The Working Group to Examine the Procedures and Processes of Agricultural Loans
(Chairman: Shri C. P. Swarnkar), appointed by Reserve Bank, had recommended in
its report (April 2007) that banks should actively consider opening of counselling
centres, either individually or with pooled resources, for credit and technological
counselling. This would make the farmers aware of their rights and responsibilities
to a great extent. Bank branches should also display as much information as possible
for the benefit of the farmers. The counselling centres should have the facility
for on-line submission of applications, which may be forwarded to the branches.
Further, another Working Group constituted by Reserve Bank to suggest measures
for assisting distressed farmers (Chairman: Shri S.S. Johl) had also suggested
that financial and livelihood counselling are important for increasing viability
3. Based on the recommendations of the above
working groups, and, as announced in the Annual Policy Statement for the year
2007-08, Reserve Bank advised the SLBC convenor banks, vide its circular dated
May 10, 2007, to set up a Financial Literacy and Credit Counselling Centre on
a pilot basis in any one district in the State/ Union Territory coming under their
4. In the Mid-term Review of the Annual Policy
for the year 2007-08, it was stated that a concept paper on Financial
Literacy and Counselling Centres would be prepared detailing the future
course of action and placed on the Reserve Bank’s website for feedback.
Accordingly, this concept paper has been prepared so that the Reserve
Bank can take further action after obtaining feedback from the public. The paper
has three parts: Part-A deals with matters relating to financial
literacy, Part-B deals with those relating to credit counselling
and Part-C outlines the suggested Scheme for Financial Literacy
and Counselling centres.
Financial literacy or financial education can broadly be defined as 'providing
familiarity with and understanding of financial market products, especially rewards
and risks, in order to make informed choices. Viewed from this standpoint, financial
education primarily relates to personal finance to enable individuals to take
effective action to improve overall well-being and avoid distress in matters that
6. Financial literacy goes
beyond the provision of financial information and advice. The focus of any discussion
on financial literacy is primarily on the individual, who usually has limited
resources and skills to appreciate the complexities of financial dealings with
financial intermediaries on a day to day basis.
for Economic Co-operation and Development (OECD) has defined financial education
as 'the process by which financial consumers/ investors improve their
understanding of financial products, concepts and risks, and through information,
instruction and/or objective advice, develop the skills and confidence to become
more aware of financial risks and opportunities, to make informed choices, to
know where to go for help, and to take other effective actions to improve their
8. Thus, financial
literacy is the ability to know, monitor, and effectively use financial resources
to enhance the well-being and economic security of oneself, one's family, and
Need for Financial Literacy
Financial literacy has assumed greater importance in the recent years, as financial
markets have become increasingly complex and as there is information asymmetry
between markets and the common person, leading to the latter finding it increasingly
difficult to make informed choices.
10. Financial literacy
is considered an important adjunct for promoting financial inclusion and ultimately
financial stability. Both developed and developing countries, therefore, are focusing
on programmes for financial literacy/education. In India, the need for financial
literacy is even greater considering the low levels of literacy and the large
section of the population, which still remains out of the formal financial set-up.
In the context of 'financial inclusion', the scope of financial literacy is
relatively broader and it acquires greater significance since it could be an important
factor in the very access of such excluded groups to finance. Further, the process
of educating may invariably involve addressing deep entrenched behavioural and
psychological factors that could be major barriers. In countries with diverse
social and economic profile like India, financial literacy is particularly relevant
for people who are resource-poor and who operate at the margin and are vulnerable
to persistent downward financial pressures. With no established banking relationship,
the un-banked poor are pushed towards expensive alternatives. The challenges of
household cash management under difficult circumstances with few resources to
fall back on, could be accentuated by the lack of skills or knowledge to make
well informed financial decisions. Financial literacy can help them prepare ahead
of time for life cycle needs and deal with unexpected emergencies without assuming
11. The OECD has brought out 'Recommendations
on Principles and Good Practices for Financial Education and Awareness'3,
a brief summary of which is furnished at Annex-I. These
recommendations are intended to help countries, both developed and developing,
in designing and implementing effective financial education programmes.
