Sunday, April 18, 2004

Credit cards a ticket to debt

Pushpa Girimaji

ITíS not often that countries in Asia speak with one voice. But they did last fortnight when leading consumer groups from the region called for a comprehensive law to protect consumers in credit transactions. The occasion was the Asian Conference on the Regulation of Consumer Credit, organised in Malaysia by the Asia Pacific Office of Consumers International, a federation of consumer organisations worldwide.

Following the policies of economic liberalisation pursued by the governments in Asia, including India, the financial sector has grown in leaps and bounds. Today, consumer credit keeps the economy well-oiled and spurs the growth of various sectors, including housing, automobile and white goods. According to the India Market Demographics Report, 2002, published last year, the purchase of white goods through finance grew in the country from 14.6 per cent in the mid-1990s to 23.9 per cent by the end of the century.

On the positive side, reforms have brought credit within the easy reach of consumers. Today, consumers need not wait to save a considerable sum to buy a house, car or even household goods, thanks to credit cards. Credit cards also help consumers to avail of loans in an emergency. According to estimates, over 9 million credit cards are in circulation in India and the credit card industry is growing at the rate of 30 per cent per annum. However, on the negative side, consumer protection laws have not kept pace with the developments in the sector, thereby exposing the consumer to the machinations of the marketplace. The aggressive promotion of credit purchases by financial as well as credit card companies, for example, are prompting consumers to spend much more than they can afford, thereby leading them into a debt trap. According to one estimate, the delinquency or default rate among credit card users in India is about 9-10 per cent. There are other problems too, like the high rate of interest, particularly on credit card transactions. Last year, in Bangalore, members of the Credit Card Holders Association of India had urged the Reserve Bank to set up an independent authority to regulate the credit card industry. They expressed particular unhappiness at the high interest rates.

Consumers are also victims of unfair marketing practices by the banking and financial sectors. They have to contend with hidden costs and undisclosed terms, besides agreements or contracts that are loaded in favour of the financier. Itís also common knowledge that private banks today employ recovery professionals, a euphemism for bouncers, to recover or repossess, without notice and through unethical means, goods such as cars sold on hire-purchase. The two-day CI conference discussed at length the problems faced by rural and urban consumers in credit transactions in both the formal and informal sectors. It also looked at the existing credit laws in Asian countries in general and in India, Malaysia, Japan and Hong Kong in particular. It concluded that even though there were a number of laws on consumer credit, they were either outdated or inadequate. `A0There was, therefore, an urgent need for a single, comprehensive law to regulate the industry and raise the standard of consumer protection. The conference also looked at the broad framework for such a law and felt that it should provide for responsible lending and standard contract forms that are fair to the borrower. The other proposals included disclosure norms, personal data protection, credit counselling, a reasonable period within which a borrower can cancel the contract (cooling off period) after signing the agreement, regulation of advertisements and marketing practices, an alternate disputes redressal mechanism, reopening of unfair contracts, guarantor protection, prepayment of loans without penalty, a cap on interest charges and consumer education. The law should also provide for an independent regulatory body to monitor the industry, the delegates said.

As S.Sothi Rachagan, Regional Director, Consumers International Asia Pacific Office, said in his closing remarks, the conference was only the beginning of a major campaign for better protection of consumers in credit transactions.