The Sri Lanka Banks’ Association (SLBA) will set up a credit counseling service to cater to individuals in financial difficulty and struggling to pay bank loans or obtain loans.

This service will be available to the public from December 2008.

Secretary General of SLBA, Upali de Silva, told the Island Financial Review that that the association was interviewing retired bankers who had specialized in credit.

"We hope to select about 12 of them and a retired bank CEO too, who will head the counseling team," he said.

De Silva said that a counselor will be appointed to the regions as well.

"We have interviewed retired bankers from Jaffna, Vavuniya and Matara and hope to have counselors who are resident in rural areas so that people can have access to their services," he said.

SLBA hopes to complete the selection process by mid-November.

"Although they are retired bankers with 30 to 40 years experience in credit they will still have to be trained in counseling and for this purpose, we will engage professional counselors from Sri Lanka and India to train the counseling team," De Silva said.

All licensed commercial banks in Sri Lanka and specialized banks, such as DFCC and National Savings Bank, are members of the SLBA. They will be required to make an annual contribution to the Credit Counseling Unit.

"The Central Bank of Sri Lanka will make it mandatory for regional development banks who are not members of SLBA to join the scheme and make contributions to the Credit Counseling Unit so that people in rural areas may make use of the service.

"We would charge a nominal fee, something like Rs.100 or Rs.150, from the public but we hope to make arrangements to refund the fee," De Silva said.

The Central Bank of Sri Lanka will provide infrastructure inputs and the location, which will be at the Centre for Banking Studies, Rajagiriya.

The head of the Credit Counseling Unit and two other counselors will operate from this office while the counselors in the regions will be required to operate from within the regions.

The Financial Ombudsman, a retired member of the Judiciary, U. Mapa, said that credit counseling was important because individuals are seldom aware of what they are getting into when applying for loans.

Mapa says banks should pay more attention to counseling people on loans rather than trying to sell a product.

"Marketing is good as long as it benefits the customer and in a competitive environment, banks are losing sight of what is more important. People are being led up the garden path and sold loan products without considering how it will really benefit them," he told the Island Financial Review.

He says that the old concept of prudence in spending was no longer practiced. Bank’s gave loans and credit cards based on employment particulars and very little or no collateral.

He also says that financial institutions exploited the mentality of the people who tend to be driven by consumerism and get into debt merely to keep up a lifestyle beyond their means.

The President of SLBA, Rajendra Theagarajah, said that high interest rates and inflation was making it difficult for people to repay loans.

He told the Island Financial Review that loan repayments have been affected and many banks are now focused on consolidating and monitoring their loan books while recovering loans, leaving credit expansion for better days to come.

He welcomed the Central Bank’s decisions to bring down the statutory reserve requirement to 9.5 percent and relaxing the restriction on banks to access the reverse repo window ten times a month from three.

As a result of these measures by the Central Bank there has been a reduction of overnight interbank rates with rates coming down to the 14 to15 percent range from the 19 to 20 percent range.

"It is hoped this will cascade into a reduction of medium term rates as well," Theagarajah said.

And this is expected to cause considerable difficulty to those who obtained home loans when rates were high as many of them could be paying high interest on their loans if the rates are fixed and not linked to market rates.

Upali De Silva said that the Credit Counseling Unit will also advise people on loan repayments in times of difficulty. The unit will also advise people on how to apply for loans and the consequences of committing to one.

"The corporate sector has lawyers to advise them but ordinary people do not, so it is important that Sri Lanka has a credit counseling scheme," he said.

At a seminar on Ombudsman schemes last month, the CEO of DFCC Bank, Nihal Fonseka, said that bank documents are plagued with a plethora of small print.

"These documents are drafted by lawyers and only they seem to understand them. At times it is difficult for bank staff to understand these documents so how can we expect our customers to understand them," he said.

Fonseka questioned the fairness of financial contracts where only lawyers understood the wordings in the contract.

"Many contracts are one-sided it seems the fair contracts law in the country is not developed. Both banking and insurance sectors can do a lot more to simplify the language.