taken by Reserve Bank of India
12. The Reserve Bank
has undertaken a project titled 'Project Financial Literacy'. The objective of
the project is to disseminate information regarding the central bank and general
banking concepts to various target groups, such as, school and college going children,
women, rural and urban poor, defence personnel and senior citizens. It would be
disseminated to the target audience with the help, among others, of banks, local
government machinery, NGOs, schools, and colleges through presentations, pamphlets,
brochures, films, as also through the Reserve Bank's website. The Reserve Bank
has already created a link on its web site for the common person to give him/her
the ease of access to financial information in English and Hindi, and 12 Indian
13. A financial education site was launched
on November 14, 2007 commemorating the Children’s Day. Mainly aimed at teaching
basics of banking, finance and central banking to children in different age groups,
the site will also eventually have information useful to other target groups,
such as, women, rural and urban poor, defence personnel and senior citizens. The
comic books format has been used to explain complexities of banking, finance and
central banking in a simple and interesting way for children. The site has films
on security features of currency notes of different denominations and a games
section. The games currently on display have been especially designed to familiarise
school children with India’s various currency notes. The site will soon be available
in Hindi and twelve regional languages.
14. In addition,
with a view to promoting financial awareness, the Reserve Bank conducted essay
competitions for school children on topics related to banking and financial inclusion.
The Bank has also been participating in exhibitions to spread financial literacy.
Last year, it participated in the exhibition aboard the 'Azadi Express' a train
to commemorate 150 years of India’s freedom struggle which began in the year 1857.
The train during a year’s run will cover several places in the country. Recently,
the Reserve Bank launched ‘RBI Young Scholars Award’ Scheme amongst students undergoing
undergraduate studies to generate interest in and create awareness about the banking
sector and the Reserve Bank. Under the scheme, up to 150 young scholars would
be selected through country-wide competitive examination and awarded scholarships
to work on short duration projects at Reserve Bank.
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'4. 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 counselling (known in the United Kingdom as debt counselling) is a process
of offering education to consumers about how to avoid incurring debts that cannot
be repaid. Credit counselling often involves negotiating with creditors to establish
a Debt Management Plan (DMP) for a consumer. A DMP may help the debtor repay his
or her debt by working out a repayment plan with the creditor. DMPs, set up by
credit counsellors, usually offer reduced payments, fees and interest rates to
the client. Credit counsellors refer to the terms dictated by the creditors to
determine payments or interest reductions offered to consumers in a debt management
17. Thus, credit counsellors help their
clients find realistic solutions to their problems and agree on repayments that
are achievable. Credit counselling is kept confidential. Counselling services
are generally offered free or for a very nominal charge, so that no undue additional
burden is put on the already indebted customer.
18. There are a variety of ways in which
credit counselling has been accomplished in different countries. While the first
well-known counselling agency was created in the United State in 1951, the concept
quickly caught the attention of other countries and over the last several years,
a host of countries have taken significant initiatives towards credit counselling.
The international experiences with regard to credit counselling are indicated
Need for Credit
Counselling in India
19. Recent times have seen
a significant transformation of the financial landscape shaped by the forces of
globalization, advances in technology, and greater market orientation and financial
innovation. Retail lending has increased phenomenally in the commercial banking
sector in recent years. As commercial banks shifted their focus from traditional
need-based lending to a broad-based portfolio, retail lending became a mainstream
business. There has been a rapid growth in consumer loans, housing loans, credit
cards and personal loans. Bank credit to housing, consumer durables and personal
loans (including credit cards) in urban and metropolitan areas, which covered
8.71 million accounts and stood at Rs.42,700 crore in 2001 rose to 25.5 million
accounts totalling to Rs..2,58,000 crore in 2006. The credit growth to these sectors
grew at a Compound Annualised Growth Rate (CAGR) of 43.3 per cent during 2001-06
compared to overall growth of credit of 23.4 per cent in the same period6.
