The Kerala High Court has delivered a significant judgment clarifying the legal framework governing educational loan eligibility, holding that banks are justified in rejecting applications based on the co-borrower's unsatisfactory credit score under the Indian Banks' Association (IBA) Model Educational Loan Scheme. The Court dismissed multiple writ petitions filed by students seeking directions to banks to grant loans disregarding their parents' credit history, reinforcing the statutory and policy-based criteria for loan approvals.
Background & Facts
The Dispute
The petitioners, all students pursuing higher education, applied for educational loans from various banks, including State Bank of India and Indian Bank. Their applications were rejected on the ground that the credit score/credit report of their co-borrowers (typically their parents) was unsatisfactory. The petitioners challenged these rejections, contending that the creditworthiness of the co-borrower should not be a determining factor for granting educational loans, as the repayment capacity of the student post-education is the primary consideration under the IBA Model Educational Loan Scheme.
Key Facts
The petitioners are students pursuing courses such as B.Sc. Nursing, MBA, and other professional degrees in recognized institutions.
Each petitioner submitted an educational loan application, supported by documents such as fee structures, admission letters, academic certificates, and CIBIL reports of their co-borrowers.
The banks rejected the applications citing low credit scores or adverse credit histories of the co-borrowers, as per the Master Circulars and IBA Model Educational Loan Scheme.
The petitioners relied on earlier Single Bench decisions of the Kerala High Court, which had directed banks to reconsider loan applications disregarding the co-borrower's credit score.
The petitioners also invoked the Credit Guarantee Fund Scheme for Educational Loans (CGFSEL), arguing that the scheme guarantees repayment of loans in case of default, thereby rendering the co-borrower's credit score irrelevant.
Procedural History
The writ petitions were filed in 2025-2026, challenging the rejection of educational loan applications:
WP(C) No. 40358/2025: Filed by Dilha Jan Govindan, seeking loan for MBA at DC School of Management and Technology, Vagamon.
WP(C) No. 45597/2025: Filed by Margaret M. Kochumuttom, seeking loan for B.Sc. Nursing at St. Martha's Hospital, Bengaluru.
WP(C) No. 4667/2026: Filed by Alana Mariya Gimmi, seeking loan for nursing course at Netaji School of Nursing, Mangaluru.
WP(C) No. 10522/2026: Filed by Juwana Rajan, seeking loan for MBA at Marian Institute of Management, Kuttikkanam.
WP(C) No. 15675/2026: Filed by Sooryan, seeking loan for an unspecified course.
WP(C) No. 19554/2026: Filed by Aiswarya Babu, seeking loan for B.Sc. Nursing at Shri Maruti College of Nursing, Karnataka.
The petitions were clubbed together for hearing as they raised identical legal issues.
The Parties' Positions
For the Petitioners
The denial of educational loans based on the co-borrower's credit score is arbitrary and illegal, as the repayment capacity of the student post-education should be the primary consideration.
The IBA Model Educational Loan Scheme and RBI Circulars do not explicitly mandate rejection based on the co-borrower's credit score.
The CGFSEL guarantees repayment of loans in case of default, rendering the co-borrower's credit score irrelevant.
The rejection violates Articles 14 and 41 of the Constitution of India, which guarantee the right to equality and the right to education.
Relied on earlier judgments such as Noorjahan N.S. v. State Bank of India [2019:KER:72386], Pranav S.R. v. State Bank of India [AIR 2020 Ker 161], and Kiran David v. State Bank of India [2022 (2) KHC 373], which had directed banks to reconsider loan applications disregarding the co-borrower's credit score.
For the Respondents/Banks
Educational loans are not a matter of right; banks can grant loans only if the applicants satisfy the conditions under the IBA Model Educational Loan Scheme and Master Circulars.
The Credit Information Companies (Regulation) Act, 2005 mandates consideration of the co-borrower's credit score to assess creditworthiness and reduce Non-Performing Assets (NPAs).
The CGFSEL is a guarantee scheme for defaulted loans and does not dilute the eligibility criteria under the IBA Scheme.
Earlier judgments relied upon by the petitioners were rendered under older versions of the IBA Scheme, which did not explicitly require consideration of credit scores. The extant IBA Scheme (2021-2022) mandates this requirement.
The decision in Haritheeth P. v. State Bank of India [2024:KER:78076] holds the field, as it considered the extant IBA Scheme and upheld the rejection of loan applications based on adverse credit reports.
Relief Sought
The petitioners sought the following reliefs:
A direction to the respondent banks to grant educational loans disregarding the credit score of the co-borrowers.
A declaration that the rejection of loan applications based on the co-borrower's credit score is illegal and violative of fundamental rights.
Costs and other incidental reliefs.
The Legal Issue
The central legal questions before the Court were:
Whether banks can reject educational loan applications solely based on the credit score/credit report of the co-borrower under the IBA Model Educational Loan Scheme and Master Circulars?
Whether the Credit Guarantee Fund Scheme for Educational Loans (CGFSEL) renders the co-borrower's credit score irrelevant for loan approval?
Whether the rejection of educational loans based on the co-borrower's credit score violates Articles 14 and 41 of the Constitution of India?
