Banks repeatedly violate RBI’s circular, deny student loans citing parents’ credit score

Despite the mandate of an education-loan policy to benefit poor students that has been in place since 2001, India's public-sector banks continue to deny student loans citing poor credit ratings. INDRANIL MUKHERJEE/AFP/Getty Images
16 January, 2021

Nearly twenty years after the National Democratic Alliance government introduced an education loan scheme to benefit students from poor families, India’s public banks continue to deny loans to students whose parents have poor credit ratings. The Indian Banks’ Association, a representative body of all banks with offices in the country, had prepared this proposal as a model education loan scheme in 2000. The next year, the NDA government announced the scheme in the union budget, promising concessions to students wishing to pursue higher education, and the Reserve Bank of India notified it in April that year. But the experience of students and the continuing need for judicial intervention indicates that the scheme’s implementation is not steered by the benefit to aspiring students, but by the caution of banks.

The RBI’s circular stated that the loan scheme “aims at providing financial support from the banking system to deserving/meritorious students for pursuing higher education in India and abroad.” To be eligible under the scheme, students should have scored 60 percent in the qualifying examinations for graduation courses; for Scheduled Caste or Scheduled Tribe applicants, the requirement was 50 percent. The scheme permitted all commercial banks to provide loans “subject to repaying capacity of parents/students,” with a ceiling of Rs 7.50 lakh for courses in India and Rs 15 lakh for courses abroad. Further, it offered a moratorium on the repayment of the loan for the period of the course and one year afterwards, or six months of getting a job, whichever came earlier.

“The main emphasis is that every meritorious student though poor is provided with an opportunity to pursue education with the financial support from the banking system with affordable terms and conditions,” the RBI’s circular stated. “No deserving student is denied an opportunity to pursue higher education for want of financial support.” Yet, students from economically disadvantaged backgrounds who apply for an education loan are commonly rejected by public-sector banks, citing their parents’ low CIBIL score. A CIBIL score refers to a three-digit number issued by the Mumbai-based credit-information company TransUnion CIBIL, which was formerly known as the Credit Information Bureau India Limited.

Banks refer to this score while assessing the creditworthiness of a potential borrower. However, the RBI’s circular does indicate that the students, and not their parents, are considered the principal borrowers. In fact, in August 2015, the Indian Banks’ Association released “Revised Guidance Notes” on the education loan scheme. “The student borrower has no credit history and as such he is assumed to be creditworthy as this is a futuristic loan,” the Guidance Notes state. It even addresses circumstances where an applicant-student’s parents have a poor credit rating. “It is likely that the joint borrower for the loan has a credit history and any adverse features could have a bearing on the assessment of credit risk … To overcome this, the bank may, as a prudent measure insists on a joint borrower acceptable to the bank, in case of adverse credit history of the parent/guardian of the student.”

But none of these appear to be implemented in practice. Vani Rajeev, a student pursuing her bachelor of science in radiology, was one such student whose education-loan application was declined by the State Bank of India citing her single mother’s poor credit history. “We had applied for the loan in February,” Anju Jayan, Vani’s mother, told me on the phone. “My daughter does not have her father. She only has me. I had a CIBIL record since I had applied for a housing loan before. The loan was rejected because of my CIBIL record.” In February 2020, Jayan applied for a loan of Rs 4 lakh for her daughter’s education, but SBI’s Kulasekharamangalam branch, in Kottayam, rejected the application soon after.

In July 2020, the Kerala High Court ruled in a similar case against a decision by a branch of the same bank in Kerala’s Kollam district, where a student’s loan application was rejected by the bank because of his parents’ low CIBIL score. “I am 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 clause 10 of Ext R1 (a) scheme,” the verdict stated. The exhibit cited by the court referred to a 2016 circular issued by the IBA, which revised the original model education loan scheme to “enlarge the coverage” and “address some of the weaknesses noticed.” The clause 10 mentioned in the judgment stated, “In the normal course, while appraising the loan, the future income prospect of the student only will be looked into.”

