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BW Businessworld

Analysis: Codes And Conscience

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Raghav Jaikar’s case is not unique! Consumerism continues to scale new heights. Youngsters, fresh into jobs, aspire for luxuries that their parents barely managed to achieve in their lifetime, thanks to lending companies offering loans and credit cards to help them in their pursuit.
As business scaled up, inherent risks surfaced — defaults started and financiers rushed for cover. Documentation, till then a formality, was scrutinised to explore options to cut losses. Clauses providing for repossession of assets became important. However, the slow legal system and high costs of litigation posed a challenge. So, lenders preferred to outsource the “difficult” task to agencies.

Regulators responded with strict guidelines, strong reprimands and penalties. Media, at times, hyped cases of apparent unfair treatment, and courts tried to do their bit. But the letter of law often eclipsed the spirit. As such instances increased, it became clear that we had to address the root cause rather than the symptoms.

Jaikar signed on loan documentation without understanding the implications of default. Ambara’s salesman sweet talked him into this. When faced with the consequence of default, Jaikar felt cheated.

Lending companies must have a strict code of conduct to ensure consumers are provided with clear and concise information. They should advertise responsibly, and their products should match the consumers’ needs and risk profile. Above all, they should consider cases of financial difficulty sympathetically. They should be vigilant against breach by sales staff, who should be trained to offer appropriate products to vulnerable borrowers. Performance may be rewarded, but mis-selling should be severely reprimanded. We now hear of a leading international bank modifying its staff incentive plan to prevent mis-selling.

The legal system also needs some reforms. We need a mechanism for speedy and fair settlements; simplified documentation, in regional language with a provision of audio support; and modified arbitration rules that ensure that the venue is the city where the transaction has fructified. Debt collection agencies should be registered and regulated. Courts must insist on evidence that a copy of the completed documentation was made available to the borrower before the loan was disbursed.

Usually, consumers are protected by market forces. But in financial products, there is limited competition, and products are complex. The Reserve Bank of India has introduced Financial Literacy and Credit Counselling Centres (FLCCs), which can be funded by contributions from financing companies. FLCCs provide objective financial counselling on responsible borrowing and educate consumers on financial products’ features and risks. These promote financial planning and help individuals in facing debt distress. In short, they guide borrowers to successfully and safely use financial products and manage their scarce resources better. These are not supposed to intervene in cases of wilful default. In due course, FLCCs can provide access to subsidised legal assistance  and facilitate speedy settlements with lenders. Qualified individuals, usually retired bankers, run the  centres. The regulator has recently issued guidelines to enhance FLCCs’ effectiveness.

There is no quick fix to Jaikar’s problems. As Joshi and his friends suggest, simplification of legal system and arbitration, and educating small borrowers are some of the initiatives. But in pursuit of softer issues like voice of conscience, reining in young sales force and collection agents, we all have a role to play. It may be as simple as guiding our maid, driver or our favourite chaiwala when he or she thinks of borrowing. We could also use our spare time to support activities that help all the stakeholders to harmoniously operate in the larger interest of the economy and society.  

The author is vice-president and chief internal auditor of Voltas, chairman of the audit committee at BOC India, and independent director at Speciality Restaurants. Views expressed are personal

(This story was published in BW | Businessworld Issue Dated 06-05-2013)