Abhishek Iyengar (name changed), a 29-year old Marketing Manager at a restaurant in Kochi, was rendered jobless as soon as lockdown started.
Like many others, his savings dried up by June, after which he started to seek easier credit through digital lenders.
The application was relatively easy — just an Aadhaar card, PAN card and contact details of two friends. They also asked for permissions, like any other app.
Abhishek started off with a loan of Rs 3,000 but only Rs 2,000 was credited. All charges included, he had to pay back almost Rs 1,000 more than he borrowed.
But the threats — downgrading of personal credit score, shaming in front of family and friends, constant calls and messages — was immediate. All of this was designed to pressure him to take out another loan to repay his previous loan, he says.
One of the apps he downloaded, had at least 20 other sub-apps where he could apply for a loan. He applied for a total loan of Rs 21,000 in seven apps, but only Rs 14,000 was credited into his account. In all, Abhishek claims he has taken nearly Rs 1.9 lakh in loans and ended up paying Rs 2.8 lakh.
What Abhishek alleges is called ever-greening of loans at the banking level — where the bank issues a new credit line to settle old dues — and is strictly banned.
Abhishek isn't alone. After he put out a post on social media, at least 180 people who suffered the same fate reached out to him. Most people who approached these lenders were facing some financial crisis. Usha and Vineeta, ended up borrowing money during the lockdown because their husbands had lost their jobs and there was a financial crisis at home.
Both have repaid in excess of Rs two lakh to the lenders, but the debt has constantly outrun them. The threatening messages and blackmail haven’t stopped as well.
Foreign nationals
The issue first gained prominence after suicides linked to these lending apps in Telangana were reported which prompted police there to act, unearthing a scam run by foreign nationals.
Spurred into action, the Karnataka police also raided five companies in Bengaluru. In all, 60 apps in Telangana and 28 apps in Karnataka were found to be operating illegally and had links with foreign nationals. Police officials in Karnataka say they have seen a spurt in the number of these apps since the lockdown began in March.
The Digital Lenders Association of India (DLAI) says there are 85 digital lenders registered with them who have signed a code of conduct, but there is no account of unregistered digital lenders operating in the country. Industry insiders say the number may range between 300 to 400, but no one has a definitive answer.
Taking cognizance of these “unauthorised digital lending platforms / mobile apps”, the Reserve Bank of India (RBI) warned people in December last year not to fall prey to “unscrupulous activities and verify the antecedents of the company/firm offering loans online or through mobile apps”. It also said these platforms are required to disclose the name of the Non-Banking Financial Company (NBFC) or bank they are associated with upfront.
While the RBI has released a customary cautionary note, the problem is that there is no regulatory definition of “digital lenders”.
And incidents in the past, from the Harshad Mehta scam to the YES Bank collapse are testimony to the fact that the RBI has most often been a reactive rather than a proactive regulator.
“The RBI is doing a fair job in promoting innovation in the FinTech sector. But the regulator should maintain a fine balance between promoting the sector and preventing exploitation of customers. It must be proactive on both fronts,” says economist and former MP Rajeev Gowda.
This lack of regulation is at odds with the pace of FinTech adoption in the country. Of new credit borrowers in India, the largest group (29%) is those who have opted for FinTech companies; the volume and value of digital transactions have shot up in recent years and a 2019 CRISIL report estimates that digital lending will touch Rs 15 lakh crore by FY 2024.
There are broadly two types of digital lenders: The shadow banks who lend money through digital channels themselves, or their agents, who act on behalf of these shadow banks.
Multiple industry sources indicated that while shadow banks are regulated by the RBI and largely follow the fair practices code, the unregistered agents may be surpassing this.
The increasing penetration of banking services, as well as the shadow banking sector, have given people alternatives to money lenders and other informal sources of credit. Ironically, the government’s concerted push for digital finance has caused these money lenders to surface on digital platforms.
Most of these apps charge exorbitant rates of interest (often disguised as processing fees and penalty charges) and use coercive methods to make borrowers repay and ensure that they fall in a debt trap.
To borrow money, most people often hand these apps permissions to access data on their phone, which is often exploited. Sources in the central crime branch investing the scam in Karnataka say the apps know all details of the person — from their home address, to the brand model of the phone and even the most frequently called contacts — which they take into account before sanctioning a loan.
“We always trust them. We never expect that an app will hack our phones,” says a borrower.
Targeted harassment
These apps then bombard ‘defaulters’ with phone calls and “name and shame” them into paying.
“The calls start as early as 5.30 am,” says Vineeta. The callers used filthy language and threatened to expose her as a “fraud” to relatives and colleagues. Several other victims DH spoke to say the harassment has pushed them to the brink.
Police officials investigating the cases said that while all possible recourse fails, they can still book those running these apps under sections of the IPC, specifically, Section 504 (Intentional insult with intent to provoke breach of the peace) and Section 506 (criminal intimidation).
Bengaluru city police commissioner Kamal Pant says that since the case had surfaced, more victims were now approaching the police but the full extent of the cases “would need further examination, as most of these apps have their servers outside India.”
Unregulated players
In mutual funds, a similar problem persists with thousands of distributors not regulated by the Securities Exchange Board of India. That’s when the Association of Mutual Funds in India — a self-regulatory body that controls distributors — comes into the picture.
Many personal finance experts suggest that this is probably the model an association like the DLAI should follow.
Anuj Kacker, Secretary, DLAI, says: “That is exactly where we want to be in the future and we are working on it. We have to complete some legal obligations for that first.”
Kacker says that they are trying various ways to reign in such unregistered digital lending apps — by awareness, creating a repository, and by getting in touch with Google Playstore. But for all this to work, the association would need more legal recognition from the regulator, he says.
There is also another issue: the lack of financial literacy and an affinity towards easier access to money. As one personal finance expert says, the fault is not just that of rogue players, but of the entire ecosystem — from the borrowers to the regulator.