Educations loans cannot be denied due to low CIBIL score: Kerala HC

Banks are in a bind as Kerala High Court directs them to exercise more compassion with students, as guarantors frequently default on education loan repayments

Kerala High Court, in May, ruled that education loan applications could not be rejected due to low CIBIL scores by lenders. The court emphasised the need for a more compassionate approach when evaluating such applications.

This ruling has left banks in a bind as education loans have a history of poor performance within the banking system. This is primarily due to factors such as the absence of collateral, interest repayment moratorium until the course completion, and the inability of parents to repay the loan in many cases reported the Financial Express.

In the report, bank officials stated that while they carefully assess education loan applications, looking for strong evidence that the education pursued will lead to good employment prospects and subsequent loan repayment, it is usually the parents who have to ensure the repayment. This is because most students do not have an independent income.

In addition, as interest accrues during the loan period, increasing the repayment amount over time, lenders exercise caution and often rely on the parent guarantors.

Ultimately banks stated that they have a responsibility to ensure that loans are likely to be repaid within the normal course of business.

While banks want to exercise caution, Kerala HC has a different perspective on the matter. Justice PV Kunhikrishnan told LiveLaw that a loan application should not be rejected solely based on a low CIBIL score as students will be leading the future of the country.

The case

According to media reports, Noel Paul Fredy, a 23-year-old student, was denied a loan due to his low CIBIL score of 560. Fredy had completed his course on May 31 and secured a job in Oman. However, he had taken out two loans, with one of them being overdue for Rs 16,667, which has caused the low score.

Advocate George Poonthottam, who represented the petitioner, emphasised the urgency of receiving the loan and argued that the job offer would repay the entire loan amount.

After hearing the arguments presented, Justice Kunhikrishnan stated that while banks may be overly technical, a court of law cannot ignore the practical realities of the situation. Consequently, the court directed the bank to sanction and disburse an education loan of Rs 4,07,200 to the petitioner's college.

What is a CIBIL score?

A CIBIL score is a credit score used to evaluate the creditworthiness of individuals and businesses. CIBIL stands for Credit Information Bureau (India) Limited, which is one of the four credit bureaus authorised by the Reserve Bank of India (RBI) to maintain credit records and generate credit scores.

The CIBIL score is a three-digit numeric summary ranging from 300 to 900, with 900 being the highest score. It is based on an individual's credit history, which includes information about their borrowing and repayment activities such as loans, credit cards, and outstanding debts. The score is calculated using various factors, including the individual's payment history, credit utilisation, length of credit history, types of credit, and recent credit inquiries.

Lenders, such as banks and financial institutions, use the CIBIL score as a crucial factor when assessing an individual's creditworthiness.

Other than the CIBIL score, lenders must also take into account income and employment history, as well as additional documentation requirements depending on the type of loan.