20. In urban areas, with a burgeoning middle-class and
changing lifestyle aspirations, more and more people are resorting to debt to
finance their consumption needs, besides asset creation. In some cases, this could
potentially lead to excesses, precipitating defaults. Such defaults could also
be the fall out of circumstances beyond one’s control. Costly medical emergencies,
retrenchment from job, hardening of interest rates, etc could inadvertently raise
debt burdens in some cases, not easily manageable within a given income stream.
The aggressive marketing of personal loans and credit cards to vulnerable section
of borrowers could also have consequences of 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
rain-dependent segment of the farming population. This needs to be considered
in conjunction with the fact that the levels of literacy in our country are still
relatively modest at 65.4 per cent in 2001, with wide differentials between urban
and rural areas. In 2001, the proportion of rural literate was about 59 per cent
as compared to 80.3 per cent in the urban areas7.
The sharp growth in credit has accentuated indebtedness of households. In the
case of farmers, as per the Situation Assessment Survey (SAS) of farmers conducted
by the NSSO, of the 89.33 million farmer households estimated in 2003, 43.42 million
(48.6 per cent) were indebted. The average outstanding debt per farmer household
was at Rs.12,585. A State-wise analysis showed that in 2003, incidence of indebtedness
was higher in states that had input-intensive or diversified agriculture. Total
debt of farmer households was estimated at Rs. 1.12 lakh crore in 2003; of which
Rs.65,000 crore was from institutional sources and Rs.48,000 crore from non-institutional
agencies. Private moneylenders accounted for Rs.29,000 crore and traders Rs.6,000
crore. About Rs.18,000 crore of debt from non-institutional sources, a major portion
of which was from moneylenders carried an interest rate greater than 30 per cent8.
Although credit to agriculture from the banking system has substantially increased
after June 2004, the informal finance still plays a significant part in rural
23. As observed in the Report of the Expert Group
on Agricultural Indebtedness (Chairman: R. Radhakrishna), indebtedness, in particular
farmers' indebtedness, has long been treated as a distress phenomenon. It is indeed
so if debt taken is not used for productive purposes. Debt can also become a distress
phenomenon if the borrower's crop fails due to natural calamities, pests, use
of spurious inputs, imprudent investments or other unforeseen reasons, or if production
becomes uneconomic because of high input costs, stagnant technology and lack of
remunerative prices which makes it impossible for the farmer to repay his capital
and interest. The interest becomes a high liability if loan is taken from non-institutional
sources like moneylenders at high rates of interest.
Regulatory and supervisory initiatives, on an ongoing basis, are being taken by
the Reserve Bank to ensure soundness of the financial system and to bring the
masses within the fold of the formal financial system. However, maintaining stability
of the financial system also requires adequate consumer protection and education
framework. Consumer protection and education initiatives empower consumers to
be better positioned to take responsibility for their own well-being. In this
context, financial literacy and credit counselling assume great relevance. There
is an increasing need to develop follow-up services to enable distressed borrowers
overcome credit delinquencies. Credit counsellors, thus serve as a viable and
task-specific advisory and as an ad hoc intermediary between the borrower and
the bank concerned. By providing sound advice to arrest deterioration of incomes
by restructuring their debt, credit counselling offers a meaningful solution for
borrowers to gradually overcome their debt burden and improve their money management
skills. It needs to be recognized that financial products and services differ
significantly from most other goods/services. Specifically, there is asymmetry
in the access to information and bargaining power between the consumers and financial
25. In many cases, especially amongst
the more vulnerable sections, individuals may not be able to articulate their
financial situation adequately with the banks and negotiate a settlement. It will,
therefore, be in the interest of the banks themselves to help individual borrowers
through appropriate financial education and credit counselling.
