Debt and Other Traps
About 30 years back all Lending by Banks was Discretionary. There were two reasons. First, because none of the banks were automated the way they are today. Second, there was no concept of Rule Based Lending. Credit Cards were just beginning to show up in major metros. That too from Foreign Banks like Citi.
Indian Banking has moved a long way from those times. Over the years, massive computerization enabled banks to consolidate their databases and led to Retail Lending Products to be designed for the customers. The most prominent one being Credit Card. Persuasive and Lucrative calls offering Credit Cards to almost everybody who had some kind of earning led to a proliferation of Credit Cards. Other Products like Personal Loans, Consumer Loans, Vehicle Loans and Home Loans caught the imagination of Indian Working Class from Low to High Networth Individuals brought very rewarding business for the banks.
While Loans were getting consumed like any other packaged (non-financial) product providing a much needed boost to the Automobile, Housing and Consumer Durables (especially electronics) industry, the defaults in payment of EMIs started increasing. A false sense of prosperity and purchasing power led to many indiscreet borrowings that eventually defaulted.
The Reserve Bank of India as a regulator got worried and to regulate the Lending Process, constituted a Committee to look into formation of Credit Information Bureaus. The recommendations of the Siddiqui Committee were placed before the RBI and a subsequent legislation gave it an official status in the Indian Economy.
However, underneath this compelling social move to create Credit Information Bureaus there were interested Investors who saw the opportunity to become the modern day sharks by being in the field of lending and place the unsuspecting middle-class people into a debt-trap. These traps started with a friendly offer of a Credit Card or Loan. The most innovative part was that for most of these Cards or Loans, no Guarantor was required.
Due to global volatility in Economy lot of these Borrowers defaulted. And thereby the Credit Information Bureaus started getting data points from Banks making all these borrowers a subject of future harassment.
What is your CIBIL Score? A singular question that could upset all the hope and dream of the Borrower, is a common question today.
One would say, what is wrong in it? Read On…
1. One takes a credit card. Defaults. The Card Company starts recovery process. The Company and the Card Holder mutually work out a settlement. The Card Holder pays the mutually agreed amount. The Card Company reports the written off amount to CIBIL. Thus far, it is all reasonable. What has not been reasonable is the kind of interest rates that were charged to the Card Holder between the date of default and the date of settlement. Exorbitant rates upto 60% got loaded into the outstanding balance. A careful study of all data of settled accounts would show that most of the Card Holders have paid more than three times the drawings/spends from their cards and yet have a delta amount as written off. Thus, even after having paid three times the spend, the Card Holder is reported as a defaulter. His Credit Rating is adversely impacted for all future loan/card applications.
2. What is more intriguing is that the piece of legislation that was passed by the Parliament is highly inclined towards the Financial Institutional and against the Borrower. The CIBIL is allowed to accept whatever data is reported by the Financial Institutions as the final data and makes it the basis for the score. Principles of Natural Justice would require CIBIL to contact the borrower who has been reported to ascertain the correctness of the position reported by the Financial Institution. But in this case, if the borrower on coming to know of the adverse report lodged by the Financial Institution would have to approach the Bank to sort out the matter and CIBIL is not responsible in any way in continuing to host the disputed data reported and its scoring on such disputed data.
3. Home Loan is a very important segment of developing India. Especially, an India that has been making the move from Joint Family System to Nuclear Family system in the last five decades. All Home Loan is adequately covered with the Home itself as a collateral. The value of Real Estate rises at a higher rate than the Interest Payable on such Loans. Yet, people who have defaulted in Home Loan Installments have been made to suffer the humiliation of adverse score preventing them from the possibility of owning a home ever again in life.
4. If you are not surprised by all these draconian policies yet, this one tops them all. Education Loan for Students are being denied on the grounds of adverse score of their Guardians/Parents/Family. A Gross Violation of Human Rights one would think.
5. The lop-sided legislation is causing immense social harm. But, that is just one part of the story. The other part is more critical for National Security . CIBIL is a company having a 55% stake by Transunion. Transunion is a foreign company and has undisclosed PE firms as their owners. Such a sensitive database is at the mercy of undisclosed international PE firms and the RBI does not have a reason to worry?
Keeping in view the kind of Social Injustice that is being perpetrated in the name of Credit Scoring, it would not be very long before half the nation becomes ineligible for Lending. That would be a Crippling Blow to the Economy and Banking Industry. Juxtapose this situation with the serial waiver of Loans that the Nation has seen since 1992. Are we creating two parts of India each suffering from Incredible deformity in access to Credit ?
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“ऋण कृत्वा घृतं पिवेत ; यावत जीवेत सुखं जीवेत “- the famous quote of Chrwak is fully applicable as seen today in our society.An “unholy alliance” ,vis vis manufacturers and Commercial banks ,Central Govt ,Reserve Bank plying pivotal role to complete the alliance
The vicious Circle :It is simple,take loan,manufacture> Dealer;take loan purchase> consumer ;take loan purchase ; thus the circle goes on..!
And above all , MICRO FINANCE , a pet child of Reserve Bank ,is an easy way to convert Black Money in to White,at same time make money by leaching lower class, who find easy to have money,,payback in easy weekly installment.
This has made them lazy,don’t care to work &it has become difficult in small town & villages to find laborer to work in their fields
Our new Finance Minister must scrap “Micro Finance” a curse for society , an Evil in disguise .
Sir!Read it.I know Have faced all this by HDFCBank.My check was cashed ,amount put in a dead account nd made me defaulter.Went for education loan nd my credit rating was defaulter of₹268/ nd SBI refused loan. Somehow managed to settle the issue by paying overcharged amount. Now SBI is charging interest on interest. Its a cobweb from where we cannot come out.Excellent write up of common man woes.
Credit card debts is a big burden for a middle class man, as i know, some banks used to give loan on the credit card for the credit limit amount and the interest used to be so much, mostly the customers used to be indian labourers in UAE, these ppl were ignorant of the loan interest, only when they start paying back they used to realise the burden of the loan taken, many committed suicide as they could not pay the credit card amount and the pressure from the bank. Your article throws light on many aspects. Thank you.
Yes. This is indeed a social peril. This needs to be handled at a broader level by people at the helm of affairs. As devastating as narcotics.
Yes..some 20-3- years before, ordinary Indian was not taking loan to get gadgets & house because such loan was not available, but ordinary man was loan-free too. Now you can get any type of loan easily & life is under loan burden.
Another problem with loan is you can get 50 lacs for house or car but you will not get even 5 lacs for business.
One thing banks should understand that a flat/house worth Crores can’t give you bread how ever a shop worth 5 lac will get you not only bread but create wealth to purchase house costing crore.
Let this fact be seen by Modi govt.