In recent times, India’s appetite for credit, particularly for the unsecured kind, has grown exponentially. As per RBI data, Indians spent around Rs 88,379.85 crores online via credit cards in June, 2023.
This towers the total value transacted via debit cards, which stands at a paltry Rs 17,012.92 crores. Even when it comes to the total number of online transactions, credit card swipes (12.5 crore) far outnumber their debit counterpart (6 crores). A report by TransUnion Cibil also reported a 34% jump in value of outstanding credit card balances, as of March, 2023.
And if experts are to be believed, this demand is only set to grow unabated in the years to come. But all this resounding growth has a strong undercurrent of alarm, too.
In March 2023, credit card delinquencies (90 days past due date) rose 66 basis points to 2.94%. There was also a steep rise in the number of defaulters in the unsecured loan category, which was at 32.9% as of April 21, 2023.
The credit conundrum It is no secret that credit cards and other unsecured personal loans are notoriously unhealthy for your financial health. The low monthly repayment threshold and quick, unsecured access are easy baits for customers at first.
However, if you fall back on your repayments even once, you will be trapped in extremely high APRs (Average Annual Percentage Rate i.e. interest payable on the loan taken) and penalties later on.
This is especially dangerous, since APRs in India can range from anywhere between 36% to 48%. This means that for every Rs 100 you take as loan, you might end up paying Rs 48 simply as interest.
While there are many options to escape the clutches of a vicious debt trap, there is an emerging breed of entities who offer professional debt management services. In short, they help you tide over your debt woes by helping you restructure, consolidate and repay all your loans.
Enter credit counselors, who focus on repairing your credit health. A small fraternity still, its foundation was laid by Abhay credit counseling credit centers, established by the Bank of India in 2006. ICICI Bank followed suit by setting up DISHA centers in 2007. These worked towards providing 1 on 1, free-of-cost services to indebted individuals. However, these centers are not functional anymore.
In 2023, they have been replaced by debt counseling platforms like FREED, SingleDebt, RectifyCredit, and more. But how reliable are they? And when should you approach them?
Grey all around As lucrative as they might sound, a word of caution before you head to such counselors. There are no RBI regulations governing such entities. In other words, these platforms operate in a gray zone, regulation wise. And most of them, like Single Debt and Loan Settle, charge an upfront payment fee for making you debt-free. And in case you find yourself entrapped deeper still in the muddy waters of debt, there is no recourse.
Says Ritesh Srivastava, who heads FREED, “While the RBI needs to bring in more stringent regulations in this space, I think it is headed in the right direction. Steps like setting the FLDG (first loan default guarantee) at 5%, or laying down strict guidelines for loan collection agents are positive indications.
“However, I believe the regulator has bigger fish to fry at the moment, hence the present lack of rules in this space. Nevertheless, India needs rules for some aspects in this space like high ARR, upfront fee charged from an already indebted person”, he continued.
Who approaches them? The average person who approaches FREED, for instance, has an active loan amount of Rs 5.4-5.5 lakhs, with at least 4-5 credit card or personal loans riding on him/her. Notes Aparna Ramachandra, who heads Mumbai-based RectifyCredit Services, “We get around 30-35 clients per month. Almost none of them are self-motivated to better their credit proactively. It’s always about repairing the individual’s damage caused by defaults on their credit cards and loans, which is obstructing their further access to credit”.
How do these work? Once you contact these platforms, your debt payments are entirely taken over by the platform. This includes negotiating with lenders on lowering interest rates, combining all your loans, negotiating with the lenders on your behalf, waiving penalties, and the like.
Srivastava says that most lenders agree on softening the terms, because of higher chances of loan recovery. “Additionally, we offer bulk loan settlements with over 60+ credit partners, so that everyone wins”.
For most of them, the experience can change the way they deal with credit. For instance, Mumbai’s Ketan (name changed) found himself in a financial fix in 2022. He had applied for a personal loan worth Rs 3,00,000, but had missed paying a few installments, pulling his credit score down to 623, making him ineligible for new loans.
After engaging with a credit counselor, for about 6 months, he claims to be more aware of credit usage. “ I cut down on the number of credit cards I had from 4 to just 1 and began regularly checking my credit score. Now, I have a CIBIL score of 703”.
After onboarding, the companies also claim to conduct capacity building sessions to deal with calls from collection agents and in some cases, even take over these calls and notices.
35-year-old Hina (name changed), a Mumbai-based professional, had a mixed bag of experiences with one such platform. “During their welcome call, we were taught how to not avoid creditor calls and keep them in the loop about our debt situation. We were also told how to deal with aggressive collection agents. But the harassment continues”.
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