Subprime fallout: RBI wants lenders to play counsellor

Concept Paper Asks Lenders To Set Up Centres To Promote Financial Literacy And Warn Loan Borrowers About Future Repayment Risks

Our Bureau MUMBAI    Banks have been told to place all information relating to fees, interest rates, yields etc. on their websites. RBI is now exploring the option of displaying the consolidated data on all banks on its website and having a dictionary of common terms. Given that customers have an easy access to personal finance these days, it is likely that even though a customer has defaulted a few banks, he may still have access to multiple credit cards. Hence, RBI has urged FLCCs to obtain comprehensive information from the bank with the largest exposure to the defaulting borrower. The central bank has also mooted the idea of having benchmarked quality standards for counsellors and agencies, apart from getting these players accredited.

THE Reserve Bank of India (RBI) is taking proactive measures to prevent a US-type subprime crisis in India. Even as banks push for credit cards and personal loans, the central bank has asked lenders to set up 'credit counselling centres' that will warn borrowers if they are raising loans beyond their means.
    The US crisis had its genesis, with American banks providing home loans to those who can't afford repayment and the authorities are now taking measures to promote financial literacy. It is widely felt that the crisis could have been avoided if borrowers were more aware of their liabilities.
    While Indian banks are more careful on home loans, aggressive marketing of products such as personal loans and credit cards to vulnerable borrowers could give way to overindebtedness and result in these loans turning bad. To avoid this, RBI has asked banks to set up credit counselling centres either individually or collectively. Two of the main conditions for setting up these centres are that they should provide 'free' advice and should not try to sell products by providing investment advice. Also, they should be outside a branch and maintain an arms length relation with the bank.
    In a concept paper, the central bank stressed the need for financial literacy since the common man does not have an access to complete information from the markets. The paper points out that the growing middle class in India is increasingly resorting to debt for funding consumption needs. Against such a backdrop, credit counsellors may help borrowers by offering them sound advice on ways to restructure the debt and better ways of money management.
    The central bank has said that it may convene a meeting of bank CEOs, the Indian Banks' Association, Nabard, cooperative banks, experts and few NGOs to discuss the concept and the mechanism to spread financial literacy. Going forward, RBI has expressed intent to make credit counselling a part of banks' fair lending codes.
    Globally, credit counselling already exists in the US, the UK, Canada, Australia and Malaysia. RBI has specified that even as there is a need to have such centres in urban and rural areas, the focus needs to be different. While rural centres could concentrate on counselling for farmers and those engaged in allied activities, FLCCs in urban locations should target individuals running an overdue in credit cards, personal loans, home loans etc. Going a step ahead, RBI has suggested that public sector banks could focus on rural areas, given the branch network while their private and foreign peers may look towards urban areas.