RBI suggests banks to form (FLCCs) in both rural and urban India

The Reserve Bank of India has drafted a document in which it has suggested the banks to form financial literacy and counseling centers (FLCCs) in both rural and urban India, which would provide free counseling to people.

The draft if put into practice will take forward the current credit counseling plans by some banks, namely Bank of India’s Abhay, ICICI Bank’s Disha Trust and Bank of Baroda’s Grameen Paramarsh Kendras.

According to the RBI draft the counseling centers should be able to take up a case on behalf of the customer. “There is a need for credit counseling centers to be empowered for liaising and negotiating with banks on behalf of their customers,” it says.

The central bank said offering credit counseling can be made a part of fair lending code for banks in due course. Even the threat of recovery agent can be delt with through the credit counseling centers. “RBI may sensitize banks to give due consideration to the debt management plan prepared by such FLCCs before resorting to recovery measures,” it said.

Regarding the single-creditor-debts the RBI said, “The FLCCs could assist the borrower in negotiating with the bank concerned. In case of multiple credits availed of by individuals, the FLCCs may negotiate with the bank/s having the largest exposure to restructure the debt and the recoveries to be shared on a pro-rata basis.”

But their work stops there: “The FLCCs would, however, not involve themselves in recovering and distributing money. This would be left to the bank concerned, or the bank having the largest exposure to act on behalf of all the banks.”

The main aim of behind the setting up of financial literacy and counseling centers is to bring in more farmers into the organized borrowing ambit, instead of money lenders, who charge a high interest rate.

Whereas in the urban sector, “The aggressive marketing of personal loans and credit cards to vulnerable section of borrowers could also have consequences of over- indebtedness and rising NPAs,” RBI said.

Mean while, when the banks set up such credit counseling centers an appropriate ‘firewall’ should be there between a bank and the counseling centre set up by it. “Financial education should be clearly distinguished from commercial advice; codes of conduct for the staff of financial institutions should be developed.”

The draft has been posted on the RBI’s bank website for the public comments and suggestions. The site is open for public comments and suggestions till April 30, 2008.