There was a "significant failure" by the agency, which failed to act on notifications by institutions that overseas students had not enrolled or had stopped attending classes, according to John Vine, the independent chief inspector of borders and immigration.
His report, An inspection of Tier 4 of the Points Based System (Students), says that the UKBA had no targets for responding to notifications from institutions.
"As a result, notifications of changes to circumstances of students, details of students failing to enrol or attend classes, or curtailment of sponsorship were not being acted upon," it says.
"Over 150,000 notifications had accumulated and were awaiting action, meaning that potentially thousands of students had retained leave to remain when they should not have done so."
However, by May this year the UKBA had reviewed all notifications and was trying to remove students who had overstayed their visa, it adds.
The UKBA had a "robust process" for awarding Highly Trusted Sponsor status, the new requirement for intuitions that want to sponsor international students, the report says.
"There was also good practice with the Agency taking a pragmatic approach to some decisions and all refusals being subject to a review by a Senior Manager," it concludes.
But it added that the process could be "onerous" and "could take a long time", with some sponsorship decisions taking more than 6 months.
Meanwhile, figures on met migration released today show a large drop in the number of overseas students entering the country.
According to the data from the Office for National Statistics, the number of non-European Union students migrating to the UK was 163,000 in the year to March 2012. This is down from 175,000 over the previous 12 month period. The fall was a major factor in a large drop in net migration to 183,000 in the year to March 2012 from 242,000 the previous year.
Nicola Dandridge, chief executive of Universities UK, said the figures on students included further education, English language schools and colleges as well as higher education institutions.
"However, it appears that legitimate university sponsored student numbers are now being affected. This tends to support other evidence that [international] university students numbers are stagnating and falling in some places.
"Recent Ucas data on applications from non-EU students shows that these are down by 0.8 per cent compared with a nearly 12 per cent increase at the same time last year."