What Santa Chidambaram can give to consumers this February?Getting the Credit Bureau up and running should be at the top of the to-do list of regulatory implementations, revamp of the education loan sector and implementation of acts such as Fair Lending Practices Act as well as a Fair Credit Reporting Act should
18 Feb 2008
It's budget season, that time to make a list of demands and requests for the finance minister to consider. One would hope, this being the last budget before an election year, the Finance Minister will be in a far more generous mood than usual. With a welcome willingness to dig deeper into his pocket.
Income tax issues would be the first on any consumer's list. As far as tax deductions are concerned there are already fairly reasonable provisions though higher limits for deductions are always welcome. What are needed now are policy and regulatory directions and actual implementation of already announced measures.
Getting the Credit Bureau up and running should be at the top of the to-do list of regulatory implementations. An active Credit Bureau will change the way the loan business is done in India and a declaration by the FM will only assist in taking this key initiative forward.
The other big reform should be the complete revamp of the education loan sector, a vital social infrastructure builder. Today, education loans are disbursed as a result of administrative fiat by the bank owner- which is the government. Hence the only significant players are the public sector banks. As of today, there is no economic or commercial sense for the private sector banks to take up education loan portfolios. The result - a lot of students are unable to avail of education loans and pursue higher education. This is because they have no access to security collateral. Or their parents don't have enough income to be acceptable as guarantors to the loans. This may not affect students who are able to get admissions to institutions such as the IITs or the IIMs. The vast majority, however, are affected by this lack of access to such loans.
There are two important reforms that can help turn around this sector.
Firstly, the already announced Education Refinance Corporation- funded using the education cess that all of us pay over and above our taxes - should be put in operation quickly. The corporation can share the risks with the commercial banks as well as provide refinance at rates that make education loans as profitable as any other loan portfolio for the banks.
Secondly, some official mechanism needs to be set up for grading various education courses based on their ability to increase employment potential, earnings potential, chances of successful course completion etc. This will then allow banks to assess the risk in providing loans for courses more objectively. In the absence of such common criteria, banks justifiably tend to play safe. After all they have the all-pervasive duty to protect their depositors' interests. This means that banks fund only traditional courses such as engineering, medicine, etc. completely ignoring the vast new areas that have opened up in our resurgent economy.
Another much needed reform, a fast track mechanism to deal with defaulting consumers of small value loans. Banks and non-banking finance companies (NBFCs) had started enthusiastically to disburse loans to customers whose economic profile gave them no access to such loans until recently. Unfortunately, the furor over extra-judicial recovery practices means that such disbursals have been halted in their tracks. Instituting a quick recovery mechanism will ensure that such recovery practices are not the norm anymore. It will also ensure that customers of the small-value-loan do not fall into the clutches of money-lenders or loan-sharks.
Finally, I think the time is ripe for a Fair Lending Practices Act as well as a Fair Credit Reporting Act. These will provide a statutory basis for the consumers to enforce their rights against lenders and ensure more discipline and responsibility on the part of the lenders.
These lists are bound to be long and implementation will take time. But even a single step taken by the finance minister as per this given list will represent a giant leap for Indian consumers.
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