Credit counselling - a social initiative to meet a vital need

Credit counselling, or the provision of financial advice and guidance to borrowers to help them in the prudent use of funds obtained and credit availed and prevent them from getting into difficulty and defaulting on payments, and helping borrowers who have already fallen into distress to review their finances, reschedule their debt payments and stage a recovery of their businesses, is a vital aspect of maintaining the financial health of both borrowers and lending institutions.

The Sri Lanka Banks Association, with strong support from the Central Bank of Sri Lanka, has therefore taken the initiative to provide credit counselling services with the setting up of a special counselling centre at the Central Bank Centre for Banking Studies at Rajagiriya.

This meets a vital need in providing advice and financial education to borrowers and credit seekers especially in the wake of global events and local developments. This initiative, with its focus on carefully planned financial management and recovery from default, is relevant to both lending institutions and their customers and is aimed at relieving debtors of the burden of their debt and enabling them manage their finances better.

Various counselling programmes of this nature have been implemented in many parts of the globe with separate institutions set up to discharge this responsibility. Customers as well as financial institutions are pushed into dire difficulties due to loans taken in a careless and ignorant manner. A major problem that could be highlighted in this context is the failure to wisely invest the proceeds of the loan and the failure to settle the loan at the given time.

There are also frequent reports of credit being used lavishly through credit cards without concern for timely settlement which eventually puts such users in deep trouble as their debts and interest costs mount. This calls for urgent measures to arrest this situation and promote a sound financial culture.

Despite the fact that this country is somewhat ahead in banking and financial sectors compared to other countries of the Asian region, it is a matter for regret that as far as obtaining loans and utilization of such monies are concerned, we are at a rudimentary stage. A well defined programme to correct this situation is, therefore, a long felt need.

While the situation in Sri Lanka has remained such, credit counselling on the provision of financing and credit is more advanced in neighbouring India. The Bank of India’s Credit Counselling Centre has been established for this purpose.

It was the first of its kind in India and has succeeded in providing a yeoman service to Indian financiers. Together with other organizations such as the ICICI Bank’s Credit Counselling Centre, they have dedicated themselves to creating awareness among the public about these services and in promoting financial discipline.

The Indian Credit Counselling Centers operate on the concept of a public service without earning a profit. They always make an effort to lessen the credit burden of the debtors enabling them to better manage their finances with proper investments.

A special knowledge is required in managing the finance of financial intermediaries and persons with assets. The methods used by banks to structure the loans of some organizations are far too complex for small and medium scale entrepreneurs.

In such a situation, they seek financial management through means that are not legally sanctioned. Furthermore, there is also a trend on the part of borrowers not to provide correct information to the banks. We also see an escalation in the trend towards borrowing and defaulting in loan repayments and this situation cannot be controlled by a third party.

This makes it important for financial institutions themselves to provide loan management services with respect to those who obtain credit from such institutions.

The contributory factors to default are the erosion in earnings and an increase in interest rates. Good financial management also depends on striking a balance between income and expenditure.

Therefore, it becomes important for counselling to focus on three aspects - resolution of the existing financial problems, creating awareness on the expenses incurred due to the misuse of credit and promoting financial management and control of expenditure. It becomes important here to guide those facing financial difficulties towards a structured financial method.

Counselling could be either pre or post loan guidance. Pre-counselling involves guiding the loan recipient to assess his financial standing and repayment capacity before obtaining credit.

This would reduce instances of loan default. Post loan counselling is aimed at preventing further indebtedness when repayment is disregarded. Credit Counselling has become an important factor for banks, enabling the institutions to assess the risk factors and the ability of debtors to repay the loans.

In Sri Lanka, the rural folk have a better experience in credit management since they have a lesser tendency to obtain credit and possess a natural instinct towards managing their funds. In contrast, due to less prudent approaches to using credit, urban folk have often shown an inability to manage their finances well and end up facing major crises.

The ‘Upadeshana’ Credit Counselling Centre is expected to commence operations on January 19 from its location at the Central Bank’s Centre for Banking Studies in Rajagiriya and will also offer its services in various provincial towns for the convenience of people in these areas.