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 came up with a peculiar explanation: After Rajapandian defaulted on a loan from a mobile app, salvage agents demanded that the factory pay on his behalf.
âI lost my job because of them,â Rajapandian said of CASHe, the app he used to get a $ 132 loan. “I constantly live with the fear that they will stalk and harass me.”
As digital loans explode in India and other developing economies, the ordeal of the Rajapandian has become increasingly common. During the pandemic, apps promising quick cash have mushroomed. Many are capitalizing on borrowers’ lack of financial literacy, charging interest rates as high as 500% annualized and in some cases using blunt collection tactics that Indian activists have linked to a string of suicides.
A growing chorus of tech companies and regulators have cracked down. Globally, Google has blocked hundreds of apps from its Android store to protect borrowers from “misleading and exploitative terms.” Officials in China, Indonesia and Kenya followed suit, shutting down dozens of startups promising easy money to unbanked people.
India, which has among the largest number of such applications in the world, has also taken action. 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 the roughly 1,100 digital loan providers were operating illegally.
But protecting borrowers in India is particularly tricky, given the country’s outdated personal bankruptcy laws and its size: more than a billion people lack access to formal credit. And while complaints of harassment by digital lenders extend far beyond its borders, India’s ambition to become a haven for technological innovation combined with Byzantine bureaucracy makes radical regulatory intervention difficult.
Millions of Indians rely on apps, and there is often no clear way for borrowers to tell the legal from the shoddy.
âThese platforms clearly address an unmet need,â said Eswar Prasad, professor at the Dyson School of Applied Economics and Management at Cornell University. âThe persistence of digital lenders charging sky-high interest rates indicates an unrealized demand for credit and other products that are not sufficiently satisfied by the traditional financial system. “
The failings of the banking system are increasingly difficult to ignore. India is one of the fastest growing fintech markets in the world, with digital loans expected to reach $ 350 billion by 2023. Much of this growth will come from short-term, unsecured loans rather than secured credits, according to Yashraj Erande, managing director and partner of the Boston Consulting Group in Mumbai.
Efforts to rule out illegal apps have met with mixed results.
After the flags were raised by Indian officials, Google reviewed hundreds of apps on the Play Store, according to a company spokesperson. Platforms now have to prove they have the appropriate lending licenses and cannot demand a full refund in less than 60 days. (Android is the smartphone of choice for most Indians, although there are some apps available for iOS as well.)
But enforcing stricter rules has become a mole game. Rahul Sasi, who runs cybersecurity firm CloudSEK and was one of the experts who made recommendations to the Reserve Bank of India, said digital lending is a sprawling market and hard to tame.
Banned apps simply move to third-party platforms such as Aptoide, he said, or advertise via SMS. Consumers sometimes take out loans without the intention of repaying them. The apps, in turn, use mafia-style collection tactics.
âThe crime will be there in one form or another,â Sasi said.
Paulo Trezentos, CEO of Aptoide, wrote in an email that his company does not host apps unless they are also available on Google Play. Lenders linked to “illegal activities in any form” are immediately removed, he said.
Analysts say the rigs are often owned by offshore entities, making it difficult for India to take legal action. Some applications use technology infrastructure built by Chinese companies that operate cloud services from Alibaba Group Holding Ltd. and Baidu Inc., according to Srikanth L., the founder of Cashless Consumer, a collective that studies the fintech industry.
In an email, a spokesperson for Baidu said fintech is now managed by Du Xiaoman Financial, a separate company, and declined to comment further. A spokesperson for Du Xiaoman Financial said the company has no business in India. Alibaba did not respond to requests for comment.
The Reserve Bank of India could toughen digital lending rules as early as this year. The guidelines under review include stiff penalties for non-compliant applications, with particular emphasis on eliminating unregulated loan providers. Large digital payment companies such as Paytm have not been accused of similar predatory behavior.
The risk is that unscrupulous businesses will step up their manipulative practices as the stress in personal lending increases. Consumer credit delinquency levels rose in September from a year earlier, Reserve Bank of India data showed last week.
“The recommendations are definitely a step in the direction of the fight against illegal lending,” said Vivek Belgavi, FinTech and alliance leader at PricewaterhouseCoopers LLP in India.
Campaigners say stricter regulatory action could also help save lives. Over the past year, SaveThem India Foundation, a nonprofit that helps victims of cybercrime, has linked 17 suicides to harsh recovery tactics.
Pravin Kalaiselvan, director of the organization, said his staff responded to more than 64,000 calls in 2021 from Indians complaining of harassment. This figure was up 31% from 2020. Hundreds of police complaints have been filed against debt collectors, although a local court recently ruled that their methods could not be interpreted as incitement to debt. suicide.
“If they had taken action a year ago,” Kalaiselvan said of regulators, “we would not have seen so many people kill themselves.”
The Reserve Bank of India did not respond to requests for comment.
For first-time borrowers like Rajapandian, who worked as a manager at a thermal power plant in Chennai, going to a digital lender in 2020 was his only option instead of credit for a traditional loan.
As the coronavirus swept through 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 cash to supplement his $ 200 monthly salary and help care for his wife and 4-year-old son.
But Rajapandian struggled to make the payments on the loan, which had a 300% interest charge. That’s when the threats started, he said.
For months, he said, CASHe agents called him several times a week, âmistreated my parents and my wifeâ and contacted the thermal power plant. When his boss grew increasingly angry, threatening to fire, Rajapandian quit his job. Last month, he filed a complaint with the police.
“I thought about suicide,” he said.
A local police station in Chennai has confirmed receipt of Rajapandian’s complaint against the app, which was filed 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 customers, has not been charged with any crime.
Rajapandian said the calls have not stopped. They have become so abusive, he said, that he tries to keep his new job a secret so that collectors don’t compromise that work as well.
“It’s not about the money anymore,” he said.
–With help from PR Sanjai.