Debt doctors play a useful role as long as they don’t scare the borrower into signing up and claim a ‘nexus’ with CIBIL to be able to‘fix’ credit records to remove the defaulter tag
A retired banker told us that Indians do not really want to default on loan repayments. But they are scared of approaching the bank for a settlement, consolidation or a moratorium (in case of temporary difficulties) for fear of being treated callously or having their collateral assets unfairly adjusted against outstanding payments. This is a genuine fear. Also, when it comes to credit cards or auto, home and personal loans, the high interest and penalty compounds rapidly and most individuals have no clue about how to negotiate with banks.
At the same time, there are serious consequences to a loan default or allowing outstanding repayment, interest and penalty to mount. You could find yourself without access to loans, credit cards and other services for seven long years, probably when you may need them the most.
This is where the ‘debt doctors’ step in. They know the settlement that a bank will accept and how best to negotiate it. They also have another role: helping those who may have gone through a bad financial phase and ‘settled’ their dues to a lender, but remain classified as defaulters. These persons are in a catch-22 situation: if they cannot get a new loan, they cannot rebuild their credit record. This requires a solution too.
So, there is a clear and necessary role and a business opportunity for agencies who can guide loan defaulters to negotiate the settlement process and rebuild their credit record. But such agencies need to be properly regulated to prevent the exploitation of hapless individuals as is rampant in the US.
Today, credit repair and advisory services are available for fees ranging from Rs3,000 at the lower end to as much as Rs16,000 for ‘Titanium Packages’. Some consultants offer settlement services and help to rebuild credit scores for around Rs7,000. And then there are free services, such as Disha Financial Counselling (which has a tie-up with Moneylife Foundation).
When does a person who had defaulted on her financial obligations approach a credit advisor? It is usually in one of the following situations. One, you are being stalked and abused by a recovery agent and want to end the embarrassment. Two, you went through a bad phase (illness, bereavement or job loss) but are now back on your feet and want to close outstanding loans without having to pay huge penalties.
Three, you had a dispute with a credit card issuer or lender and decided not to pay, only to discover that you have been reported as a defaulter. Unless you settle the issue, you lose access to fresh loans, credit cards, brokerage accounts, etc, which are all a necessary part of modern living.
Or, four, you have been slapped with a legal notice making a wildly exaggerated payment demand that you are neither able to pay nor dare to ignore. Of the four reasons that make you want to approach a debt doctor, we have problems only with the last.
One of the biggest players in this market is Credit Sudhaar (CS), set by two former Standard Chartered Bank (Stanchart) executives. CS has forged a series of relationships that cover the credit repair spectrum.
It claims a tie-up with Credit Information Bureau of India Limited (CIBIL) which is still the only credit information company (CIC) that most lenders refer to and can access credit records from. The promoters of Credit Sudhaar were also directors of Shaha Finlease Pvt Ltd which has been reprimanded by the banking ombudsman for aggressive recovery strategies.
In 2010, Shaha Finlease bought Stanchart’s credit card defaulter portfolio and began sending legal notices to customers. Most of these are old dues that customers thought were forgotten until they were slapped with a legal notice. The catch is that the few thousand rupees that they owed to the Bank, which was never claimed for years, is shown to have ballooned to several lakh rupees with the compounding of interest and penalties. The legal notice provides no details or break-up of the principal, interest and penalty. It only has one big demand number, often over Rs10 lakh!
The exaggerated demand, fear of embarrassment by abusive recovery agents, being listed as a defaulter for seven years, or the prospect of a legal battle, are enough to cause panic. Within days of getting the notice from Shaha Finlease, say sources, the defaulter gets a marketing call from Credit Sudhaar. Depending on the extent of alarm, the defaulter ends up signing one of the many credit advisory/ debt repair packages. These range from a ‘Gold’ package priced at Rs7,500, ‘Platinum’ at Rs11,000 and ‘Titanium’ at Rs16,000. The third option includes a host of services such as tax advisory, or help in writing a Will, which have nothing to do with credit advice. Significantly, some of those who did not sign up for help, allege that they began to receive abusive calls from recovery agents of Shaha Finlease.
Once the defaulter signs up for credit repair, there is a quick settlement. In one case that I have accessed, there was a demand of over Rs11 lakh, when the original default was just Rs17,000. It was settled at Rs1.5 lakh. Another legal notice for Rs10 lakh+ was settled at under Rs50,000. This is surely a very profitable, but shady, business.
A shady strategy employed by several debt repair consultants is to claim a ‘nexus’ with CIBIL and the ability to ‘fix’ the credit records to remove the defaulter tag. While there are many claims of this kind, we have absolutely no evidence. All credit bureaus are also emphatic that their records cannot be tampered with. But it is probably CIBIL’s strange technical backbone that mixes up credit records of people with similar-sounding names, with painful consequences, that makes the story believable.
However, a settlement is usually reported accurately, because it creates another business opportunity for credit advisors. Most top lenders won’t lend, or even give a credit card, to someone whose credit record reflects a settlement. So there is an opportunity in helping to rebuild the credit record of those who can’t get a loan. Here, again, Credit Sudhaar has a tie-up with two non-banking finance companies (NBFCs) called Dipran Finance Pvt Ltd and Safe Capital. Both are members of CIBIL with access to credit records.
Persons seeking to rebuild their credit records are given small loans of Rs15,000 to Rs20,000 which they repay in an orderly manner. This is done several times to create records of multiple loans so that the impact of the default is minimised and they become eligible for credit cards and bigger loans again. This, too, is a necessary service—after all, someone who wants to be financially sensible deserves another chance. The problem again is in the hustle to extract more money by selling unnecessary products and services.
For instance, CS’s Titanium package offers to access credit reports from all three CICs to do a multi-bureau analysis. This is pure nonsense, because, despite Moneylife’s hard work, the new CICs, Experian and Equifax, do not have data anywhere comparable to that CIBIL has. Similarly, CS offers a ‘Credit Health Package’ which is an insurance from Tata AIG to cover identity theft (Rs2 lakh), fraudulent charges (Rs1 lakh), ATM assault and robbery (Rs50,000) and lost wallet (Rs5,000) adding up to Rs3.5 lakh. This primarily generates business for the insurance company and fat commissions for CS.
Unfortunately, the number of people affected by lack of access to formal credit is just too small for the Reserve Bank of India to prescribe appropriate regulation to stop companies from using scare tactics to drum up the business of exploiting the defaulters.
Sucheta Dalal is the managing editor of Moneylife. She was awarded the Padma Shri in 2006 for her outstanding contribution to journalism. She can be reached at [email protected]