India’s Digital Shylocks Draw The Ire Of Regulator

The growth in digital lending has come with shades of grey. Will the courts and the regulator need to step in?

A customer uses the Globe Telecom Inc. GCash mobile payment application on a smart phone. Representational image. (Photographer: Veejay Villafranca/Bloomberg)
A customer uses the Globe Telecom Inc. GCash mobile payment application on a smart phone. Representational image. (Photographer: Veejay Villafranca/Bloomberg)

You’re going about your day when you see there is a text message waiting for you. It is a message from a digital lending application offering you a Rs 1 lakh personal loan within the next 5 minutes. All you need to do is sign up on the lending platform, click through a few approvals and the money will hit your account. No lengthy bank-KYC needed.

Tempting. It’s not like you really need the money, but there are always aspirational purchases you can make.

Should you take it?

The Reserve Bank of India cautions that you take a good look at who is offering you the money and what the catch is. On Dec. 23, for the second time this year, the RBI warned the public against falling prey to unscrupulous and unauthorised online lenders. “Members of the public are hereby cautioned not to fall prey to such unscrupulous activities and verify the antecedents of the company/ firm offering loans online or through mobile apps,” said the regulator, adding that only RBI and some state government approved entities can give out loans.

The warning came amid continuing reports of digital lending applications targeting customers for small value loans at usurious rates. If these customers eventually default, all sorts of means are being used to recover the money.

Last week, the Hyderabad police arrested six people belonging to online lending firms Onion Credit Pvt. and Cred Fox Technologies Pvt., after two borrowers died by suicide because of coercive recovery practices. Later, the police in Hyderabad also arrested 11 other people on similar charges.

Digital Lenders: Two Sides Of The Coin

There are no industry-wide estimates of how large India’s digital lending segment has grown. In 2018, Boston Consulting Group estimated that it could be a $100 billion market for India by 2023 across all segment.

The growth in the industry, however, has come with shades of grey. Alongside legitimate non-bank lenders who offer convenience to borrowers via digital platforms, have come fly-by-night operators who may or may not be backed by registered lenders.

A quick search on the Google Play Store reveals hundreds of instant loan applications available for short term financing in India. Loans on these applications are available at annualised interest rates ranging between 18-365%. While genuine digital lenders would extend short-term personal loans for two to six months, unscrupulous lenders tend to offer loans for seven-15 days at higher rates.

“These types of lenders also do not provide clear loan agreements, charge customers with very high procedural fee before approvals and don’t conduct proper KYC checks before providing loans,” said Anuj Kacker of Digital Lenders Association of India.

The proliferation of such lending platforms has come alongside job losses and salary cuts, which could have led to higher defaults.

According to a study of the unsecured personal loan market conducted by credit bureau Crif High Mark, non-bank lenders saw a default rate of 7.58% in personal loans worth less than Rs 50,000 as of August.

This rise in defaults has brought on unethical recovery practices either by some digital lenders themselves or by third-party agencies serving these lenders. From accessing private phone records and reaching out to contacts, to repeated phone calls, threatening messages and fake legal notices, these agencies have used aggressive tactics to recover dues.

According to the head of a peer-to-peer lending firm, who spoke on conditions of anonymity, while lenders can tell third party agencies to comply with ethical norms, they cannot force them. At best, a lender can stop working with them. To adequately control such instances, the RBI would have to step in with clear guidelines for such agencies, he said.

PIL Against ‘Cyberterrorism’

The issue could soon find its way to court.

A citizen’s group called Save Them India Foundation filed public interest litigation at the Supreme Court in September, seeking a ban on digital lending applications not registered with the RBI or those with Chinese ownership.

According to the PIL, a copy of which has been reviewed by BloombergQuint, these applications are illegally obtaining the contact details of friends and family members of the borrowers and are reaching out to them in the event of a default to name and shame borrowers.

The litigation refers to this as “cyberterrorism”.

The coercive practices employed by such digital lending apps is leading to multiple suicides across the country. We are trying to ensure that personal information of a borrower is not misused illegally and they don’t end up in a debt trap. It is a serious problem now and we are sure that the Supreme Court will put an end to it.
Pravin Kalaiselvan, Chairman, Save Them India Foundation

The PIL also questions the practices of Google Play Store, which has a policy to not list mobile applications providing loans for less than 60 days. The PIL alleges that such applications can still be found on the Play Store.

“Mass complaints were filed over Google Play Store (and) apps were flagged as inappropriate. Google Play Store did take an action (sic) on few companies’ apps but it did not stop those companies from harassment. Users were asked to download an unverified version outside the play store to make payment,” the PIL stated.

An email was sent to Google on Thursday afternoon. The story will be updated with any response.

Alongside, the question of access to customer information such as contact lists is highlighted in the PIL. “Users complained about the calls that were going to the contact lists. Users say that they never gave any permission to the apps to make a copy of contact list and calls can be made to them. Only 2 reference contacts were given by users that were to be contacted only in case if the user itself is unavailable to take the calls or is a defaulter. This is a clear case of data hijacking or theft, the PIL said.

According to S Nappinai, advocate Supreme Court of India and founder at Cyber Saathi, while app developers may claim that they received customer consent to access this data, courts have taken a nuanced view on this matter.

App developers are under the “misapprehension” that merely because they have taken customer consent during the download, they can make use of private data indiscriminately, she said. “There are plenty of international case laws where courts have struck down such actions by app developers. If the courts find that the use of the permissions was unconscionable, the app developers can face liability.”

Should RBI Go Beyond Warnings?

While the Supreme Court is yet to take up the PIL, the regulator has had to step in with two cautionary warnings as reports of malpractices continue to emerge.

So far, the RBI has only issued warnings. Would it need to do more?

In the past, lending malpractices in the microfinance industry forced the regulator to step in and cap rates and loan amounts to vulnerable borrowers. Even if the RBI chooses not to go that far in the case of small-ticket personal loans, it may have to look for ways to supervise and regulate the distribution of such credit.

In June 2019, an expert committee on micro, small and medium enterprises, constituted by the RBI, had recommended creating a special category of entities called loan service providers. These service providers would be agents for borrowers, helping them access institutional financing through technology platforms. These entities would also be regulated by the RBI.

Implementation of the suggestion is still awaited.

According to Sandeep Srinivasa, founder of digital financing firm RedCarpet, the LSP infrastructure could be used to solve the problems faced by the unsecured lending market today.

“The recommendation to create LSPs was made after discussions with the industry and it could hold the answer to removing these recovery practices,” Srinivasa said. “If the RBI brings in this category and ensures that lenders only tie-up with LSPs it approves, then there can be a greater degree of control.”

In the interim, the RBI could choose to penalise errant lenders but it would want to avoid curtailing innovation in the segment, said VG Kannan, former managing director, State Bank of India and former chief executive of Indian Banks’ Association

“Since the digital lending ecosystem is still in its infancy, the regulator could consider a more measured approach in penalising lenders backing these third-party applications,” Kannan said. “This is to ensure that stringent regulation does not kill the sector.”