Financial health counselling

It’s a sad fact that when it comes to money and investments, most investors learn from mistakes— their own or someone else’s. Taking the old adage that an ounce of prevention is better than a pound of cure, RBI has released a concept paper in which it stresses on the need for financial literacy.

     Print Edition: May 1, 2008

Current Inadequacies

• Counselling at present is mainly curative, being given after a crisis has occurred

• Counselling centres perceived as debt collection wings of the banks

• Lack of credence attached to the references made by these centres to banks

• Inadequate credit information of borrowers

• Lack of awareness among retail customers

It’s a sad fact that when it comes to money and investments, most investors learn from mistakes— their own or someone else’s. Taking the old adage that an ounce of prevention is better than a pound of cure, the Reserve Bank of India (RBI) has released a concept paper in which it stresses on the need for financial literacy so that investors know what they are getting in to.

With a growing economy and soaring salaries, there has been a spurt in activity among investors, especially in the middle-income group, investing in mutual funds, sharetrading, borrowing loans for homes, vehicles, and so on. Financial services providers are offering products that may not be the easiest to understand, although there are also efforts, like that taken by Crisil (see page 32), to help investors better understand complex products. But this is hardly enough, and the number of gullible, and uneducated, investors is growing. The bottom line is that financial literacy is essential.

Word’s worth

“There is no reason why an investor’s money should leave his bank account when share allotment is not assured.Technology will enable us to do that”
— C B Bhave, chairman, Sebi

“The fall is not a bullmarket correction but a serious downturn that could last 6-8 months”
— Ajay Bagga, CEO, Lotus India Mutual Fund

“Valuation wise, I don't see much downside from here. But the recovery will take some more time”
—Manish Sonthalia, VP (equity strategy), Motilal Oswal Securities

“Food prices are the kingpin of price structure. Their rise will make inflation control tougher and hurt economic stability”
— Prime Minister Manmohan Singh

Source: Economic Times and Business Standard

In its paper, the RBI has reiterated the need for preventive financial literacy to help borrowers overcome defaults as well as investors to make informed choices. Pointing out that banks need to be involved in the education process, the central bank’s paper says that one of the reasons for over-indebtedness and rising NPAs is the aggressive marketing of personal loans and credit cards to vulnerable sections of borrowers.

Credit counsellors can help borrowers gradually overcome their debt burden and improve their money management skills, adds the paper. So, the next time someone defaults on loan repayments, instead of being asked to repay at the earliest, he might be asked to visit the bank’s counselling centre. The paper also suggests that banks set up financial literacy and counselling centres (FLCCs) that can help borrowers restructure payment to settle debts and also warn them if they are borrowing beyond their means. What does this mean to you?

If the bank’s recommendations are implemented, the current credit counselling initiatives by some banks like Bank of India’s Abhay, ICICI Bank’s Disha and Bank of Baroda’s Grameen Paramarsh Kendras, will get a boost. The central bank has suggested a system in which banks give due consideration to the debt management plans prepared by such FLCCs. In addition, the paper recommends that banks create trigger points so that individual cases are referred to the FLCCs before the recovery mechanism swings in. The central bank is also for expanding the role of FLCCs to handle customers from other banks. For example, in case of multiple credits availed of by individuals, FLCCs may negotiate with the banks having the largest exposure to restructure the debt and the recoveries could be shared on a pro-rata basis. Stressing on the need for independence of these centres, RBI says that serving bankers should not be included on their boards.

— Rakesh Rai

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