Mechanisms in the form of Corporate Debt Restructuring (CDR) in regard to loans
by banks and DFIs to large corporates are already in place to overcome their debt
burden. Somewhat similar framework has also been provided to micro, small and
medium enterprises. The extent of active interaction between individual borrowers
and banks is, however, not readily available. Credit counselling is intended for
individual borrowers and not for institutional borrowers.
taken by Reserve Bank of India
27. As stated earlier,
the working groups chaired by Shri C.P. Swarnkar and Shri S.S. Johl, constituted
by the Reserve Bank had 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, and in terms of
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. Further, based on the experience gained, the
concerned Lead Banks were advised to set up such centres in other districts.
A few banks have already taken initiatives in opening credit counselling centres
in the country. An Internal Group constituted by the Reserve Bank to study credit
counselling initiatives, visited some of the counselling centres in the state
of Maharashtra viz., ‘ABHAY’ counselling centre8 (an initiative of
Bank of India); Disha Trust9 (an initiative of ICICI Bank Ltd.) and
Grameen Paramarsh Kendras10 (an initiative of Bank of Baroda). The
observations of the Internal Group are summarized in paragraphs 29 to 33 below.
The counsellors at these centres assist people on a face to face basis as well
those who approach them over telephone, email, or by means of letters. Customers
facing credit problems arising out of multiple credit cards, personal loans, housing
loans and loans from societies approach the counselling centres for advice and
guidance. The counsellors guide their customers and help them to take up with
the banks concerned for rescheduling/ restructuring of loans.
Some of the common features of these centres are as under:
counselling centres are mainly funded by Trusts set up by banks or funded by the
- The counsellors manning the centres
are retired or serving bank employees.
is provided free of cost.
- The counselling presently
provided by most of the centres is mainly curative in nature, being given after
a crisis event had occurred.
31. The unique features
observed in some of these counselling centres are:
for experts to guide farmers on modern farming methods, cooperative farming, marketing
- 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.
32. Training and awareness camps
are organised by some of these counselling centres to educate people of the need
to save and to familiarize them with the concept of credit cards, impact of minimum
charges, etc. As these counselling centres are housed mainly in the banks' premises,
expenses incurred are mainly on account of payment of honorarium to counsellors;
such honorarium ranged from Rs.12,000 to Rs.30,000 per month.
Although efforts are being made to hold training camps and creating awareness
among the masses on the need for saving, planning expenditure and also about various
banking facilities, etc., a lot more is yet to be done to popularise and scale-up
Issues in setting up of Credit Counselling
34. Some issues relating to setting up of
counselling centres in India that need to be addressed are as follows:
- As credit counselling initiatives, presently, are individualistic
efforts of the banks that have set up counselling centres as Trusts fully funded
by them, there is an apprehension that these centres might be perceived as debt
collection wings of the banks concerned. Thus, although it could be argued that
a bank, by virtue of its nature of business, is, indeed, better placed to take
up credit counselling initiatives, there is a need for appropriate 'firewall'
between a bank and the counselling centre set up by it..
major constraint faced by the counselling centres in their effort to bring about
a solution for the distressed borrowers is the 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.
- As quality of service is an important aspect,
it is desirable to have appropriately bench-marked quality standards for credit
counsellors and counselling agencies. Like-wise, it would also be desirable to
have a system of accreditation of counsellors. Once setting up of counselling
centres gather momentum, they could consider forming an association of credit
- Enlisting committed and well-trained
personnel is crucial for success of counselling centres – this needs to be addressed/
- Inadequate credit
information/credit history of the borrowers or total lack of such information
is another area of concern, which needs to be addressed.
lack of awareness is major stumbling block in such initiatives, it is necessary
to give wide publicity to the concept of credit counselling and the free availability
of such services.
