Mumbai: On 31 December 2006, when the rest of the city was raucously ushering in the new year, Vijay (name changed to protect privacy), a 20-something salaried employee, was contemplating suicide. He had acquired multiple credit cards, run up huge bills and even taken several loans on them. Recovery agents were knocking on his door every day, but with a monthly income of less than Rs10,000, Vijay couldn’t pay his dues. In sheer desperation, he had taken out a life insurance policy and was hoping that the money his wife received after his death would help her pay off the debts. He was unaware that most such policies have a clause rendering them invalid if the policyholder commits suicide within a certain period after taking the policy.
Vijay would have probably taken his own life had he not remembered something he had read in a vernacular daily. And so, early in the new year, he walked into the office of Abhay, India’s first credit-counselling centre. Two hours in the small office at Dadar, a Central-Mumbai borough, and Vijay was free (well, almost). Former bankers of Bank of India, who run Abhay, advised him to replace his high-cost credit card debt with a low-cost personal loan. That, they explained, would halve his interest cost from 36% to 18%. At their prompting, Vijay’s wife took up a job and became a joint applicant for the personal loan.
India’s credit-card industry is around two decades old, but data on the number of cards issued and the total spending vide plastic is not freely available. By one estimate, as on 31 March 2006, the country had 18 million credit cards. As for spending, one study says Indians spent Rs14,000 crore through their credit cards in 2005-06. And credit card firm Visa claimed that in 2005, Indians withdrew $26 billion (Rs1,14,400 crore) from automated teller machines using their credit cards.
The number of credit cards has soared in recent years with banks selling them aggressively. In their eagerness to sell cards, banks often do not verify the creditworthiness of consumers. And in an effort to build their loan portfolios, banks woo credit-card customers with loans. The result: unmanageable debt for people such as Vijay, and bad loans for banks. Credit-card loans that have gone bad account for 5% of the total advances (or loans) of some banks. India’s central bank has already warned banks to keep an eye on their swelling credit-card outstandings.
Credit-counselling centres such as Abhay are popular in the US, where they first emerged in the 1950s, and in other developed countries. Abhay itself, registered as a trust, was founded by the Bank of India in September 2006 as part of its celebrations to mark 100 years in existence. Apart from the centre in Mumbai, Abhay runs another at Wardha, a city in Eastern Maharashtra. “Since its establishment in September, 125 consumers have come to our centre,” says V.N. Kulkarni, head of Abhay. “They are lower-class and middle-class people who have taken loans on credit cards without understanding the way they work.”
Although Abhay has the mandate to guide people on all aspects of money management, its focus has been credit-card loans. Most consumers who take loans on credit cards do not realize that the interest rate is 36% a year. The trust also plans to organize seminars to educate customers on the basics of credit-card use (including the rate at which loans are extended on cards).