K C Chakrabarty: Furthering financial inclusion through financial literacy
and credit counselling
Address by Dr K C Chakrabarty, Deputy Governor of the Reserve Bank of India, at the
launch of Federal Ashwas Trust, Kochi, 30 November 2009.
* * *
I am happy to be here this morning and feel privileged to launch the Federal Ashwas Trust
for running the Financial Literacy and Credit Counselling Centres (FLCC) of Federal Bank. At
the outset, let me warmly congratulate my old friend and colleague Shri M. Venugopalan, MD
and CEO, Federal Bank, and his team for bringing the FLCC of Federal Bank to fruition.
Even though Kerala has the highest literacy rate amongst all States in the country, I am sure
that centres such as these have a vital role to play in providing valuable services to the
people in the district.
As our Hon'ble Finance Minister emphasized in his Budget speech, our approach to banking
and financial sector has been to ensure robust oversight and regulation while expanding
financial access and deepening markets. The merit of this balanced approach has been
borne out in the recent experience as the turbulence in the world financial markets has left
the Indian banking and financial sector relatively unaffected. The recent turmoil which
engulfed the western world and its financial sector brought to even sharper focus the
pressing need to protect the vulnerable from Ponzi schemes through safety nets of financial
education, counselling and timely advice.
The establishment of FLCCs is an important milestone in furthering financial inclusion. As I
have emphasised time and again, opening a no frills account is by itself not financial
inclusion. That is just the beginning. Financial inclusion is a much broader term which can be
construed as the process of ensuring fair, timely and adequate access to financial services,
namely, saving, credit, payment and remittance facilities, and insurance services at an
affordable cost in a fair and transparent manner by the mainstream institutional players.
Educating people and making them financially literate thus becomes integral to achieving
financial inclusion, which is why centres such as these are needed.
With the above perspective, I organize the rest of my remarks under the following sections.
In Section 1, I propose to talk about the importance of financial education. In Section 2, I
would briefly touch upon the need for credit counselling. Section 3 discusses the specific
objectives of setting up the FLCCs. Section 4 covers the role of RBI and, finally, I shall share
some of my thoughts on issues and challenges that we need to address.
I. Financial education
Financial education can broadly be defined as the capacity to have familiarity with and
understanding of the financial market products, especially rewards and risks in order to make
informed choices. Viewed from this standpoint, financial education primarily relates to
personal financial education to enable individuals to take effective actions to improve overall
well-being and avoid distress in financial matters.
The financial markets offer a variety of both simple and complex financial products. It is
difficult for the common person to grasp the downside risks associated with financial
products especially if he or she is confronted by a blitz of clever advertising. Making wrong
choices while choosing financial products becomes one of buying in haste and repenting at
leisure. The focus of any discussion on financial education is thus primarily on the individual,
who usually has limited resources and skills to appreciate the complexities of financial
dealings with financial intermediaries on matters relating to personal finances on a day-today
basis.
Lack of literacy in general and financial literacy in particular, are the main hurdles in
expanding the coverage of financial services to the poorer segments of society.
Notwithstanding the initiatives taken so far, given the large magnitude of the problem,
concerted efforts need to be made in this direction. Banks should, therefore, come forward to
set up literacy centres and guide their clients about the features, benefits and risk of various
financial products. With no well established banking relationships, the un-banked poor are
pushed towards expensive alternatives. These centres can educate the people about proper
financial management tools, inculcate saving habits and generate demand for financial
products and services which in turn will boost financial inclusion. This process of education
could benefit the banks as the centres while interacting with customers would be in a much
better position to understand their specific requirements, which could then be a critical input
in appropriate product design.
Financial education is also an integral component of customer protection. Despite concerted
efforts, the current levels of transparency coupled with the difficulty of consumers in
identifying and understanding the fine print from the large volume of information, leads to an
information asymmetry between the financial intermediary and the customer. For example,
customers are often penalised for minor violations in repayments, although they have limited
redressal mechanisms to rectify deficiencies in service by banks. In this context, financial
education can greatly help the consumers.
II. Credit counselling
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.
As per the All India Debt and Investment Survey, 2003, nearly a fourth of the households
were indebted in 2002. The per cent of indebtedness households in rural areas increased
sharply from 23 in 1991 to 27 in 2003; the corresponding figures for urban areas during the
same period were 19 and 18, respectively. As per the NSSO survey (2003), out of 89.35
million farmer households, 43.42 million (48.6%) were reported to be indebted. Farmer's
indebtedness was highest in Andhra Pradesh followed by Tamil Nadu and Punjab. The
average outstanding loan per farmer household was highest in Punjab, followed by Kerala,
Haryana, Andhra Pradesh and Tamil Nadu.
The report on the Situational Assessment of Farmers (NSS 59th round-2003) estimated that
64.4% farmer households are indebted in Kerala as against the national average of 48.6%.
The major reasons for arrears in repayment reported include high cost of cultivation, fall in
prices of agricultural produce and crop failures. Opening of credit counselling centres such
as these can certainly benefit the people.
