Fri. Jan 21st, 2022

When V. Rajapandian was fired from his job at a heat treatment plant in India, the reason had nothing to do with performance or declining income. Instead, his boss offered a peculiar explanation: After Rajapandian defaulted on a loan from a mobile application, repair agents claimed the plant on his behalf.

“I lost my job because of them,” Rajapandian said of CASHe, the application he used to secure a $ 132 loan. “I live constantly with the fear that they will track me down and harass me.”

As digital lending exploded across India and other developing economies, Rajapandian’s ordeal became more and more widespread. During the pandemic, applications promising fast cash grew. Many capitalize on borrowers’ lack of financial literacy, charging interest rates as high as 500% on an annual basis, and in some cases using harsh collection tactics that have linked Indian activists to a series of suicides.

A growing chorus of technology companies and regulators struck. Worldwide, Google has blocked hundreds of applications from its Android store to protect lenders from “misleading and exploitative terms”. Officials in China, Indonesia and Kenya followed suit and closed numerous new ventures that promised easy cash to bank members.

India, which has one of the highest number of such applications in the world, has also acted. The Reserve Bank of India raised the prospect of new rules for digital lenders in November. A panel set up by the bank found that more than half of some 1,100 digital loan providers are operating illegally.

Share of lenders in India's digital space

But protecting borrowers in India is particularly difficult, given the country’s outdated personal bankruptcy laws and mere size – more than one billion people do not have access to formal credit. And while complaints about harassment by digital lenders extend far beyond its borders, India’s ambition to become a haven for technology innovation combined with a Byzantine bureaucracy makes comprehensive regulatory intervention difficult.

Millions of Indians rely on the applications, and there is often no clear way for lenders to distinguish the legal from the sloppy.

“These platforms clearly serve an unmet need,” said Eswar Prasad, a professor at Cornell University’s Dyson School of Applied Economics and Management. “The persistence of digital lenders charging exorbitant interest rates indicates the latent demand for credit and other products that are not adequately met by the traditional financial system.”

Gaps in the banking system are becoming increasingly difficult to ignore. India is one of the fastest growing fintech markets in the world, with digital lending expected to reach $ 350 billion by 2023. Much of this growth will come from short-term, unsecured loans rather than guaranteed credit, according to Yashraj Erande, a board member. director and partner of the Boston Consulting Group in Mumbai.

Attempts to rule in illegal applications have had mixed results.

After flags were hoisted by Indian officials, Google checked hundreds of applications in the Play Store, according to a company spokesperson. Platforms must now prove that they have the appropriate lending licenses and they can not claim full repayment in less than 60 days. (Android is the smartphone of choice for most Indians, although some of the applications are also available for iOS.)

But enforcing stricter rules has become a game of beat-a-mole. Rahul Sasi, who runs the cybersecurity firm CloudSEK and was one of the experts who made recommendations to the Reserve Bank of India, said digital lending is a vast market that is difficult to tame.

Prohibited applications simply move to third-party platforms like Aptoide, he said, or advertise through text messaging. Consumers sometimes take out loans with no intention of repaying them. The applications in turn use mafia-like collection tactics.

“Crime will be there in some form,” Sasi said.

Paulo Trezentos, CEO of Aptoide, wrote in an email that his company does not host apps unless it is also available on Google Play. Lenders associated with “illegal activities in any form” are removed immediately, he said.

Analysts say platforms are often owned by foreign entities, making it difficult for India to take legal action. Some applications use technology infrastructure built by Chinese firms providing cloud services from Alibaba Group Holding Ltd. and Baidu Inc. utilizes, according to Srikanth L., the founder of Cashless Consumer, a collective that studies the fintech industry.

In an email, a Baidu spokesman said fintech is now being handled by Du Xiaoman Financial, a separate company, and declined to comment further. A spokesman for Du Xiaoman Financial said the company did not conduct any business in India. Alibaba did not return requests for comment.

The Reserve Bank of India can already tighten digital lending rules this year. Guidelines under consideration include severe penalties on non-compliant applications, with a specific focus on the elimination of unregulated loan providers. Larger digital payment companies like Paytm have not been accused of similar predatory behavior.

The risk is that unscrupulous firms may intensify manipulative practices as stress builds up in personal loans. Crime levels for consumer credit rose in September from a year earlier, the Reserve Bank of India’s data showed last week.

“The recommendations are definitely a step in the direction of combating illegal lending,” says Vivek Belgavi, the fintech and alliance leader at PricewaterhouseCoopers LLP in India.

Activists say stricter regulatory action could also help save lives. Over the past year, SaveThem India Foundation, a non-profit organization that assists victims of cybercrime, has linked 17 suicides to harsh recovery tactics.

Pravin Kalaiselvan, the organization’s director, said his staff had made more than 64,000 calls in 2021 from Indians complaining of harassment. That figure was 31% higher than in 2020. Hundreds of police charges have been filed against debt collectors, although one local court recently ruled that their methods could not be interpreted as incitement to suicide.

“If they had acted a year ago,” Kalaiselvan said about regulators, “we would not have seen so many take their lives.”

The Reserve Bank of India did not respond to requests for comment.

For the first time lenders like Rajapandian, who worked as a manager at a heat plant in Chennai, approaching a digital lender in 2020 was his only option instead of credit for a traditional loan.

As the coronavirus spread across India, closing factories and displacing millions of workers, Rajapandian tried to prepare for the worst. CASHe, which he downloaded to his Android phone, offered a quick infusion of money to supplement his $ 200-a-month salary and help him take care of his wife and 4-year-old son.

But Rajapandian struggled to make payments on the loan, which had an interest charge of 300%. That’s when the threats began, he said.

For months, he said, CASHe agents called him several times a week, “abused my parents and wife” and contacted the heat plant. When his boss became increasingly angry and threatened with dismissal, Rajapandian left his job. Last month, he filed a police complaint.

“I considered suicide,” he said.

A local police station in Chennai has confirmed receipt of Rajapandian’s complaint against the application, which was lodged on December 17. CASHe, a Mumbai-based company founded in 2016, did not respond to a detailed list of questions. The company, which claims a customer base of more than 3 million, has not been charged with a crime.

Rajapandian said the calls did not stop. They have become so insulting, he said, that he is trying to keep his new work under control so that collectors do not endanger that work as well.

“It is no longer about the money,” he said.

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