Credit Counselling for Responsible Retail Banking Dilip Tommy Monson,2011PGP624

Credit Counselling can be defined as 'counselling that explores the possibility of repaying debts outside bankruptcy and educates the debtor about credit, budgeting, and financial management. It can be considered as an integral part of financial literacy which serves to provide familiarity with and understanding of financial market products, especially rewards and risks, in order to make informed choices. Credit Counselling can be mainly used to serve three purposes Solving Existing Financial Problems Educating consumers about the cost of credit mismanagement and improving financial management Encouraging distressed people to access formal financial system

Based on the functions performed by credit counselling, it can be thus broadly classified into Preventive Counselling: In preventive counselling, the centre provides awareness regarding cost of credit, availability of backward and forward linkages where warranted, etc. The clients are also advised on how to avail of credit on the basis of their repaying capacity. Preventive counselling can be done through the media, workshops and seminars Curative Counselling: The client approaches the counselling centres to work out individual debt management plans for resolving their unmanageable debt portfolio. Here, the centre tries to renegotiate the loan with the bank so that the credit terms are relaxed or altered to facilitate the payment of loans by the borrower.

History of Credit Counselling Credit Counselling agencies started in U.S in 1951 with the setting up of The National Foundation of Credit Counselling(NFCC). It was initially started to monitor legislative and regulatory activity for its retail credit members and also conducted public awareness campaigns on credit. Further NFCC tried to promote financial literacy and help consumers avoid bankruptcy. Credit Counselling agencies has also gained popularity in Europe with both for profit-making debt management companies and charities such as Christians Against Poverty and the Consumer Credit Counselling Service gaining widespread acceptance. Credit Counselling- The Indian Context In India the financial sector has undergone vast transformations due to: Globalization, advances in technology, and greater market orientation and financial innovation. Increase in retail lending due to shift from traditional need-based lending to broadbased portfolio lending. This has led to rapid increase in consumer loans, housing loans, credit card and personal loans. The retail sector credit increased at a rate of 43.3% in comparison to the overall growth rate of 23.4%.

Credit Growth Retail Segment (2001-2006)

300,000 250,000 200,000 150,000 100,000 50,000 0

CAGR=43.3%
258,000 42,700 2001 2006

Mind set of urban Indian consumers underwent a transformation due to increase in disposable income and changing lifestyle aspirations. This resulted in an increase in debt of the people due to use of credits to finance future consumption. Further, decreased job stability, increasing of interest rates and unexpected medical emergencies could result in increasing debt burden for Indian consumers. Also, aggressive marketing of personal loans and credit cards could also result in increasing over- indebtedness and rising NPAs. In rural areas, especially in areas of rain-fed agriculture, vagaries of monsoon, coupled with lack of adequate risk mitigation policies lead to hardship for the raindependent segment of the farming population. Further lower literacy rates in rural areas in comparison to urban areas made them susceptible to financial exploitation. Lack of proper financial structure also led to high interest burden in rural regions. Traditional moneylenders used to charge interest as high as 30%. In this background, the RBI was initiating regulatory and supervisory initiatives to ensure soundness of the financial system and to bring the masses within the fold of the formal financial system. However this also meant that an adequate consumer protection and education framework is in place. Further, a need for a follow-up mechanism by which distressed borrowers could overcome their credit delinquencies was felt. The working groups chaired by Shri C.P. Swarnkar and Shri S.S. Johl, constituted by the Reserve Bank thus emphasized the need for credit and technical counselling for increasing the viability of credit, particularly in the relatively under-developed regions. In the light of the recommendations of the two groups in the Annual Policy Statement of 2007-08, the convenor banks of the State/Union Territory Level Bankers Committees were advised in May 2007 to set up, on a pilot basis, a financial literacy and credit counselling centre in the State/Union Territory, coming under their jurisdiction. Based on the experience gained, the concerned Lead Banks were advised to set up such centres in other districts.

Major Credit Counselling Agencies in India Based on the initiatives taken up by some of the individual banks, credit counselling agencies were thus set up in India. Some of the major counselling agencies were Abhay an initiative of Bank of India Disha - an initiative of ICICI Bank Ltd. Grameen Paramarsh Kendras an initiative of Bank of Baroda

Features of Credit Counselling in India The major characteristics of the credit counselling agencies were: Counselling Centres facilities can be availed in person or through telephone, email or by means of letter. The counselling centres are mainly funded by Trusts set up by banks or funded by the banks themselves. The counsellors manning the centres are retired or serving bank employees. Counselling is provided free of cost. Counselling presently provided by most of the centres is mainly curative in nature, being given after a crisis event had occurred. Credit counselling agencies also provided there expertise in:

Arrangement for experts to guide farmers on modern farming methods, cooperative farming, marketing strategy, etc. Focus on credit related problems of urban clientele on account of credit card, personal loans, housing loans, and defaults on account of business failures. Manned by Agricultural Officers of the bank to provide awareness on various products and services of the bank. Although, credit counselling agencies provided their expertise in the above mentioned fields, there major activity was concern with restructuring of loans through Debt Management Plans Credit Counselling Agencies and Debt Management Plans A debt management plan is a formal agreement between a debtor and creditor(s). Debt Management Plans help reduce outstanding, unsecured debts at a reduced level over a fixed period of time to help regain control of finances. The debt management plan is exclusively designed to provide individuals with a unique solution for your financial situation. A debt management plan is created by the counselor by taking into consideration: The financial situation of the borrower Obtaining the credit report about the customer from the bank

Based on this, the counselling agency tries to renegotiate the terms of credit by trying to finance charges, late fees and/or over-limit charges, monthly payments or increase the time to pay off debt. However, it should be noted that the bank need not agree to the terms of the DMP always. Some of the advantages associated with DMP are: Reduced payments through reduced interest rates and charges Negotiations done by more experienced counsellors Flexible plans taking into consideration the financial situation of the borrower Non-confrontational approach to debt relief

In India Debt Management plans can be obtained only for borrowings upto Rs. 50 lakhs. Challenges/ Criticisms of the Credit Counselling Centres The major criticism faced by Credit counselling agency are As counselling centres is mainly funded by banks itself they may end up becoming debt collection wings of the bank itself. Proper firewall measures between banks and counselling centres must be present to prevent this from happening Lack of credence attached to the references made by these centres to banks, on the grounds that they have no 'locus standi' in the matter. Therefore, there is a need for credit counselling centres to be empowered for liaising and negotiating with banks on behalf of their customers. Lack of appropriately bench-marked quality standards for credit counsellors and counselling agencies. Thus it would be desirable to have a system of accreditation of counsellors. Further, the major challenges faced by the counselling agencies are: Difficulty in enlisting committed and well-trained personnel. This issue needs to be addressed quickly as it is decisive in the success of the counselling centre. Inadequate credit information/credit history of the borrowers or total lack of such information is another area of concern, which needs to be addressed. This is a major concern as proper financial advice cannot be provided in its absence. However, the major area of concern is the lack of awareness regarding credit counselling agencies and the free availability of their services.

Going forward, credit counselling agencies are required to play a decisive role in ensuring the financial literacy of the masses and providing sound financial management plans.