Kerala HC: Banks Can Deny Education Loans If Parent Co-borrower Has Low Credit Score

The Kerala High Court has ruled that banks may refuse education loans to students if the parent acting as a co-borrower has a poor credit score, but the application can be reconsidered if an alternative co-borrower with a sufficient credit score is provided.

Justice M.A. Abdul Hakhim, presiding over a single bench, dismissed a batch of petitions filed by students challenging the refusal of banks to grant educational loans solely because their parent co-borrowers had low credit scores. The students had sought directions to compel banks to ignore parents' credit scores and sanction the loans.

The petitioners argued that the repayment capacity of the student after securing employment should be the primary consideration. They pointed out that the Central government's Credit Guarantee Fund Scheme for Education Loans (CGFSEL) guarantees repayment, and that denying loans to meritorious but financially weak students would undermine the scheme's purpose. The CGFSEL allows students from economically weaker sections to obtain collateral-free education loans up to ₹7.5 lakh without requiring a third-party guarantor. The petitioners also contended that the refusal violated their fundamental rights to education and life under Article 21 of the Constitution.

In response, banks submitted that education loans are not a matter of right and are granted only when applicants meet conditions set by the Indian Banks' Association Model Educational Loan Scheme and related Master Circulars. They argued that the petitioners could succeed only if they demonstrated a violation of these guidelines.

The court observed that banks must recover the entire loan amount with interest and therefore need to take precautions, including assessing the creditworthiness of co-borrowers. Under the CGFSEL, the maximum guarantee is only 75% of the defaulted amount, and banks must first recover amounts by seizing borrower assets before claiming the guarantee.

Dismissing the petitions, the court held that it could not restrain banks from considering the credit score of a co-borrower in education loan applications.