Loan sharks earn by biting thanks to fintech
(BLOOMBERG) – Technology has brought about a new kind of financial scourge: digital loan sharks.
These unscrupulous lenders have started inflicting pain on many borrowers in countries that have allowed the proliferation of financial apps, such as India.
Take MV Rajapandian, who worked in a heat treatment plant. He recently lost his job because loan sharks started demanding payment from his business when he failed to repay a $132 ($177) loan on a mobile app.
As digital lending explodes in India and other developing economies, such cases have become increasingly common. Many apps capitalize on borrowers’ lack of financial knowledge, charging interest rates of up to 500% annualized and, in some cases, employing heavy-handed collection tactics that Indian activists have linked to a string of suicides.
Globally, Google has blocked hundreds of apps to protect borrowers from “deceptive and abusive terms”. Officials in China, Indonesia and Kenya followed suit, shutting down dozens of start-ups promising easy money to the unbanked.
India, which has among the largest number of such apps in the world, has also taken action. The Reserve Bank of India in November raised the prospect of new rules for digital lenders. A panel set up by the bank found that more than half of the roughly 1,100 digital loan providers were operating illegally. Analysts say the rigs are often owned by offshore entities, making it difficult for India to take legal action.
The Reserve Bank of India could tighten digital lending rules as early as this year. The guidelines under consideration include stiff penalties for non-compliant applications, with a particular focus on weeding out unregulated loan providers. Major digital payment companies such as Paytm have not been accused of similar predatory behavior.
The risk is that unscrupulous companies will intensify their manipulation practices as stress builds up in personal loans. Consumer credit delinquency levels rose in September from a year earlier, Reserve Bank of India data showed last week.
Campaigners say tougher regulatory action could also help save lives. Over the past year, SaveThem India Foundation, a non-profit organization that helps victims of cybercrimes, linked 17 suicides to harsh recovery tactics.
Mr. Pravin Kalaiselvan, director of the organization, said his staff received more than 64,000 calls from Indians complaining of harassment last year. This figure has increased by 31% compared to 2020. Hundreds of police complaints have been filed against debt collectors, although a local court recently ruled that their methods cannot be construed as incitement to suicide. . “If they had acted a year ago,” Mr Kalaiselvan said of the regulators, “we wouldn’t have seen so many people committing suicide.”
For new borrowers like Mr. Rajapandian, who worked as a manager at a thermal power plant in Chennai, approaching a digital lender in 2020 was his only option instead of credit for a traditional loan.
As the coronavirus swept across India, closing factories and displacing millions of workers, Mr Rajapandian tried to prepare for the worst. CASHe, which he downloaded to his Android phone, offered him a quick cash injection to supplement his US$200 monthly salary and help him care for his wife and four-year-old son.
But he struggled to make payments on the loan, which had a 300% interest charge. That’s when the threats started, he said.