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July 8, 2020

Can educational loan be denied because applicant’s parents have unsatisfactory credit scores?

by Mahesh Mara in Compliance Law

Can an application for an educational loan be denied solely due to the fact that the applicant’s parents have unsatisfactory credit scores?

A credit report is a detailed breakdown of an individual’s credit history prepared by a credit bureau. Credit bureaus collect financial information about individuals and create credit reports based on that information, and lenders use the reports along with other details to determine loan applicant’s creditworthiness. A credit report is like a report card on how one manages their finances and gives a credit score based on their past credit history and behaviour. This report helps the lender to take a decision on granting of loan and also, on the rate of interest they should charge.

The grant or denial of a loan depends on various factors, one of which is the credit score of the applicant. However can an application for an educational loan be denied solely due to the fact that the applicant’s parents have unsatisfactory credit scores? A similar situation was addressed by the Kerala High Court in the case of Pranav v. Branch Manager SBI.

Facts of the Case:-

  • The petitioner is a 1st year B.Tech student in Food Technology who had applied for an education loan for pursuing his studies in an Engineering College in Tamil Nadu.
  • The application had been declined on the ground that the CIBIL report of the petitioner’s father showed that there was a default in a commercial vehicle loan availed by him.
  • In the hope of getting the education loan sanctioned, the petitioner’s father closed the commercial vehicle loan and got the fact endorsed in the registration particulars of the vehicle.
  • It was submitted that even thereafter and after the closure of the loan was brought to the notice of the respondent, the application for education loan was declined stating that the credit history of both the parents reveal multiple defaults.

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Submission by Petitioner 

  • The petitioner submits that after the default had been cleared, the continued rejection of the education loan on the ground of past default is completely illegal.
  • Reliance was placed on judgment of the Madras High Court as well as judgment of this Court where directions had been issued to grant education loans in similar circumstances.

Submission by Respondent

  • Writ petition to release an education loan is not maintainable.
  • While processing the loan application submitted by the petitioner it was seen that the petitioner’s parents had earlier been sanctioned vehicle loans, cash credit loans and gold loans from the State Bank and from other banks.
  • The vehicle loan was repaid only after the loan became overdue. The cash credit loan had become NPA on multiple occasions and the credit history of the petitioner’s parents did not permit the sanction of the educational loans.
  • The model education loan scheme of the Indian Banks Association and Office Memorandum prescribing guidelines issued by the State Bank of India were relied on to contend that the credit score is liable to be taken into account where education loan is sought for prosecution of studies in management quota in colleges outside the State.
  • It was further contended that the CIBIL score of the petitioner’s father and mother do not justify the grant of loan.

Observations of High Court with reference to a previous similar case

  • It is clear that the petitioner’s application for education loan has been rejected by the respondent on the sole reason that the CIBIL report of the petitioner’s father is unsatisfactory.
  • The credit history of both parents also revealed multiple defaults.
  • This Court had previously considered a similar situation.
  • The petitioner therein was also an OBC candidate who secured admission for BDS course in a private college in Thiruvananthapuram.
  • The contention of the bank was specifically that the guidelines issued by the Indian Bank Association did not permit the issuance of the education loan.
  • The specific contention was that the credit score of the parents of the petitioner therein did not justify the issuance of the loan.
  • Insofar as the object of the Educational Loan Schemes formulated by the Bank in compliance with the circular issued by the Reserve Bank of India having statutory force is to ensure that a meritorious student shall not be deprived of the opportunity to pursue higher education merely on the ground that he/she does not have resources for the same.
  • The Model Scheme formulated by Indian Banks’ Association which was forwarded by the Reserve Bank of India to lending Banks for formulation of appropriate Educational Loan Schemes was one in which the repayment possibilities of the loan were contemplated to be made not on the financial position of the parents but solely on the projected future earnings of the students on employment after education.
  • High Court was of the view that the rejection of the request for loan on the ground that the father of the petitioner does not have the requisite credit score is arbitrary and violative of the spirit of the circular issued by the Reserve Bank of India dated 28.04.2001 which is binding on the Bank.

Opinion of the High Court in the Current Case

  • High Court was of the opinion that the only difference in the instant case is that the petitioner seeks the loan for joining a B.Tech course in a college outside the State.
  • The contention of the respondents that the admission is in the management quota is not borne out by any documents.
  • The orders of rejection also did not disclose any such consideration for the rejection of the loan.
  • The petitioner belongs to OBC community and he is seeking the educational loan for continuing his B.Tech studies.
  • High Court was of the opinion that unsatisfactory credit scores of the parents of the petitioner cannot be a ground to reject an educational loan in view of the fact that the repayment capacity of the petitioner after his education should be the deciding factor as per the scheme.
  • High Court directed the respondents to reconsider the application preferred by the petitioner for education loan within two weeks from the date of receipt of a copy of this judgment.
  • The respondent is to abide by the RBI guidelines and the model scheme and shall take all efforts to see that the petitioner is granted all benefits due thereunder.
  • The CIBIL scores of the parents shall not be pressed into service to deny the loan, if the petitioner is otherwise found eligible.

Thus, an application for an educational loan cannot be denied solely due to the fact that the applicant’s parents have unsatisfactory credit scores as it was held by the Kerala High Court in the case of Pranav v. Branch Manager SBI.

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