The Court's Analysis
The Court undertook a detailed analysis of the IBA Model Educational Loan Scheme, Master Circulars, CGFSEL, and Credit Information Companies (Regulation) Act, 2005, along with relevant judicial precedents.
Interpretation of the IBA Model Educational Loan Scheme
The Court noted that the IBA Model Educational Loan Scheme has evolved over the years, with the 2021 and 2022 versions explicitly requiring consideration of the credit score and credit report of the co-borrower. The Scheme was formulated pursuant to a policy decision by the Government of India to provide financial support to meritorious students, but it does not create a right to educational loans.
"The Model Educational Loan Scheme was formulated by the Indian Banks' Association at the instance of the Central Government on the introduction of the Educational Loan Scheme in the year 2001. The Scheme was modified from time to time to address difficulties arising during implementation."
The Court relied on the Division Bench decision in Arya v. Reserve Bank of India [2015 (4) KLT 478], which held that there is no fundamental right to educational loans and that the right to higher education is not a fundamental right.
Validity of Credit Score as a Criterion
The Court observed that the Credit Information Companies (Regulation) Act, 2005 was enacted to provide a mechanism for collecting and sharing credit information of borrowers to reduce NPAs and ensure financial discipline. The Act mandates that banks consider the credit score/credit report of applicants to assess their creditworthiness.
"When the financial credibility of the Applicants for loans is verified at the time of granting the loan itself with reference to their credit history provided by the Credit Information Companies, it would avoid the possible defaults of the loan and would reduce the NPAs."
The Court held that ignoring the credit score of the co-borrower would defeat the purpose of the Act and lead to increased defaults, particularly in educational loans, which constitute a major share of NPAs.
Analysis of CGFSEL
The Court examined the Credit Guarantee Fund Scheme for Educational Loans (CGFSEL) and held that it is not a scheme for granting loans but a guarantee scheme for defaulted loans. The CGFSEL guarantees 75% of the defaulted amount to the lending institution, but the bank remains responsible for recovering the entire outstanding amount from the borrower.
"The provisions of the CGFSEL could not be considered for the grant of Educational Loan under the IBA Model Educational Loan Scheme. The CGFSEL does not in any way dilute provisions in the IBA Model Educational Loan Scheme."
The Court relied on the decision in Nizamudheen P. v. Union of India [2023:KER:19425], which had rejected a similar contention based on the CGFSEL.
Judicial Precedents
The Court distinguished earlier Single Bench decisions relied upon by the petitioners:
In Noorjahan N.S. v. State Bank of India [2019:KER:72386], the Court had directed the bank to insist on another relative as co-borrower, effectively nullifying its observation that credit score is irrelevant.
In Pranav S.R. v. State Bank of India [AIR 2020 Ker 161], the Court had held that the repayment capacity of the student is the deciding factor, but this was based on the 2001 IBA Scheme, which did not explicitly require consideration of credit scores.
The extant IBA Scheme (2021-2022) mandates consideration of credit scores, and the decision in Haritheeth P. v. State Bank of India [2024:KER:78076] holds the field, as it considered the updated Scheme.
The Court held that the petitioners could not demonstrate any violation of the IBA Scheme or Master Circulars and were bound by the decision in Haritheeth P.
The Verdict
The Court dismissed all the writ petitions, holding that:
The rejection of educational loan applications based on the co-borrower's low credit score/unsatisfactory credit report is legal and sustainable under the extant IBA Model Educational Loan Scheme and Master Circulars.
The CGFSEL does not dilute the eligibility criteria under the IBA Scheme, as it is merely a guarantee scheme for defaulted loans.
The petitioners failed to demonstrate any violation of the IBA Scheme or Circulars by the banks.
The banks were directed to reconsider the loan applications if the petitioners provide an eligible co-borrower with a satisfactory credit score/report.
What This Means For Similar Cases
Credit Score Is a Valid Criterion Under Extant IBA Scheme
Banks are justified in rejecting educational loan applications based on the co-borrower's low credit score under the 2021 and 2022 IBA Model Educational Loan Schemes.
Practitioners must note that earlier judgments directing banks to disregard credit scores were based on older versions of the IBA Scheme and are no longer good law.
The decision in Haritheeth P. v. State Bank of India [2024:KER:78076] is the governing precedent, as it considered the extant Scheme.
CGFSEL Does Not Guarantee Loan Approval
The Credit Guarantee Fund Scheme for Educational Loans (CGFSEL) is not a scheme for granting loans but a guarantee mechanism for defaulted loans.
The CGFSEL does not override the eligibility criteria under the IBA Scheme, and banks remain responsible for recovering 100% of the defaulted amount.
Practitioners cannot rely on the CGFSEL to bypass credit score requirements for loan approval.
No Fundamental Right to Educational Loans
There is no fundamental right to educational loans under Articles 14 or 41 of the Constitution.
The right to education does not include a right to financial assistance from banks, and loan approvals are subject to policy-based criteria.
Students must satisfy all eligibility conditions, including providing a co-borrower with a satisfactory credit score, to avail educational loans.
