This could be your story or mine. You will surely recognise autobiographical elements here in this dark fable unless you’re a tycoon who knows how to profit off tragedy. Name, age, family, job…yes, job loss, life tightening around you like an invisible noose. You could have been Exhibit A in this grimy drama: his name is P Sunil, a suitably Everyman name. A 28-year-old software engineer from Hyderabad, Sunil lost his job during last year’s lockdown. Salary down to zero, his financial life was tossed into an abyss he had scarcely imagined possible a few years ago.

That’s when Sunil came across digital lending apps. Instant, unsecured loans with just a few clicks on his mobile phone. He was savvy enough to know hidden risks could lurk here, but he was up for it. He was in a far worse spot anyway, an airless dungeon, and this appeared to him like an oxygen dispenser would appear to someone choking on post-COVID lung fibrosis…which is where he was, metaphorically speaking.

So he clicked, and clicked again. Sundry instant loan apps sprang into action, drafting Sunil in as the latest name and number on their database. He was gambling—with the hope and intention that he would soon land a job and pay all this money back. But the ancient laws of borrowing risks are written by unforgiving gods. Sunil’s job resume stayed blank. His dues began to balloon with the interest, accumulating like pus.

Soon, the gates of hell opened. Recovery agents stood there. Harassing calls and messages started coming not only to him but flowed to people on his contact list. Shame and humiliation were piled on to misery. In December, Sunil crumbled. What flowed next on his social network was news of his suicide.

The story of Kirni Mounika, 24, an agriculture extension officer in Rajgopalpet village in Telangana, had more black drama within the same canvas. She didn’t lose her job, only her equilibrium. The sole earning member of her family, she was supporting three younger brothers—the very burden that made her turn to lending apps. Police say she borrowed around Rs 17,000 from one app. When the due date arrived, she borrowed another Rs 22,000 from a second app to pay back the first loan, and then again…she kept juggling with loaded dice. After she killed herself on December 12, police found 55 such apps installed on her phone. She had borrowed some Rs 2.71 lakh by then, had repaid about Rs 2.5 lakh, and still owed over a lakh as interest.

Perhaps a premonition that she was sinking deeper into the morass made her halt that vicious cycle of borrowing, but the angels of hell had got their opening. Harassment came via hundreds of calls and messages with fake FIRs and court notices. The recovery agents threatened to block Kirni’s bank accounts, Aadhaar and PAN. Eventually, they drew that darkest sword: humiliation. Messages flowed to her phone contacts—including her colleagues—calling her a “defaulter”. That’s when the pesticide can come into the picture.

Over the last couple of months, the list of victims is lengthening like evening’s shadow. Exhibit A, B…the gallery is filling up and overflowing. The details, in most cases, are eerily similar. People in desperate need of money borrow from digital lending apps, defaults follow almost inevitably,
then harassment by recovery agents… finally, suicide.

So what are these apps? No surprises, many of them are dubious, shadowy players. Often, one company operates multiple apps—laying a crafty trap all around the prey. You borrow from one app, begin to choke on repayment, and the representatives of other apps knock on your door. Sometimes the first app’s representative directs you to other apps. In either case, they already know you need money, and exactly how much. Bait is dangled, you bite again. By the time you realise it’s a debt trap, it’s often too late. That’s when debt rhymes with death.

The bait seems innocuous: short-term loans with repayment periods as low as a week. But the terms are often non-transparent; high processing charges and interest rates are the norms. In one case, a processing fee of Rs 1,200 was charged for a Rs 5,000 loan! The borrower received only Rs 3,800, but with interest charged on the whole sum, the onset of a debt cycle was almost pre-scripted. The second loan again comes with that high processing fee. You sink a bit more.

Since these apps seek permission to view your contacts, SMSes, photo gallery, and other phone details while installing them, you yourself hand them the tools of harassment. This starts with soft suggestions to take new loans, goes on to threats, bogus FIRs, court notices, complaint letters to RBI, what have you. Phone calls and messages to family, friends, and colleagues ensue like doom’s script. The recovery agents often create WhatsApp groups with titles such as ‘Mr X is Fraud’ and add your colleagues and relatives to the group. Honour dies first.