Scheme for Financial Literacy and Counselling Centres
35. In the light of the various aspects/issues
outlined in Part A and Part B above,
and in order to make credit counselling more effective and popular, a scheme for
setting up of FLCCs is suggested:
The broad objective of the FLCCs will be to provide free financial literacy/education
and credit counselling. The specific objectives of the FLCCs would be:
To educate the people in rural and urban areas with regard to various financial
products and services available from the formal financial sector ;
To make the people aware of the advantages of being connected with the formal
financial sector ;
(iii). To provide face-to-face financial
counselling services, including education on responsible borrowing and offering
debt counselling to individuals who are indebted to formal and/or informal financial
(iv). To formulate debt restructuring plans for borrowers
in distress and recommend the same to formal financial institutions, including
cooperatives, for consideration ;
(v). To take up any such
activity that promotes financial literacy, awareness of the banking products,
financial planning and amelioration of debt-related distress of an individual;
(vi). To take up any other activity that facilitates the
FLCCs should not, however, act as investment advice centres.
37. Debt counselling/credit counselling can be both preventive
and curative. In case of preventive counselling, the centre would provide awareness
regarding cost of credit, availability of backward and forward linkages where
warranted, etc. The clients would be encouraged to avail of credit on the basis
of their repaying capacity. Preventive counselling can be through the media, workshops
and seminars. In the case of curative counselling, the clients may approach the
counselling centres to work out individual debt management plans for resolving
their unmanageable debt portfolio. Here, the centre could work out effective debt
restructuring plans that could include repayment of debt to informal sources,
if necessary, in consultation with the bank branch.
While the FLCCs centres would provide financial literacy and credit counselling,
the activities of the Rural Development and Self employed Training Institutes
(RUDSETI) towards skill development/capacity building could be dovetailed with
FLCCs initiatives, for increasing the earnings/debt repaying ability of the distressed
While credit counselling services may be provided by banks both in rural and urban
areas, it may observed that a large segment of the Indian population is resident
in rural areas with literacy levels lower than in urban areas. The rural population
is also more dependent on the informal sector for its financing needs. It is necessary
that a segmented approach, rather than broad-based generalised approach to counselling
for all types of borrowers, is adopted. The centres in rural areas could concentrate
on financial literacy and counselling for farming communities and those engaged
in allied activities. The centres in Metro/Urban areas could focus on individuals
with overdue in credit cards, personal loans, housing loans, etc. Given the their
network and reach, the public sector banks could consider focusing on the rural
areas, while the private and foreign banks could consider setting up counselling
centres in urban areas.
Organisational / Administrative
40. To start with, banks may set up Trusts/Societies
for running the FLCCs, singly or jointly with other banks. A bank may induct respected
local citizens on the Board of such Trust/Society. However, serving bankers may
not be included in the Board. FLCCs may be funded fully by the bank/banks to begin
with. In order to have maximum coverage, FLCCs may need to be set up at all levels
viz. block, district, town and city levels. SLBCs may discuss and coordinate with
banks, both in public and private sectors, and arrive at a plan for setting up
of FLCCs at different levels in a phased manner. However, to start with, lead
banks may take the initiative for setting up FLCCs in the district headquarters.
While the endeavour should be to keep costs as low as possible, in order to support
banks in setting up FLCCs in rural and in urban areas where there is concentration
of low income borrowers, cost-sharing through the Financial Inclusion Fund set
up in NABARD could be considered. Once the system stabilizes the counselling centres
could cover part of the cost by levying nominal charges on the banks whose borrowers
have commenced repayments due to the credit counselling and debt management plan
drawn up by the counselling centre. This would, in the long run, help the FLCCs
to operate on self-sustaining basis. The counselling centres should maintain arms
length relationship with the bank and preferably not be located in the bank's
premises. In the rural areas, if for the sake of minimizing cost, the branch premises
is used, to start with, it should be kept completely separate. The idea is that
these centres should not be perceived as a recovery or marketing agent of the
bank concerned, and bank clientele, even of other banks, should feel comfortable
in voluntarily approaching the centres.
and debt management services may be provided free of charge to the customers so
as to put no additional burden on them.
