Financial Education & Credit

Counseling for Responsible

Retail Banking
Dr K Ramesha, Professor
 Financial Development
Financial development has also been quite
impressive - for example financial assets/GDP or
bank assets/GDP etc
The picture of macro level financial deepening
changes once we look at the micro-level realities
Financial products and services have become
complex
Competition forces Banks to mis-sell, adopt
unethical practices, lack of transparency and so
on
 Customer Protection & Financial
Education
Consumer Protection, Financial Education and
Financial Stability - a triad for the efficient functioning
of the Financial System
In any financial service, the customer is the targeted
beneficiary - central focus of financial services
regulation
Without a proper customer protection framework, ill-
informed and less financially literate bank customers
would remain vulnerable to inappropriate products and
services
 Charter of Customer Rights
Right to Fair Treatment
Right to Transparency, Fair and Honest Dealing
Right to Suitability
Right to Privacy
Right to Grievance Redress and Compensation
Above charter is meaningless in the absence of
an financially literate customer
 Customer Complaints &
Financial Literacy
Is it true that financial literacy can greatly
reduce the number of customer complaints?
Take the case of Banking Ombudsmen
Scheme
Customers who are not satisfied with the
response of the bank only contact BO
 Financial Education
Financial education
Financial literacy and
Credit counseling
 Financial Literacy
Financial inclusion
PM JDY, PMSBY, PMJJBY
Advantage to banks of these schemes
depends on level of awareness of financial
products and services
 Financial Education Basics & Beyond Shri
SS Mundra DG, July 15, 2015
Wise Illiterates
have resources, understand risks, but despite that with an
unnerving regularity, keep falling into the trap of scams
Greed-driven Illiterates
Educated people falling into email traps for instance
Information-deprived Illiterates
Retail customers mismatch between sophistication of financial
products and customer awareness
Illiterate Illiterates
PMJDY and other programs aimed at financial inclusion
Kindergarten Illiterates
Young students
 Financial Education Basics & Beyond
Shri SS Mundra DG, July 15, 2015
Canadian National Strategy for Financial Literacy
Goals
Manage money & debt wisely
Plan & save for future
Prevent & protect against financial fraud and financial abuse
Implementation
Collaborating and sharing between governments, educators,
financial service providers, employers and non-profit
organisations, as well as individuals and families
Tailoring programs and applying plain language principles
Reaching and engaging each and every individual
 What is Credit Counseling?
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 serves three purposes.
First, it examines the ways to solve current
financial problems.
Second, by educating about the costs of
misusing a credit, it improves financial
management.
Third, it encourages the distressed people to
access the formal financial system
 Credit Counseling
Credit counseling is seen as an integral part of
financial inclusion
Financial Inclusion Task Force (UK) recognizes
face to face money advise
access to banking and
access to affordable credit
Credit counseling may take the shape of
financial education
Urgency to this issue in India in view of rapid
growth in consumer loans, housing loans and the
more recent emphasis on financial inclusion
 Why Counseling?
Individuals may learn about the way financial
markets function and may learn to behave more
strategically
Individuals may not be able to articulate their
financial situation adequately to the banks
Increasing middle-class population and changing
lifestyle aspirations - people are resorting to debt
to finance their consumption and asset creation
Certain segments of population may be
susceptible to the vicissitudes of economic
environment
 Why Counseling?
Very modest literacy rate on the one hand and
increasingly complex financial products and services
Better utilization of products and services
Increasing number of complaints from individual
borrowers (retail loans, credit card, harassment in
recovery etc)
In the interest of banks/lenders (against the backdrop of
growing indebtedness)
We will have to understand the importance of financial
literacy & credit counseling against the backdrop of sub-
prime crisis
 What is Credit Counseling?
We may broaden the scope of credit
counseling - financial counseling
Credit counseling offers a viable task-
specific, advisory ad hoc mechanism
between the borrower and the bank
 Ex ante Credit Counseling
Ex ante credit counseling
basically in the nature of financial counseling
or education - product, purpose and process
quantum of loans individuals can borrow based
on the cash flows
cost of borrowing, cost of misuse and recovery
procedures are informed to the borrowers
ex ante counseling is known to lower the
probability of default and relatively easy
recovery
 Ex post Credit Counseling
Ex post counseling occurs
after a crisis event or default
advisory in nature for managing the crisis and
exploring various avenues for relief in the
interim
curative in nature
purpose is recovery - may be through
restructuring
 Process of Credit Counseling
Credit counseling agencies are not the collection
agents of banks/lenders
Nurturing a borrower back to health after a
default can be a time-consuming process
We may think of counseling in Indian context
as an integral part of loan application
media, telephone, sensitization of agents etc
face to face interaction in rural areas (both potential
as well as defaulted customers)
 Credit Counseling - International
Experiments
US - National Foundation for Credit Counseling
- 1951
promote financial literacy and avoid bankruptcy
US - Association of Independent Consumer
Credit Counseling Agencies (AICCCA) - 1993
UK - Consumer Credit Counseling Service
(CCCS) - 1993
helps consumers with budgeting and money
management
Credit Counseling - International
Experiments
Credit Counseling Canada (CCC) - 2000
Credit Counseling and Debt Management
(CCDM) - Malaysia
Credit Counseling of Singapore (CCS) -
2003
to assist financially distressed consumers
 Approaches for Credit
Counseling
Who can offer credit counseling?
Banks plus NGOs, Specialized Agencies funded by
banks, selection process etc
How can we integrate credit counseling as part
of Retail Banking?
Should counseling be ex ante or ex post or a
combinations of both?
Should we have specialist counselors - housing,
farm loans etc?
 Approaches for Credit
Counseling
Should there be accreditation for
counselors? Who and How?
Should counseling agencies be regulated
and how?
How to ensure confidentiality of
information?
Can banks finance counseling agencies?
 Credit Counseling - Conclusion
Beginning must be made
Initiative should come from banks in their own
interest
Experiments/pilot projects must be undertaken
by banks in collaboration with
NGOs/Consumer Organizations
Undoubtedly Credit Counseling is a Win-Win
Situation for Banks as well as Individual
Customers
 Financial Literacy and Credit
Counseling Centers
FLCC Centers not very effective
Visit RBI homepage and click on Financial
Education
Trainers kit financial literacy guide
 Thank you