Earlier, there were reports of farmers committing suicides in some parts of the country due to
their financial liabilities. Through the provision of timely and professional advice, common
people can be helped to manage their debt, improve money management skills and gain
access to the structured financial system. Counselling can help solve current financial
problems, create awareness about the costs of misusing a credit, can improve financial
management and help develop realistic spending plans. Debt counselling/credit counselling
can be both preventive and curative. In case of preventive counselling, the centres could
provide awareness regarding cost of credit, availability of backward and forward linkages,
where warranted, etc. The clients could 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 centres could work out effective debt restructuring plans that could
include repayment of debt to informal sources, if necessary, in consultation with the bank
branch.
III. Specific objectives of FLCCs
With the above background, let me remark on the specific objectives of setting up FLCC. As
you are aware, while 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:
i. To provide financial counselling services through face-to-face interaction as well as
through other available media like e-mail, fax, mobile, etc. as per convenience of the
interested persons, including education on responsible borrowing, proactive and
early savings, and offering debt counselling to individuals who are indebted to formal
and/or informal financial sectors;
ii. To educate the people in rural and urban areas with regard to various financial
products and services available from the formal financial sector;
iii. To make the people aware of the advantages of being connected with the formal
financial sector;
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 services, financial planning and amelioration of debt-related distress of an
individual;
FLCCs are not expected to act as investment advice centres /marketing centres for products
of any particular bank/banks. Counsellors may refrain from marketing/providing advice
regarding investment in insurance policies, investment in securities, value of securities,
purchase/ sale of securities, etc., or promoting investments only in bank's own products.
IV. Role of the RBI
We, at the RBI, actively encourage these initiatives and one of the main reasons for my
coming here to launch the trust is to demonstrate our commitment to this cause. RBI has
completed 75 years and in our platinum jubilee year, we are making concerted efforts to
expand the reach of formal finance through outreach initiatives. All the stakeholders are
being encouraged to push aggressively for greater financial inclusion. The Banking Codes
and Standards Board of India (BCSBI) has recently brought out an updated code to ensure
that the banks formulate and adhere to their own comprehensive code of conduct for
minimum standards of banking services, which individual customers can legitimately expect.
And finally, the Banking Ombudsman Scheme has been instituted for redressal of grievances
against deficient banking services, covering all the States and Union Territories.
V. Issues and challenges
Since promoting awareness is one of the primary objectives, the FLCCs should give due
emphasis to customers' rights under fair practices code and act as watch dogs. Our
institutions must provide high quality public services to all citizens with transparency and
accountability. To achieve this, there are several issues and challenges that come to my
mind:
i. The first issue is that of treating the customers fairly. Transparent pricing, terms and
conditions of financial products including interest charges, premia, fees and user
friendly products made available in a form which is intelligible to borrowers would go
a long way in reducing the need for having financial education centres in the first
place. There is a need to sensitise the bank staff to engineer an attitudinal shift with
empathy for the poor, strengthen and streamline systems to improve the efficiency
of our distribution and delivery mechanisms.
ii. The second issue for banks is to expand the range and reach of counselling and
advisory services to vulnerable sections. For this a large number of such centres
would be required. Up to end June 2009, banks have reported setting up 154 credit
counselling centres in various States of the country. Obviously, there are many
districts which still do not have such centres and we need to strive towards setting
up more centres.
iii. Third, banks need to facilitate the empowerment of credit counselling centres for
them to be effectively liaising and negotiating on behalf of their customers. It must
be understood that FLCCs are to facilitate responsible behaviour among financial
institutions serving customers at the base-of-pyramid as part of their focus on equity
and efficiency.
iv. The fourth issue is that of enlisting committed and well trained personnel to man
these centres. As quality of service is an important aspect, it is desirable to have
appropriately bench-marked quality standards for credit counsellors and counselling
agencies. A related issue is that whether there should be accreditation of credit
counselors? If so, who should do it, industry associations or individual banks? These
could be considered in due course.
v. The fifth issue that faces agencies is that of following a segmented approach
vis-àvis a broad-based generalized one. It is clear that banks may have to adopt a
segmented approach specific to different categories of borrowers and different credit
segments. Similarly, in respect of urban and rural areas, different approaches would
be required. For instance, the centres in rural and semi urban 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 overdues in credit cards, personal loans, housing loans, etc. Thus,
the challenge is to tailor differential literacy and counselling mechanisms depending
upon the need.
vi. Sixth, an important issue from the financial literacy perspective is that of content
design and appropriate delivery medium and mechanism suitable to the particular
target group.
vii. Lastly, as 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. Effectively utilizing the various mass communication
channels and leveraging information technology would assume importance in this
context.
VI. Conclusion
I hope the FLCC of Federal Bank would bring "Ashwas" or relief to the common person. The
bank, based on the experience gained, may like to consider opening more such centres in
other districts of the State in due course as the benefits of such initiatives flow back to the
banks. We need to collectively strive to deepen and broaden the agenda for inclusive
development; and to ensure that no individual, community or region is denied the opportunity
to participate in, and benefit from the development process.
I wish the Trust all the success.