Proper infrastructure would have to be put in place by banks with adequate communication
and networking facilities. Separate cubicles for the customers could be set up
to maintain the privacy/ confidentiality of the discussions with the borrowers.
Types of Credit Counselling
In Australia, the Victorian Consumer Credit Review Report 2006 recommended that
financial counselling services should include early intervention (preventive)
counselling as well as counselling for consumers in financial crisis (curative
counselling). In the US, the Bankruptcy Abuse Prevention and Consumer Protection
Act of 2005 made credit counselling a requirement for consumer debtors filing
for bankruptcy. Banks may evolve trigger points to refer cases where there are
early warning signals to the counselling centres before taking measures for recovery.
Timely intervention will help to arrest any further financial deterioration of
Credit Counselling and Debt Settlement
may encourage their own customers in distress or customers of any bank to approach
the FLCCs set up by it. Information about such FLCCs can be provided through the
various fora available under the Lead Bank Scheme.
FLCCs may conduct open-house seminars either at the centre or at various places
in the district for group counselling. Banks operating in the district can sponsor,
wholly or partly, such seminars in areas predominantly covered by them.
For single-creditor-debts, the FLCCs could assist the borrower in negotiating
with the bank concerned. In case of multiple credits availed of by individuals,
the FLCCs may negotiate with the bank/s having the largest exposure to restructure
the debt and the recoveries to be shared on a pro-rata basis. The FLCCs would,
however, not involve themselves in recovering and distributing money. This would
be left to the bank concerned, or the bank having the largest exposure to act
on behalf of all the banks.
In Australia, practicing credit counsellors are required to be 'accredited'.
The Financial Counselling Association of New South Wales oversees the accreditation
process. This helps to ensure the quality and reliability of their service. Accreditation
would require the credit counsellors to meet benchmarked quality standards to
ensure optimum outcome for consumers. The banks may consider suitable accreditation
process, either through an existing organization like IBPS, or through an association
of financial counsellors, when formed.
and Training – Counsellors
48. As counselling centres
will play a crucial and responsible role in assisting and guiding the distressed
individual-borrowers, it is necessary that only well qualified / trained counsellors
are selected to man the centre on a full time basis. In his Budget speech for
the year 2008-09, the Finance Minister indicated that individuals such as retired
bank officers, ex-servicemen, etc. will be allowed to be appointed, among others,
as credit counsellors. Credit counsellors should have sound knowledge of banking,
law, finance, excellent communication and team building skills, etc. At present,
knowledge and skill upgradation is mostly dependant on the initiative of the individual
counsellors. Some training at the time of joining is being given by the banks,
but this is focused only on the services provided rather than a full course on
financial management. Proper training and skill upgradation is essential for the
counsellors to keep themselves abreast of the latest developments in the banking
industry. Training is also required to be provided to the counsellors on an on
going basis to constantly upgrade their skills. To ensure a regular supply of
trained counsellors, it would also be useful if specialised courses on credit
counselling and debt management are conducted by IIBF and professional institutions
offering courses on banking and finance.
49. Counselling centres should be equipped
to deal with requests received in person, by phone, e-mails, post, etc. They should
have a toll free line, e-mail and fax facilities for easy contact. To maximize
the outreach of the counselling centre, mobile units could also be set up to service
all the blocks in the districts.
50. Credit counsellors, at present, merely render advisory
services to their clients and cannot directly approach banks/creditors to discuss/negotiate
on behalf of their clients. In order that the system of credit counselling is
taken forward, RBI may issue guidelines to facilitate the setting up of FLCCs
by banks for group and individual counselling and to whom banks could also refer
cases, apart from encouraging individuals to directly approach such centres. In
its advice, RBI may sensitise banks to give due consideration to the Debt Management
Plan prepared by such FLCCs before resorting to recovery measures. RBI may evolve
a mechanism for dissemination of information on FLCCs set up by banks.
