Financial literacy and Credit Counselling

The Reserve Bank Of India has recently asked banks to establishFinancial Literacy and Credit Counselling Centres either individually or in association with other banks with pooled resources.In a concept paper issued recently RBI has advised that banks can set up Financial Literacy and Credit Counselling Centres[FLCCs]that may be run and managed by trusts or societies.While FLCCs may include respectable local individuals on the boards of such trusts or societies RBI has specifically stated that bankers presently in service must not be included as members on the boards of FLCCs.
The concept paper released by RBI has three parts-Part A,Part-Band Part C.Part A deals with issues and matters relating to financial literacy.Part B pertains to issues relating tocredit counsellingand Part Coutlines the suggested scheme for FLCCs.
Objectives Of FLCCs-
The main objective of FLCCis to provide information about various productsand services,face to face financial counselling,education on responsible borrowingand offering debt counselling to individuals.While big borrowers are able to negotiate and get loans at finer sub-PLRrates of interest small borrowers are required to borrow at rates equivalent to PLR or above PLR..Small borrowers are thus at a disadvantage.As regards one time settlement of overdue loans also big borrowersare able to negotiate and obtain substantial concession whereas small borrowers do not know how to go about and to whom to represent in the matter.The proposed centre may be a boon to such borrowersand they can approch banks through them.
RBI has advised that FLCCs must be distinct and separate entities and they have to operate independently.To start with they can function from the premises of banksto save on cost.They must function in such a way that it must not appear that they are recovery agents or marketing associates of banks.Initially banks have to help fund the FLCCsand once the system stabilisesthe centres can recover part of the costby levying nominal charges on the bankswhose customers start repayment following credit counselling by the centre.
The RBI has also stressed need for trainingfor the counsellors.Proper training and skill upgradation is essential for counsellorsto keepthemselves abreast of latest developmentsin banking industry.In order to ensure regular supply of trained counsellorsspecialised trining programmes may have to be designed by Indian Institute of Banking and Finance.Inputs in training must be credit counsellingand debt management and other related issues.
The above move is a welcome initiative on the part of RBI.Promotion of financial literacy and credit counselling are indispensible bases for meaningful and complete financial inclusion.At present districts where all households have opened bank accounts are treated as districts with full financial inclusion.As a matter of fact opening of a bank account is the starting point in fiancialinclusionand it is not the completion of inclusion.Real financial inclusion is complete once all households and individuals come to the mainstream of financial and economic life.This requires concertedand constant efforts in that direction.Banking system can not bypassthe vast majority of riskier small entrepreneursand small businessmen and agriculturists.While urban employment is incresing thereare no additional job opportunities created in rural sector except throughnational rural employment guaranteeprogramme.The poor and rural people also need economic reforms as much as the urban people and the richer sections of society.The real economic strength of Indian economy lies in rural sector.The vast business potential available in the bottom of the pyramid must be exploted by banks.Banks will find lot of business opportunities in agriculture,small industries,smalland medium enterprises,etc.Complete financial inclusion of all these will bring into banks'fold substantial fresh business opportunities.
There is a pressing need to make the above segments financially literate,and credit literate.It is necessary to diluge these segments with information on how to borrowand make profitable use of credit,how to remain creditworthy,,how to negotiate and get best possible rate and terms of sanction,,how to address and overcome problems as and when they ariseetc.Also newindividual customers who have opened bank accounts including no-frill accounts must also be taught how to make use of banking products and services.Debt management,the manner in which debt which has become irregular can be restructured etc must be taught to them.The FLCCs may serve a useful purpose if they are set up .They can make substantial contribution to real financial inclusion.The RBI must finalise the scheme at the earliest and circulate the same to banks.Banks operating in a particular centre may join together and set up an FLCCfor the benefit of customersand banking public.New trusts or societies maybe formed for this purpose.Trusts that are in existence in the locality may also take up the job of establishing and running an FLCC if the same is permissible as perthe objects clause of the trust.Banks can donate funds to such trusts in order tofacilitate the establishment of FLCC.Banks may also encourage interested local individuals to establish a trust or society for the purpose of setting up and managing an FLCC.[Published in Business Line dated 22nd April 2008]