Education loans cannot be refused due to co-borrowers’ low CIBIL scores.
Facts and issues of the case
The petitioners are aggrieved by the denial of education loan. The petitioner wanted to study Post Graduate Diploma in Management (Securities Market) in the National Institute of Securities Markets (NISM), Navi Mumbai. The petitioner submitted application for education loan of ₹7,30,000/- to the 2nd respondent-Manager of State Bank of India. The petitioner had submitted all documents required by the Bank in support of the application. The Bank, however, rejected the loan application submitted by the petitioner. The 2nd respondent rejected the application for education loan for the reason that the CIBIL score of the co-applicant is not up to the mark. The petitioner challenges Ext.P6 communication and seeks to direct the 2nd respondent to process his loan application.
The petitioner in W.P.(C) No.4821/2022 wanted to study MBA in Happy Valley Business School, Coimbatore, affiliated to Annamalai University, Chennai. The petitioner submitted application for sanction of education loan of an amount of ₹3,96,000/- from the respondent-Branch Manager of the State Bank of India. The petitioner submitted all the requisite documents in support of her application. The respondent, however, issued letter stating that the CIBIL score of the co-borrower is less than 685. The petitioner was required to resubmit the application with a co-borrower of satisfactory credit history.
The respondent stated that Circular dated 27.06.2014 issued by the Reserve Bank of India requires that banks/financial institutions should 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 Bank processed the application submitted by the petitioners and it was found that the credit history of co-borrowers is not up to the mark.
The educational loans, along with instalment and leases, and small business facilities and commitments, are classified as retail loans as per Circular issued by the Reserve Bank of India, contended the respondents. Consequently, in Master Circular dated 20.03.2021 issued by the State Bank of India, it was provided that Borrower/Co-borrower/Guarantor should not have any adverse credit history. In case of secured loans, CIBIL Score should be -1 or more than 591 and in the case of unsecured loans, CIBIL Score should be -1 or more than 685.
The learned counsel for the respondents argued that the judgment of this Court in Pranav S.R. (Supra) was delivered on the basis of the Model Scheme framed by the Indian Banks Association and this Court had no opportunity to analyse and Circulars of the RBI and Master Circular issued by the SBI based on the Circulars of the RBI. Relying on the judgment of the Hon’ble Apex Court in ICICI Bank Limited v. Official Liquidator of APS Star Industries Limited and others the learned Standing Counsel argued that the Circulars issued by the RBI have statutory force. The Standing Counsel also relied on the judgment in Annamalai University represented by Registrar v. Secretary to Government, Information and Tourism Department and others and urged that the Circulars and Guidelines of the RBI have the status of subordinate legislation.
When a judgment is delivered without adverting to such statutory instruments, such judgment should be treated as per incuriam, contended the Standing Counsel, relying on the judgment in Dr. Shah Faesal and others v. Union of India and another.In this Court directed the student to substitute the Co-obligant with one having sufficient credit score, in order to avail educational loan, pointed out the Standing Counsel. In Kasaragod Co-operative Educational Society Ltd. No.C.904 v. Registrar of Co-operative Societies (General), Thiruvananthapuram and others , this Court has held that writ petition is not the remedy when a Co-operative Bank denies loan, contended the petitioner.
Observation of the court
The court had heard the learned counsel for the petitioners and the learned Standing Counsel representing the Bank.
The applications submitted by the petitioners for educational loan have been rejected by the Bank for the reason that the parents / co-applicants do not have the requisite credit score. This Court in Pranav S.R. (Supra) has held that unsatisfactory credit scores of parents cannot be a ground to reject an educational loan in view of the fact that the repayment capacity of the student after his education should be the deciding factor as per the Circulars issued by the Indian Banks Association.
The respondents argue that the judgment in Pranav S.R. (Supra) was delivered by this Court, based on Circulars issued by the Indian Banks Association and this Court had no opportunity to read Exts.R2(a) and R2(b) Circulars issued by the RBI, which have statutory support as those are issued in exercise of the powers under Section 35A of the Banking Regulation Act. The fact that Banks are bound by the Circulars issued by the RBI, is not in dispute.
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. Vidya Lakshmi Portal for students seeking Education Loan has been developed under the guidance of Department of Financial Services, (Ministry of Finance), Department of Higher Education (Ministry of Education) and Indian Banks Association (IBA).In exercise of the powers conferred by Sections 21 and 35A read with Section 56 of the Banking Regulation Act, 1949, the Reserve Bank of India, in public interest, has issued Reserve Bank of India (Priority Sector Lending- Targets and Classification) Directions, 2020. Direction 4 contained therein categorises Education as a priority sector. Direction 11 states that Loans to individuals for educational purposes, including vocational courses, not exceeding ₹20 lakhs will be considered as eligible for priority sector classification.
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 judgment in Kasaragod Co-operative Educational Society Limited (supra) was a case involving denial of a commercial loan and hence will not apply to the facts of the case. In view of my finding that do not apply to the facts of these writ petitions, the judgments of the Hon’ble Apex Court in ICICI Bank Limited (Supra) and Annamalai University (Supra) will not be of any assistance to the respondents.
This Court in the judgment in Pranav S.R. (Supra) has held that for educational loans, the repayment possibilities are to be decided not on the financial position of the parents but solely on the projected future earnings of the students on employment after education. In view of the facts and reasons stated above, I find no reason to take a different view in the matter.
The writ petitions are therefore allowed. The respondents are directed to reconsider the loan applications submitted by the petitioners, disregarding the low Credit Score of the co-obligants, if any, and sanction and disburse eligible loan amount, if the petitioners are otherwise eligible, within a period of one month.Kiran-David-Vs-Assistant-General-Manager-State-Bank-of-India-Kerala-High-Court-123