For large-value MSME loans, recovery and collections could both be a challenge.
Digital lending startups are grappling with the flurry of news around coercive collection tactics used by multiple lending platforms amounting to harassment of borrowers. While most of these platforms have turned out to be unregulated and fraudulent entities, the fledgling startup sector has, on the whole, attracted negative attention from the banking regulator and the law enforcement agencies because of these developments.
The Digital Lenders Association of India (DLAI), the industry body for such lenders, has come out with its own statement on the issue and has asked consumers to stay away from unregulated platforms, but given the association of multiple NBFCs themselves with such unscrupulous platforms, matters have become more complicated. It has also requested all lending platforms to adhere to its code of conduct adopted by its members.
“Payday lenders have been facing troubles with the regulators world over, many have been shut down in China and the United States, it might have been the case that few have found their way into India,” said Anuj Kacker, secretary, DLAI.
The Good Lender and the Bad Lender
Kacker believes that while on the face of it the fraudulent apps might be difficult to differentiate from the genuine ones working with banks and large NBFCs, there are multiple small signs which borrowers need to keep an eye out for before accepting loans online.
“We have created a checklist at DLAI to highlight the telltale signs of platforms which might be operating in the grey zone,” he added.
The industry body along with its members is also considering creating customer awareness campaigns to prevent borrowers from falling for such fraudulent platforms or loan sharks donning a digital lender’s avatar.
Further, banks and prominent NBFCs prefer to work with loan sourcing platforms which offer affordable interest rates and work as per the guidelines set out by the RBI. Hence consumers should look for loan options from such entities rather than instant cash apps on the Google Play Store.
High Interest Rates
Unscrupulous moneylenders have been dominating the grey economy for years and many of them have moved their physical presence online by creating simple apps to lure customers, said an industry source who is aware of the developments. Moreover, with COVID-19 disturbing the income of multiple sections of the population, many consumers fell into the lure of easy money.
“What they mostly failed to realise was the huge interest rates that they were getting charged in the garb of a quick loan without any documentation,” said the source mentioned above.
In a press note, the Cyberabad cyber crime police station pointed out that one of the affected borrowers had first taken a loan from ‘Cash Mama’ and then received similar instant loan offers from multiple platforms namely ‘Monkey Cash’, ‘Mera Loan’ and others. When the borrower could not pay the total amount asked for, he was threatened, abused and harassed, the release said.
The source of funding for these platforms is what is being probed by investigative agencies currently. Interestingly, the note states that Cash Mama and Loan Zone have tied up with nine NBFCs to process these loans, among them a clutch of popular peer-to-peer lending applications have also been named -- i2i Technologies, Liquiloans and FairAssets Technologies which operates the Faircent platform. P2P lending platforms are RBI-regulated entities.
“Any growing sector grows through trials and tribulations, especially post-COVID such platforms have grown very fast and a few have employed coercive collection tactics. What was needed was more proactive steps from the regulator and some proactive measures from the local governments as well,” said Harshvardhan Lunia, chief executive officer, Lendingkart, a major MSME lender.
The Global Story
Payday lenders have a bad name globally. What started with instant cash loan outlets across developed nations like the United States and China, has now moved into the digital realm. Many of these apps have been shut down or forced to change interest structures by local regulators.
For instance, payday lenders could charge as high as 500 percent in different states of the USA, since there are no restrictions on interest rates. Again in China, the regulator as well as the judiciary has been trying to rein in the mushrooming lending platforms in the country. The Chinese People’s Supreme Court in a 2015 judgement had said that it would enforce collections on loans which charge 24 percent per annum or below and rates up to 36 percent was legal but with conditions.
Industry sources pointed out that when the crackdown started in China many of the platforms migrated to other countries like Indonesia, Vietnam and the Philippines. A 2018 Reuters report highlighted how more than 400 fintech lenders have been banned by the regulator for operating without a licence.
COVID and the Cash Crunch
While the problem with unscrupulous money lenders is not new, COVID-19 has brought the issue to the forefront. A large section of the population faced massive cash flow issues during the lockdown months as business was almost down to zero. This pulled many consumers into debt traps, where they looked online for instant loans and got trapped into paying very high interest rates.
“At a time when banks and large NBFCs slowed down their loan disbursals, these digital platforms tried to fill the void with personal loans given out with zero KYC and almost instantly,” said one of the industry sources mentioned above.
Also, these platforms targeted blue-collar workers, temporary workers and others who would need small value instant cash loans towards the end of the month. In the Hyderabad case for instance the initial loan amount was Rs 5,000 given out for seven days.
Kacker from DLAI pointed out that such ultra short duration loans typically come with very high interest rates and consumers need to stay away from such lenders. While on the face of it the interest amount might look small, at a compounded annual rate they go up to as high as more than 100 percent per annum, he added.
At Moneytap, of which he is a cofounder, Kacker said they encourage much higher tenure personal loans.
DLAI is looking to engage in conversations with the RBI, the Finance Ministry and other nodal bodies to ensure that digital lenders can continue with their business smoothly while unscrupulous entities get rooted out of the system.
At an industry level they are also conducting awareness programmes which can help make borrowers careful about borrowing from such platforms. Through a press note, the industry body has highlighted certain checks which borrowers can undertake before taking a loan. Firstly they should have a proper KYC check, followed by a proper loan agreement getting signed between an RBI-registered entity and a borrower.
Secondly, DLAI has also suggested consumers to stay away from ultra short duration payday loans since they tend to have very high interest rates. Further, the body has also insisted on setting up digital repayment mechanisms, in order to ensure that all payments are accounted for.
The RBI has also cautioned consumers against falling for such unscrupulous lenders and has highlighted the list of regulated lenders from whom consumers can borrow money.