y v reddy : credit counselling - an indian perspective address by dr y v reddy, governor of the reserve bank of india, at the foundation day function of the bank of india, mumbai, 7 september 2006. * * * mr. chairman, distinguished guests and friends, i am thankful to mr. balachandran for providing this opportunity to be with this eminent gathering assembled for a noble cause. bank of india has been among the banks known to be a pioneer in several areas of commercial banking. in this context, the initiative by the bank to establish credit counselling centers on a pilot basis highlights the pro - active role being played by our banks. in fact, a major reason for my agreeing to participate in this ceremony is to demonstrate the reserve bank of india's commitment to the cause of credit counselling - a recent initiative in our country. in my remarks on this occasion, some introduction on the importance of this topic would be in order. an overview of the global practice in this area could then be followed by a discussion of the indian context with regard to credit counselling. any mechanism of credit counselling has to reckon with the processes, costs and benefits. the concluding thoughts are in the nature of illustrative issues towards initiating and popularising credit counselling in india. introduction with the changing growth dynamics of the economy, it is not difficult to envisage situations where certain segments of the population become susceptible to excessive borrower optimism or even to vicissitudes in the economic environment. such susceptibility could also arise from unforeseen shocks or emergencies that make repayment difficult. by providing sound advice to arrest the deterioration of incomes and restructure their debt, credit counselling offers a meaningful solution for borrowers to gradually overcome their debt burden and improve their money management skills. in this regard, the question is whether there is a role for public policy in matters relating to credit counselling? we must recognise that financial intermediaries, the corporates and high net worth individuals generally possess in - house knowledge of matters relating to financial management and can afford to employ outside expertise as appropriate in regard to their investment decision and management of distressed loans. public policy has enabled an operational mechanism in the form of corporate debt restructuring ( cdr ) in regard to loans by banks and development financial institutions to large corporates. somewhat similar framework has also been provided to small and medium enterprise. in regard to agricultural loans and most of the small borrowers, however, only broad

, nurturing a borrower back to health after a default can be a time - consuming process, besides causing severe inconvenience for the distressed families. traditional banking technologies rely mainly on a set of pre - assigned standards to determine whether a potential borrower will be able to service a loan. this lack of knowledge on low - income household circumstances restricts the banks ability to objectively assess whether the expected loan can be sustainable. sometimes, a two - track approach towards mitigation of borrower risks is advocated. in the near - term, credit counselling can constitute an integral part of banks ’ loan application, which can facilitate better assessment of credit risk and repayment capacity. in the urban areas, where people are more technosavvy, such counselling can take place over the internet or the phone. in the rural areas, such interface could be made more personalised through direct face - to - face interaction with the affected clientele. such preventative counselling would enable the borrower to determine the optimal level of sustainable debt and pre - empt deterioration of accounts at a future date. this is also likely to lower the incidence of customer complaints against banks. an important consequence of the counselling process may be that, as potential borrowers learn more about the way financial markets function, they may learn to behave more strategically and to prepay more often when interest rates are benign. if such behavior becomes prevalent, together with a positive effect of counselling on default, it may be an additional argument that counselling helps lowincome borrowers. issues it is necessary to recognise that there are several issues which require to be addressed in identifying possible approaches to initiate and popularise credit counselling for individual borrowers. let me flag some of these issues for your consideration. first, how well can we combine credit counselling with some elements of financial literacy? second, should credit counselling concentrate on ex ante or only on ex post elements or some combination of both? third, should credit counselling agencies devise differential mechanisms to take into account different credit segments such as housing loans, consumer loans, farm loans as well as different categories of individual borrowers such as salaried, self - employed, seasonally employed etc? is it better to have more general credit counsellors? fourth, given the differential nature of cash flows and consumption patterns in rural and urban areas, is there a need for a segmented approach towards credit counselling? fifth, should there be