The petitioner in the case was a 20-year-old student, Pranav SR, who had applied for an education loan of Rs 5,70,000 in order to pursue a bachelor of technology course in Tamil Nadu. The loan application was rejected on the grounds that Shaji R, Pranav’s father, had defaulted on a commercial vehicle loan, according to his CIBIL report. “I paid the money that was due this month in the following month,” Shaji explained to me. “I paid the dues this way for two months. They informed me that my CIBIL score is low because I had a month’s arrears pending.” Shaji then closed the vehicle loan so that Pranav could apply again, but the bank rejected his application again stating that his parents had poor credit histories. 

Shaji said he felt dismayed by the treatment of bank officials towards borrowers, noting that his wife and Pranav had approached SBI’s Kadakkal branch to apply for the loan. “The manager there told my wife that if you have children, you should educate them only if you have money,” Shaji said. “It really upset me to hear that. What is even more upsetting is that they never bother to even accept the application by hand. They just ask you to drop the application on the table and leave.” The application was declined again, in May 2020.

The family then moved the high court and received a favourable order in two months. But even after the order, Shaji said, the bank tried to delay the sanction of the loan “as much as possible,” before eventually processing it. Their advocate, B Mohan Lal, said the bank officials were “reluctant to comply” with the order. “We had to intimidate them with the prospect of a contempt notice,” he said.

The previous year, Lal had appeared for another student, Noorjahan NS, who had filed a writ petition in the high court against SBI’s Kottarakara branch in Kollam after her application for an education loan had been rejected on similar grounds. Noorjahan had applied for a loan of Rs 7,40,000 to cover the expenses of her course at a dental college. As in Pranav’s case, her loan was also rejected because of arrears on a vehicle loan availed by her father. “I had bought a four-wheeler in 2010 on a long-term loan that could be repaid until 2017,” Najeeb Khan, Noorjahan’s father, said. “I missed paying three instalments of the loan on time. It affected my CIBIL score.”

The SBI’s counsel argued in the case that the court cannot interfere “in a commercial decision of the present nature.” However, the court observed that the loan scheme was introduced as a “socially and economically relevant scheme” to support the pursuit of higher education of students who may be in want of financial assistance. The court finally ruled in Noorjahan’s favour, noting that SBI’s rejection of the loan application based on her parent’s credit score was arbitrary. The court stated that repayments under this scheme “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.”

Lal pointed to the similarities in the two cases. “In both the cases, the parties had paid off their dues through a one-time settlement or otherwise,” he said. “But when you apply for a loan and you have to deposit a particular amount by say, 15th every month and you pay the amount on 16th, you are treated as a defaulter. Even if you pay dues of two or five months in a single instalment, you will still be a defaulting person. Then they will always perceive you as a thief.”

The advocate also pointed out that both students belong to Other Backward Classes, a fact mentioned in both court orders. “In the case of Noorjahan, she had obtained admission in the management quota in a self-financing college,” Lal told me. A management quota refers to seats for admission that are filled by a university based on its discretion, and not strictly by the general eligibility criteria. “So they argued that she is not a meritorious candidate. They raised the same point in the second case as well.” But the IBA’s guidelines, as revised in 2015, stated that “a student getting admission offer under merit quota may choose to take up a course under management quota as a personal preference. Such students may be sanctioned loans under this Model Scheme.”

Despite the recent court orders, Lal said that rejection of education loans based on parents’ CIBIL records continues to be commonplace, as reflected by the case of Vani Rajeev. In July, soon after Pranav’s case was reported in the papers, Rajeev approached SBI’s Kulasekharamangalam branch again, and tried to argue her case using the high court’s ruling. “But they said that they have received no such directive,” her mother Jayan told me. She was working as an accountant in UAE until 2014, when she lost her job and returned to Kerala. In desperation, Rajeev even wrote to the prime minister Narendra Modi and the union finance minister Nirmala Sitharaman, informing them of her situation, in October last year. “I am requesting you with great agony and advice me to continue my studies to support my family,” she wrote. “My only hope of survival is the education loan.”

