India’s loan apps prey on the unbanked as harassment mounts

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 particular explanation: After Mr. Rajapandian failed to repay a loan from a mobile app, debt collectors demanded that the factory pay on his behalf.

“I lost my job because of them,” Mr Rajapandian said of CASHe, the app he used to get a $132 (Dh484) loan. “I constantly live with the fear that they will stalk me and harass me.”

As digital lending explodes in India and other developing economies, Mr. Rajapandian’s ordeal has become increasingly common. During the Covid-19 pandemic, apps promising quick money have multiplied.

Many take advantage of borrowers’ lack of financial literacy, 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.

A growing chorus of tech companies and regulators has clamped down. Globally, Google has blocked hundreds of apps from its Android store to protect borrowers from “misleading 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.

But protecting borrowers in India is particularly tricky, given outdated personal bankruptcy laws and the size of the country – more than a billion people lack access to formal credit.

While complaints of harassment by digital lenders stretch far beyond its borders, India’s ambition to become a haven for technological innovation combined with a byzantine bureaucracy makes sweeping regulatory intervention difficult.

Millions of Indians rely on apps and there is often no clear way for borrowers to tell legal from bad.

“These platforms clearly fill an unmet need,” says 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 being sufficiently met by the traditional financial system.”

The shortcomings of the banking system are 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 lending rather than secured loans, according to Yashraj Erande, managing director and partner of the Boston Consulting Group in Mumbai.

Efforts to curb illegal apps have had mixed results.

After Indian officials raised flags, Google reviewed hundreds of apps on the Play Store, according to a company spokesperson. Platforms must now prove that they have the appropriate lending licenses and they cannot demand full repayment in less than 60 days. (Android is the smartphone of choice for most Indians, although some apps are also available for iOS.)

But enforcing stricter rules has become a mole game. Digital lending is a sprawling and difficult market to tame, says Rahul Sasi, who runs cybersecurity firm CloudSEK and was one of the experts who made recommendations to the Reserve Bank of India.

Banned apps simply move to third-party platforms such as Aptoide, he says, or advertise via SMS. Consumers sometimes take out loans without the intention of repaying them. The apps, in turn, use mafia-like collection tactics.

“Crime will be there in one form or another,” adds Mr Sasi.

Paulo Trezentos, the general manager 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 expelled, he says.

The rigs are often owned by offshore entities, making it difficult for India to take legal action, analysts say. Some apps use technology infrastructure built by Chinese companies that leverage cloud services from Alibaba Group Holding and Baidu, according to Srikanth L, the founder of Cashless Consumer, a collective that studies the FinTech industry.

In an email, Baidu says FinTech is now managed by Du Xiaoman Financial, a separate company. A spokesperson for Du Xiaoman Financial said the company does not operate any business in India. Alibaba did not return requests for comment.

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 particular emphasis 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 increased in September from a year earlier, according to data from the Reserve Bank of India.

“The recommendations are definitely a step in the direction of fighting illegal lending,” says Vivek Belgavi, head of fintech and alliances at PricewaterhouseCoopers in India.

Tougher regulatory measures could also help save lives, campaigners say. In the past year, SaveThem India Foundation, a non-profit organization that helps victims of cybercrimes, has linked 17 suicides to tough recovery tactics.

Pravin Kalaiselvan, director of the organization, says its staff responded to more than 64,000 calls in 2021 from Indians complaining of harassment. 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 their methods could not be construed as incitement to suicide.

“If they had acted a year ago,” Mr Kalaiselvan says of the regulators, “we wouldn’t have seen so many people committing suicide.”

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

For the first borrower, 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 $200-a-month salary and help him care for his wife and four-year-old son.

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

For months, he says, CASHe agents called him several times a week, “abused my parents and my wife” and contacted the thermal plant. When his boss became increasingly furious, threatening to fire him, Mr Rajapandian quit his job. Last month, he filed a complaint with the police.

“I considered suicide,” he adds.

A local police station in Chennai has confirmed receipt of Mr Rajapandian’s complaint against the app, which was filed on December 17.

CASHe, a Mumbai 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.

The calls haven’t stopped, says Mr. Rajapandian. They’ve become so abusive, he says, that he tries to keep his new job a secret so collectors don’t jeopardize that job as well.

“It’s no longer a question of money,” he adds.

Updated: January 21, 2022, 5:40 a.m.