The functioning of the FLCCs in each State may be monitored by a Committee headed
by the Regional Director of the Reserve Bank of India and feedback provided to
the banks on a regular basis.
Transparency / Disclosure
52. To help the customers make informed
decisions, all banks may display on their websites particulars of all fees, interest
rates, yields and other features of standard products offered by them. The Reserve
Bank may also display the consolidated data on its website for one-stop information
on all banks, and develop, in association with the Indian Institute of Banking
and Finance (IIBF)/IBA, a dictionary of common terms used to describe and compare
products so that they are easily understood.
53. At present, there is relatively
easy access to personal finance, particularly availability of multiple credit
cards to a customer, though he may be a defaulter to some of his banks. It is
imperative that credit information companies are set up and up-scaled quickly
to provide both positive and negative information to the banks. The FLCCs, in
turn, could obtain comprehensive credit information from the concerned bank or
the bank having the largest exposure to the defaulting borrower.
A great deal of emphasis needs to be given by all the institutions to educate
the public of the various schemes/ facilities. All forms of publicity, viz. press
conferences, workshops, publications, websites, road shows, mobile units, village
fairs, etc. should be actively explored. A suitable budget needs to be provided
by all banks for the purpose. In order to go ahead in a planned manner, a Standing
Committee on Financial Literacy and Counselling may be set up by the Reserve Bank
with members from the Reserve Bank, NABARD, IBA, BCSBI, CIBIL, NGOs working in
the area and consumer organizations; this will foster greater collaboration in
areas relating to consumer education and protection of consumers’ interest.
The list of counselling centres should be placed on the websites of IBA, BCSBI,
RBI, etc., and regularly updated.
56. In order to make Financial
Literacy and Credit Counselling a success, it is necessary to create widespread
awareness about the concept .and, more importantly, for banks to appreciate the
overall benefits of such initiatives. It is necessary to have the total and complete
involvement of the top management of banks in this initiative. The Reserve Bank,
therefore, may convene a meeting of CEOs of major commercial banks, IBA, NABARD,
and national level associations of cooperative banks, apart from experts and leading
NGOs working in this field to discuss the concept, scope, modus operandi, etc.
of providing financial literacy and credit counselling services, and thereafter
issue detailed guidelines on the subject. Offering credit counselling could be
made a part of fair lending code for banks in due course.
The OECD’s 'Recommendation
on Principles and Good Practices for Financial Education and Awareness'
(i). Governments and all concerned stakeholders should
promote unbiased, fair and coordinated financial education.
Financial education should start at school, for people to be educated as early
(iii). Financial education should be part of the
good governance of financial institutions, whose accountability and responsibility
should be encouraged.
(iv). Financial education should be clearly
distinguished from commercial advice; codes of conduct for the staff of financial
institutions should be developed.
(v). Financial institutions
should be encouraged to check that clients read and understand information, especially
when related to long-term commitments or financial services with potentially significant
financial consequences: small print and abstruse documentation should be discouraged.
(vi). Financial education programmes should focus particularly
on important life-planning aspects, such as basic savings, debt, insurance and
(vii). Programmes should be oriented towards financial
capacity building, and appropriately targeted on specific groups, and made as
personalised as possible.
(viii). Future retirees should be
made aware of the need to assess the financial adequacy of their current public
and private pension schemes.
(ix). National campaigns, specific
websites, free information services, and warning systems on high-risk issues for
financial consumers (such as fraud) should be promoted.