On 30 December, Rajeev received a letter from SBI referring to her letter to the prime minister. It simply repeated that Jayan was denied the loan because of her CIBIL score. The family was unsure about challenging the bank’s decision in court because the legal fees would be expensive. “I am educating her by borrowing money,” Jayan told me. “Denying her an education is not an option.”

As early as 2011, the Madras High Court had ruled that students are the principal borrowers of education loans, and not their parents. In its judgment that year in the case of Hannah Dotris versus Assistant General Manager, State Bank of Mysore, the court held, “The bank should adopt a more reasonable and pragmatic approach to the entire issue bearing in mind that the repayment shall be made by the student concerned, who avails loan and such repayment commences after completion of her course of study.” Yet, public-sector banks have continually denied the loans, leading the Madurai bench of the Madras High Court to take note of it in 2018. Citing the 2011 judgment, the bench observed, “It is rather unfortunate that the aforesaid order came to be passed in the year 2011 and various subsequent orders of this court had also passed, even then the financial institutions have been continuing to reject applications of this nature on similar grounds.”

K Srinivasan, the convener of Education Loan Task Force—a Chennai-based voluntary body that offers guidance to students in the application process—said that housing and vehicle loans, unlike education loans, are sanctioned after assessing the present financial status of the borrower. “IBA has clarified that educational loans have to be dealt with in an independent manner and not to be linked to the CIBIL rating of your parents,” he said. In case a bank is concerned about the credibility of a borrower because of their parent’s poor CIBIL rating, Srinivasan suggested that a family member or anyone who does not have a low CIBIL score can stand in as a third-party guarantor on the repayment of the loan.

In 2015, the union ministry of finance collaborated with the department of higher education—under the ministry of human resources development—and the IBA to launch Vidya Lakshmi, a web portal to ease the process of securing education loans. According to Srinivasan, while the portal created a single window for students to apply to multiple leading banks across the country, its implementation has been poor. “You apply to three banks but none of the banks will take it seriously and the students don’t know where to complain. Nobody takes a decision because they think the other person will,” he told me. He suggested that instead of a simultaneous submission of loan requests to three banks, there should be a hierarchical process where the student has to consult a second or a third bank only after her first choice of bank declines her application.

Emailed queries to the concerned SBI branches, the IBA and the MHRD went unanswered. This piece will be updated if and when a response is received.

Srinivasan pointed to one recurring factor that led to mistrust between banks and borrowers in Tamil Nadu—during election seasons in the state, political parties promise a waiver on education loans. “It unnecessarily misguides the students,” he told me, noting that he receives hundreds of queries from students who ask him when the loan waiver would be implemented. “Later, when a statement is given that it is not possible, no media will take it up. If DMK or AIADMK declare that education loans will be written off, that will come as a prominent news item. Then all students who borrowed will get misled. With the hope that the government will write it off, they will stop repayment.”

The data suggests a steady decline in education loans to less privileged students. In January 2020, the Business Standard reported that according to RBI data, there has been a steady drop in the growth of education loans since 2016, with outstanding loans contracting by 3.4 percent as of November 2019. The report further stated that high-value loans—of above Rs 10 lakh—were rising, and only smaller loans, which benefit the lesser privileged, were shrinking. According to RBI data, the report stated, the sum of outstanding education loans smaller than Rs 10 lakh declined from Rs 60,000 crore in March 2016 to Rs 53,000 crore by the end of November 2019. In December 2019, Sitharaman had said that there is no proposal under consideration for waiver of education loans, adding that banks have been instructed to adopt a “non-coercive strategy” to recover the loans.

Srinivasan said education loans were not a priority for the banks or for the government. “There are serious attempts at every level—at the banks’ level, at the government level—to discourage educational loans,” he said. “Nobody takes it seriously. Interest subsidy also is not properly disbursed.” Srinivasan added, “Education loan is an investment, it is not a loan at all. It is a national investment, investment on the future knowledge of society.”