Pulling out of the debt trap

Delhi-based Anuradha Saikia (Name changed) was working as Assistant Manager (marketing) in a big export house with an annual income of Rs 7 lakh. Two years ago, Saikia, 32, took a car loan of Rs 5 lakh and used multiple credit cards to buy consumer goods to live a lavish life—and accumulated a debt of Rs 7 lakh. Till the time she lost her job in January this year, she was completely unaware of the fact that her monthly income was not sufficient to match her lifestyle expenses. Today, with savings of Rs 2 lakh in her bank account, she is unable to pay off her debt. “I still have money to pay off my debt over the next 3-4 months. After that, I will have no option but to default on EMIs unless I get some job,” she says. 

Debt, be not proud Has debt repayment become a burden? Here’s the way out. Call the creditors Tell them about your inability to repay and work out an alternative schedule Prepay debt Can take cheaper loan on NSC/FD/insurance to retire high-cost loan Take credit-counselling Seek help from counsellors if you are unable to deal with the creditors Review expenses Create a spending plan; monitor it regularly

Defaults on housing, auto and personal loans are on the rise, with many individuals facing the brunt due to job losses or pay cuts—a trend that is likely to continue over the next year or two. So, what are the options for people like Saikia who are nonwilful defaulters but are unable to repay their dues? Recently, several banks have come up with various initiatives in an effort to deal with this growing problem. BT examines some of the options.

Reconstruct your loan  
The Asset Reconstruction Company of India (ARCIL), which is jointly backed by ICICI Bank, SBI and IDBI, has launched “Arms”, an organised retail-loan recovery and resolution initiative aimed at helping distressed borrowers seek a loan-default resolution in the most cordial way. Says S. Khasnobis, MD & CEO, ARCIL: “There is a clear shift in the way the vast majority of population thinks today. From “earn and save” earlier, the thinking now is “earn and consume”. This changed scenario led us to create an organised mechanism to quarantine the retail non-performing loans (NPLs) from the banking system.”  

“Arms”, which works as recovery agent for banks and other lending institutions, has employed an army of trained resolution officers/counsellors that gets in touch with distressed borrowers whose loan obligations have been taken over by ARCIL. The approach is to first understand the borrower’s reasons for the default and ascertain if the borrower is willing to clear the default by assuming responsibility for the situation and co-operating with the agency. Once satisfied with the intentions of the borrower, counsellors proceed to provide suitable options. These may include extension of repayment period (with requisite down payment to be decided on a caseto-case basis), or settlement or any alternative arrangement for structured repayment, or even loan foreclosure by selling the collaterals with the borrower’s co-operation.  

The Arms way Asset reconstruction company, Arcil, helps down-in-debt individuals get back on track. A lowdown: What is Arms? How does it help individuals deal with distressed loans? Arms is a division of Arcil with special focus on retail and consumer loan default resolution. It has a team of about 50 employees. Can distressed borrowers approach Arms directly? Arms takes up only those distressed loans that are taken over by Arcil from institutions such as National Housing Board and ICICI Bank. Right now it’s the Arms that approaches the borrowers, and not the other way round. However, a borrower can provide relevant details to Arms to find out if his loan obligation has been taken over by Arcil or not. Also, the company hasn’t acquired unsecured loans like credit cards and personal loan. What practices are followed by Arms that go beyond the regulatory requirement in the FDCP (Fair Debt Collection Practices) code? As part of its communication strategy, Arms uses the term “resolution”, which is different from “recovery”. There could be many reasons for a bank loan default by a borrower. As part of the strategy, importance is placed on the intention of the borrowers to check defaults. Then, Arms provides solutions for borrowers to resolve the issues. So far, what kind of cases has Arms resolved? Arms became operational on August 15, 2008. Arcil claims to have a good experience so far and would like to build capacity first before talking about individual cases.

“Generally, we ask the borrower to disclose financial position in detail to us so as to justify the resolution approach. On the other hand, we handle difficult borrowers or intentional default situations with a “no nonsense approach” in accordance with the law of the land,” says Khasnobis. So far, Arms has acquired around Rs 1,200 crore worth of secured retail loans from banks. Opt for Counselling Individuals who have fallen into debt trap can also approach debtcounselling centres for succour.