Credit Counselling- Global Scenario
There are a variety of ways in which credit counselling has
been accomplished in different countries. The first well-known credit counselling
agencies were created in 1951 in the United States when credit grantors created
the National Foundation for Credit Counselling (NFCC). Their stated objective
was to promote financial literacy and help consumers to avoid bankruptcy. Credit
counselling, however, came into its own as a result of the passing of the Housing
and Urban Development Act in 1968. Under this Act, the US Department of Housing
and Urban Development was allowed to authorize public and private organizations
to provide counselling to mortgagors. The resulting services and infrastructure
led to the development of the credit counselling industry.
1993, the Association of Independent Consumer Credit counselling Agencies (AICCCA)
was founded in the United States, citing a need for industry-wide standards of
excellence and ethical conduct. This formally organized the NFCC’s competition.
The AICCCA was formed from the group of counsellors who favoured telephone delivery
of debt management programmes. The NFCC was, in the beginning, strongly opposed
to this telephone business model, primarily favouring face-to-face counselling
as a more effective solution. Eventually, all organizations practised both phone
and face-to-face processes with some agencies using large inbound call centres
driven by mass media advertising.
The Bankruptcy Abuse
Prevention and Consumer Protection Act of 2005 made credit counselling a requirement
for consumer debtors filing for bankruptcy in the United States. In order to meet
this requirement, during the 180-day period preceding the filing of bankruptcy,
the debtor must complete a programme with an approved non-profit budget and credit
counselling agency. Such a programme may include, but is not limited to, one counselling
session conducted by phone or over the internet.
the concept caught the attention of other countries and over the last several
years, a whole host of countries have undertaken significant initiatives towards
credit counselling. The Consumer Credit Counselling Service (CCCS) in the UK,
established in 1993, helps consumers with budgeting and better money management
as also their debt repayment plans. Funding for CCCS comes from the businesses
in the community, which benefit from repayment they would not receive if the debtor
defaulted. In addition, there is also a National Debt Line through which a bank
customer can get free financial advice. In fact, the Banking Code in the U.K provides
that member banks shall discuss financial problems with customers and together
evolve a plan for resolving these problems.
a non-profit counselling organization in 2000. Termed Credit Counselling Canada
(CCC), the organization seeks to enhance the quality and availability of not-for-profit
credit counselling for all its citizens.
The Bank Negara
Malaysia has established a Credit Counselling and Debt Management Agency (CCDMA)
to provide credit counselling and loan restructuring advice to individuals. The
establishment of CCDMA is to proactively ensure that the household sector continue
to be resilient by providing an avenue for existing and potential individual borrowers
to seek advice and assistance on managing their credit while at the same time
promoting a sound and robust banking system by facilitating debt repayment efforts
and minimizing incidence of non-payment arising from poor debt management. The
CCDMA will provide free credit counselling, education and debt settlement services
to consumers. The CCDMA will also assist consumers to proactively manage their
debt via out-of-court procedures based on agreed repayment plans between the creditors
and the debtors.
With rising personal bankruptcies, primarily
on unsecured debt, Credit Counselling of Singapore (CCS), established in 2003,
is meant to assist financially distressed consumers.
Role of Financial Education: The Indian Case' - Inaugural Address by Dr. Y. V.
Reddy, Governor, Reserve Bank of India at the International Conference on Financial
Education organised by OECD and co-hosted by Pension Fund Regulatory and Development
Authority at New Delhi on September 21, 2006.
Sarah Mavrinac, INSEAD, The Business School for the World
3Policy Brief July 2006; The importance of Financial Education, Organisation
for Economic Cooperation and Development (OECD).
Credit counselling- legal definition: http://www.nolo.com/definition.cfm/Term;
Report of the Expert Group on Agricultural Indebtedness, July 2007, Chairman:
5Wikipedia encyclopedia: http://en.wikipedia.org/wiki/Credit_counselling
6Banking Statistical Returns
Counselling: An Indian Perspective: Address delivered by Dr. Y.V. Reddy, Governor,
Reserve Bank of India at the Foundation Day Function of Bank of India, Mumbai
on September 7, 2006.