Many youngsters have an expensive lifestyle and are in debt. It is a slippery slope: Ritesh Srivastava, CEO of FREED

Ritesh Srivastava, CEO, FREED

Indians are borrowing more. According to Reserve Bank of India data, outstanding personal loans rose 84 percent to Rs 35.98 lakh crore in September 2022 from Rs 19.55 lakh crore in September 2018. Outstanding credit card debt, arguably the most dangerous type of debt, has also consistently gone up. Often, borrowers fall into debt traps and don’t know how to get out of them. Worse: they don’t even know they’ve fallen into a debt trap and realise the extent of the problem much later.

In such times, credit counselors can be of help. India has seen a small number of credit counsellors over the years, though there isn’t a central database to know exactly how many there are. That’s where the entry of FREED is a welcome step. FREED is a platform that helps people resolve their debt issues. Started by Ritesh Srivastava in August 2020 after he came back from the US, this online platform onboards debtors who need to resolve their debt issues. FREED works with them, banks and other lenders to chart out a repayment plan so that individuals can clear their loans and start off on a clean slate. The aim is to repay, not seek a pardon from debt.

In an exclusive conservation with Moneycontrol’s Kayezad E Adajania, Srivastava talks about how FREED goes about helping make people debt-free. Edited excerpts:

More and more people are borrowing. The problem starts when they cannot repay. How big is this problem really?

The household debt to GDP (gross domestic product) ratio is now in the range of 37-38 percent, up from 12-13 percent four or five years back. As the consumption side in our economy grows, so does the borrowing and eventually debt. Many people buy their mobile phones and other such consumables on buy-now-pay-later schemes.

According to our estimate, there is $1 trillion worth of total household debt in India. Of this 16 percent lies in unsecured debt, which is credit card and personal loans (not backed by any asset unlike say, a car or home loan). Of this $160 billion, 10 percent is our estimation of the default rate. This means a sum of around $16 billion debt is in default. This is huge.

How does your debt counselling work? Take us through the process

When consumers approach us, we assess their financial situation and their capacity and intent to repay. Our job is to help resolve their stressed and delinquent debt and help them become debt-free.

Let’s be clear – this is not about pardoning their debt. If they are in debt, they’ve got to pay one way or another, right?

That is correct. They should have an intention and the money to repay and clear their debt. Our job is to make a programme of how they would be able to do it in a reasonable time. There is never any intention to get the debt completely pardoned off.

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So, what happens after you assess a customer’s situation?

We set up a special trust vehicle. We work with one of India’s largest trusteeship firms. FREED operates digitally. So, the account is opened digitally. After we assess a person’s debt, goals and options, we come up with a debt-relief plan that works with his income and expenses. We set up a transfer of money, a sum every month, from their savings account to this trust account. And then, the money gets paid off to their creditors from that trust account.

But this is not just a transaction. It’s a journey of transformation. Debt is a negative emotion. It’s one of the biggest reasons for divorces in the US and a key reason for separation in India, too. It brings anxiety, uncertainty, depression, anger, and frustration. And when debt collectors knock on your door, chase you, and in some cases harass you, the borrower is in hell. In India, it’s a social stigma if you are a defaulter.

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FREED's objective is not just to get the borrower out of debt. Throughout the journey, we hold their hand – from being a debt-burdened consumer to becoming a debt-free consumer, making them aware of their rights as a borrower, and what the lenders can and cannot do. If we enlighten consumers on what their rights are, chances are that they will be able to fend for themselves in case their borrower rights are violated.

How long does this programme run? Do you have a timeframe within which you would want a borrower to repay all debt?

A timeframe of 18-24 months is reasonable. The way the programme is structured, the borrower saves money every month for their debt-free goal. And as the money accumulates, we keep resolving their accounts, basically, the debt gets knocked out one by one. Therefore, throughout this process of 18 to 24 months that the borrower traverses through this programme, there is also a financial discipline that is getting instilled in the borrower of saving money every month.

What if a borrower doesn't have a job or loses their job? How would the funds go to the trust account? Do you liquidate some of their investments?

We do not liquidate any of their savings – we do not even touch their savings.

Our aim is not to give a loan to repay a loan. FREED is about credit counselling where we help people repay their debt using their own resources. We also help them liaison with their banks and lenders and make them aware of their rights and obligations so that they come out of debt quickly and systematically.

But the underlying premise is this: they need to have resources, they need to have some sort of income out of which they can repay their debt. How they do it is what we advise them on.

Unfortunately, there are some borrowers who enroll and then midway or a couple of months down the line, they may have further financial hardship. In that case, we make some arrangements to lower their monthly obligation (the money they transfer from their savings account to the trust account).

If the borrower’s financial situation worsens and it comes to a point where they may not even be in a situation to pay anything at all towards their debt-free plan or goal, they just drop out from the programme, unfortunately. Whatever money was saved up in the trust account is refunded to them. Since we didn't deliver any service (rendering a resolution of their debt), the money (in the trust account) goes back to the borrower.

Do the lenders of your customers speak with you? Do they acknowledge your presence? Because you represent the borrower, not the lender.

Once the bank classifies the borrower as a non-performing asset (NPA), it goes to a collection agency. Typically, the borrower keeps avoiding the collection agency. The chase, the persuasion, and at times, the harassment, continues. After 7-8 months, the collection agency might just be able to collect, at best, 20 percent of the debt. So, when we offer a settlement of 40-45 percent of the debt, the lender is happy to talk to us and consider our offer. We have a proven track record with them.

It’s just that we do the repayment on terms that are affordable for the borrower. If the lender can wait, then it’s fine. Sometimes the lender continues its own collection efforts. On average, a customer who's coming to us has at least four creditors. That could mean that one lender might be willing to talk to us, but another lender might not. Eventually, there is a win-win for borrowers and lenders. Till date, we have not seen a settlement being turned down. It is usually a question of “when” and not “if”, so timing is the key here!

What are your fees? I assume the borrower pays you, not the lender.

Correct. The borrower pays us. Because we represent the borrowers, not the lenders.

We charge a flat 10 percent of the debt enrolled on the platform. If we settle Rs 53,000 worth of enrolled debt for a borrower, we will charge Rs 5,300.

Many people laid off by startups were used to high lifestyles. When their salaries stopped, they were found to be in debt. Do you get any of these cases?

Yes, unfortunately.

There are customers, who have gotten accustomed to exorbitant or expensive lifestyles. And due to the loss of income, many of them are finding it hard to keep up with the payments. We have seen that many such people live from paycheck to paycheck because they have expensive tastes and EMIs (equated monthly installments). Much of their salaries go into repaying debt. And then, there’s the expensive lifestyle. As a result, they don’t save much, or worse, nothing. It's a slippery slope, thereafter.

In Bengaluru, we saw many engineers taking a pay cut. But inflation is high. They do not get any relief from home rentals and EMIs. They still have existing EMIs and unsecured, personal loans or credit cards to service. Once they start missing payments, it just gets worse.

Three things that you advise young people in their 20s and 30s to ensure their debt does not spiral out of control.

Being debt-free might seem challenging, but with robust financial planning and discipline, it is indeed achievable.

-      It is important to differentiate between your needs and wants and keep a check on your monthly expenses.

-      Avoid borrowing excessively, when you are already in debt, cut down your spending and put your debt repayment on a deadline.

-      If you find yourself in a sticky situation with your debt, don’t hesitate in seeking professional help.