be achieved by these loans. 

Justice N. Nagaresh also observed that imposing such conditions would defeat the very purpose of granting such loans, thereby discouraging banks from doing so. 

"The Banks including the nationalised Banks are within their competence to sanction student/education loans dehors any special Scheme framed by the Government or RBI. But, when the Banks disburse loans as priority sector loans, the eligibility criteria fixed for sanction of such loans should necessarily have a nexus with the object sought to be achieved. The Nationalised Banks and Scheduled Banks will not be justified in framing conditions for sanctioning of such priority sector loans so as to defeat the very purpose of grant of such loans."

The petitioners had moved the Court aggrieved by the denial of education loans by the 2nd respondent-Manager of State Bank of India citing that their co-applicants (parents) did not have the requisite CIBIL scores.

Advocates Manoj Ramaswamy, Jolima George, Jisha Sasi, C.B. Sabeela, Aparna G and Chinnu Rose Mary Thomas appeared for the petitioners and argued that the Reserve Bank of India had affirmed that an education loan is a futuristic loan aimed to provide financial support from the banking system to deserving/meritorious students for pursuing higher education in India and abroad. They argued that the rejection of their loan applications goes against the RBI mandate.  

Further, reliance was placed on Pranav S.R. v. The Branch Manager, SBI & Anr to contend that unsatisfactory credit scores of the parents of the applicants cannot be a ground to reject an educational loan application since the repayment capacity of the applicant after his education should be the deciding factor. Therefore, it was submitted that the respondents were compelled to sanction and disburse the educational loan applied for by the petitioners. 

Advocates Jawahar Jose, Cissy Mathews and Edwin Joseph appearing for the respondents vehemently opposed the petition. The Bank submitted that the SBI educational loan policy was that the loan would be sanctioned jointly in the name of the student and their parents/guardians and therefore, the parent/guardian would be a co-borrower in the loan. The Bank has to ensure that the co-borrower has the necessary credit discipline and has the prerogative to depend upon the Credit Information Report, it was submitted.

The respondent stated that an RBI Circular issued in 2014 requires that banks/financial institutions include in their credit appraisal process/loan policies, suitable provisions for obtaining Credit Information Reports from one or more of the Credit Information Companies so that the credit decisions are based on information available in the system.

The educational loans are classified as retail loans as per another RBI Circular issued in 2007, contended the respondents. Consequently, in SBI's Master Circular dated 20.03.2021, it was provided that Borrower/Co-borrower/Guarantor should not have any adverse credit history.

However, the Court opined that the 2007 and 2014 RBI Circulars do not apply to the facts of these petitions and agreed with the dictum laid down in Pranav S.R (supra). It was held that the educational loans provided by the Banks in India under Vidya Lakshmi Scheme stand on a different footing from the circulars relied on by the respondents.

"India is one of the youngest nations in the world with more than 54% of the total population below 25 years of age. Yet, less than 5% of potential workforce in India gets formal skill training to be employable and stay employable. With a view to enable poor and middle class students to pursue higher education of their choice without any constraint of funds, a Scheme was provided by the Government of India to ensure that no student misses out on higher education for lack of funds."

The Court also noted that in the exercise of the powers conferred by Sections 21 and 35A r/w Section 56 of the Banking Regulation Act, the RBI in public interest issued Reserve Bank of India (Priority Sector LendingTargets and Classification) Directions, 2020. Attention was called to Direction 4 contained therein which categorises Education as a priority sector.

Further, Direction 11 stated that loans to individuals for educational purposes, including vocational courses, not exceeding ₹20 lakhs will be considered eligible for priority sector classification.

Therefore, the petitions were allowed and the respondents were directed to reconsider the petitioners' loan applications disregarding the low Credit Score of the co-borrowers, and sanction and disburse eligible loan amount, if the petitioners are otherwise eligible, within one month.

Case Title: Kiran David v. Assistant General Manager

Citation: 2022 LiveLaw (Ker) 217

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