The Hindu Business Line : Retool the consumer credit system

DO you know that the home loan you took from a bank in one city, or town, could determine the interest rate on a proposed vehicle loan at a different bank in a different part of the country?

Do you know that the details of all your loans and credit card spending will be reported to a central agency, even if you promptly meet your obligations every month?

Do you know how your bank uses the sensitive personal information it collects from you?

Do you know what legal rights your bank gets on you when you sign the dotted line on the application form? Do you understand how the interest and finance charges in the your credit card statement are calculated?

Do you know how to seek external assistance if you feel you are overcharged on the interest payable? If these questions stump you, don't panic.

You are not alone. This predicament is part of a broader set of symptoms that highlights the need for overhauling and retooling the consumer credit machinery in India.

The three cogwheels at the core of the credit system — industry, society and policy — are perilously out of sync with each other. A status check on each of these three interconnected components can help shed some light on the situation.

The retail or small consumer lending industry — the first core component of the system — is as developed in India as in other countries.

The product portfolio of most credit providers today comprises an extensive range of offerings, such as personal, home and vehicle loans, charge cards, credit cards, debit cards and co-branded cards.

The product features and functionalities are undoubtedly innovative, offering cash-back schemes, discount schemes, balance transfer facilities, accident insurance and flight travel insurance.

The customer acquisition techniques employed by companies involve a slew of tactics such as database marketing, telemarketing, Internet marketing, ATM marketing, mass mailing, up-selling, down-selling, cross-selling, and other targeted campaigns.

The cost of the principal levied on the borrower is not just confined to simple interest calculated on the outstanding balance. In addition to myriad forms of interest assessments and EMIs, the borrowers' expenses also include a host of surcharges, such as processing fees, annual fees, late fees, ATM access fees, cash withdrawal charges and limit excess charges.

Credit providers are adopting the latest technology solutions for booking and managing customer accounts.

They access detailed personal information about prospective customers and use techniques for identifying `good' customers to limit loss write-offs from fraud and default. Credit information sharing among institutions through credit bureaus has not only been granted legal sanction and but also made mandatory to facilitate better credit risk management by the industry.

Debt recovery practices range from telephone dunning to outsourced third-party collections and involves at times ruthless measures such as threats, coercion and kidney collateralisation.

Overall, the consumer lending industry in India is near the leading edge of business practices by global standards, even if the measures adopted are questionable.

Starkly contrasting the industry is the second component of the credit system — the society of consumers — which, other than learning how to use all credit instruments available in the market, has not even taken baby steps to match the quantum leaps made by the industry.

Except for a minority, most consumers are oblivious to the changes sweeping the industry and the impact they will have on their dealings.

A case in point is the less than muted consumer reaction to the passage of the Credit Information (Regulation) Bill in Parliament, which affects not just defaulters but all consumers at large. Consumers are generally ill-informed about the terms and conditions of their credit agreements, unclear of their legal rights and ignorant of options available for dispute resolution.

The policy environment, which is the third core component of the credit system, appears ill-equipped to fathom and address the complexity of issues emerging from the information asymmetry and misalignment that exists between industry and society.

Unlike other areas, where policies are well-defined but the enforcement mechanism inefficient, consumer credit is an area where the problems are compounded by policies that are non-existent, antiquated or inadequate in scope.

The usury prevention regulations, where they exist — as, for instance, in Tamil Nadu — are old fashioned and do not recognise the sophistication of modern-day credit products and interest assessments.

There is no comprehensive privacy policy to ensure security, confidentiality and fair use of personal information.

There are no detailed policies on fair debt collection practices to restrain companies from inflicting a human cost on the society.

The penalty charges for corporate malpractice in India are measly and fail to act as a deterrent.

These are some of the glaring gaps that need to be filled to create a robust and responsive regulatory environment — a present day imperative to protect naïve consumers from predatory credit providers as well as safeguarding credit providers from mala fide customers.

In what is the consequence of selective and disparate Americanisation, we have an industry that is tearing away on jet wings, a regulatory mechanism straggling in its wake on old, creaky, wooden wheels, and a consumer society hobbling helplessly, barefoot, miles behind the other two.

Policymakers have the responsibility of ensuring that all three pieces move in tandem by putting in place a set of regulatory mechanisms that,

take a comprehensive view of the entire consumer credit system in all its complexity, and,

promote equity by balancing the interests of different stakeholders during every activity in the credit life-cycle.

Unless such a balance is established, there is a danger of consumers getting caught in debt traps and creditors accumulating unsustainable levels of NPAs, both of which will have adverse and near irreversible consequences for the economy as well as society.

(The author, an alumnus of IIT Madras and Massachussetts Institute of Technology, is a risk-management specialist.)

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