Disha Financial Counselling supported by ICICI Bank and Abhay Credit Counselling backed by Bank of India are two such centres. When approached, officials at these centres first ascertain the genuineness of the borrower, and then, based on various parameters such as the amount of loan outstanding, amount repaid, and assets of the borrower, go on to assess the possible ways to resolve the issues.

The solutions could range from increased loan tenure and one-time settlement to partial waiver of the loan amount, among others. The assessment reports are then sent to the respective banks where both the parties arrive at a mutually-acceptable solution. In certain cases, counsellors also suggest banks to slash interest rate by converting credit card dues—which bear interest rates of as much as 50-60 per cent—into personal loans.

Says Himanshu Kohli, Cofounder, Client Associates: “To avoid any loans from becoming non-performing assets (NPAs), banks are even willing to customise the repaying solutions for borrowers by addressing both short-term and long-term inability of the borrower. In case of job loss or illness, sometimes banks offer a moratorium period to the borrower till the time he/she gets a new job.” Financial experts say individuals can also get rid of high-interest loans by taking cheaper loans against their investments such as life insurance, FDs, PFs and NSCs.

Watch Your Credit History For individuals, having a good credit history is becoming increasingly important. India’s Credit Information Bureau, CIBIL, has already launched its operations, having acquired a database of 130-million individuals and their credit history. If you default intentionally, it may reflect in your credit history and will spoil your chances of getting a future loan. Banks also access the data to see your levels of leverage. If you already have too much debt, it will also show in your credit sheet and banks will shy away from lending to you.

Avoid a debt trap
Financial planners recommend that one must think twice before going for any kind of loan. Says Kohli: “Even if the loan amount is small, always check whether you have the capacity to pay it back. It is better to make an assessment in advance rather than to run into trouble later.” Calculating your personal net worth will give you an idea of your financial strength. This is done by dividing the sum of all your assets including real estate, cash in hand and bank accounts, investments in instruments like the NSCs, FDs, mutual funds, etc., with your total debt such as home mortgage, credit card balance, etc. As a matter of rule, your total liabilities should not be more than 50 per cent of your assets. This will save you from a lot of hassles.

 

“People generally hesitate to default on their EMIs” In a conversation with Business Today, Arun Thukral, Managing Director, CIBIL (Credit Information Bureau of India), says that the financial turmoil has surely affected the credit markets in India but there’s no clear indication that delinquencies on the retail loans are rising. Excerpts: Do you think that defaults in the retail loan segment have gone up? The response of banking industry has been quite proactive. In case of loan defaults, banks are increasingly opting for restructuring of loans, reducing interest rate, giving longer time to repay the dues and, in certain cases, waiving off some portion of the loan. In India, the impact will be cushioned as the pool of good borrowers always exceeds bad borrowers. So you believe Indians are responsible borrowers? Traditionally, India has a responsible borrowing culture. People generally hesitate to default on EMIs. In fact, in nine out of 10 cases, individuals would rather prefer to cut down on expenses over non-payment of their liabilities. At the same time, the credit penetration in India is still low at 15 per cent compared to 60-70 per cent in the South-East Asian countries. How does the credit score issued by CIBIL help in fostering a responsible borrowing culture in the country? The role of CIBIL is to minimise defaults and maximise credit penetration and portfolio quality by providing comprehensive credit information about individual borrowers. As the economy is going through tough times, the banks feel a dire need to audit the quality of their credit portfolios in a bid to avoid the accumulation of non performing assets (NPA). While the market for credit is expanding, it is also getting riskier. As the size of the Indian market grows and competition increases, speed in risk assessment is of utmost importance not only in deciding to extend credit but also in deciding upon appropriate pricing. What are the criteria for getting a good credit score? Today, we have a database of over 130 million accounts and all of them are rated on a scale of 300 to 900. If you have a good credit score, say 700, this implies lower interest rates, waiver of processing fees and faster disbursement of funds. A customer will be able to build a good credit history by proper financial planning and by maintaining a good track record of repayment of dues for loans/credit cards.