Why do lending apps seek access to your sensitive phone data? Because it’s your user data—salary details, spending habits, financial transactions—that helps even above-board lenders paint a sketch of your creditworthiness. But a financial portrait of you often only means drawing a graph of your desperation. Most charitably, you could say it’s big data analytics and AI-based algorithms gone rogue.

Tarun Kumar Kalra, Senior Vice President, CredoLab, an alternative credit-scoring company, says digital lenders harness the power of data to help build AI-based scoring algorithms to strengthen their credit risk assessment frameworks. “These are ideally aimed at helping assess and price risk before offering loans to the credit-hungry. Issues arise when the data is used for other purposes, especially for ‘name and shame’ debt collection,” he explains. Requesting access to digital footprints should be done with utmost responsibility and the highest standards of ethics, he adds. “It shouldn’t capture any personally identifiable information.”

Akshay Mehrotra, Founding Member of Fintech Association for Consumer Empowerment (FACE), says the fintech lending industry, born four to five years ago, is clearly divided into two segments—organised lenders, and the unregulated players. The former are either registered as NBFCs, or work with large banks or NBFCs, and abide by a formal code of ethics. “These regulated startups currently make up some 80 per cent of the market. They have private equity and venture capital coming in and they’ve built a disruptive model to reach out to over 450 million customers—the same as India’s credit card penetration—in just four years,” says Mehrotra, who is also CEO of digital lending app EarlySalary.

But the unregulated part of the industry is a dark, roiling sea. Its source of capital is unknown. And they are clearly classifiable as moneylenders—with all the attendant evil. Mehrotra cites four areas of concern: product tenures, high-interest rates and processing fees, access to sensitive data, and coercive recovery practices.

EMIs, by law, should be due every 30 days, but most unregulated digital moneylenders run 7-15 day loan products. And while you may borrow a very small amount (say, Rs 500), the substantial processing fee effectively translates into a huge internal rate of return (IRR), says Mehrotra. “So for a seven-day loan of Rs 1,000, you have to repay Rs 1,150—nearly 700+ per cent IRR compared to the regulated fintech lender’s 18 to 30 per cent IRR,” he explains.

Google Playstore’s developer policy says all personal loan apps must disclose information such as repayment tenure, interest rates, and the name of the licensed NBFC partnership. Many unregulated apps act in a non-transparent manner and flout these rules. That policy only allows personal loan apps that offer a minimum 60-day repayment period from the date of issue of the loan; again, most fly-by-night apps flout that. Google has now started removing apps that don’t comply with its developer policy and the relevant country’s banking regulations. Yogi Sadana, CEO of CASHe, says any organisation that lends money to the Indian public has to be registered with the RBI, but scores of these lenders operate unlicensed through apps that can be easily downloaded. Customers should exercise caution and completely avoid borrowing at usurious rates, he says.

On the aggressive, coercive tactics of recovery agents, he says these clearly flout stipulated RBI norms. “Most complaints emanate from entities that aren’t regulated by the RBI. These app-based entities use outright dodgy tactics. There has been a huge social media outcry in the past few weeks over this,” says Sadana. He too advocates extreme caution from potential borrowers before falling for even small loans with short turnaround times and minimum documentation. Be very aware of the terms and conditions before taking on any financial obligation.

Mehrotra adds that moneylenders have always resorted to coercive collection tactics unlike the more rule-bound banks and NBFCs. FACE too has issued a code of conduct that all its members follow. What are acceptable collection processes? He says it includes calling, home visits, and offering settlement and reconstruction policies. Lenders can also proceed legally against seriously defaulting customers. “Regulated entities update the (credit) bureau every 30 days on loan prepayment behaviour. Delays or non-payment have a serious impact on the customer’s credit score, which in turn impacts ability to borrow further,” he says.

Soon after the suicide stories started surfacing, the Reserve Bank of India (RBI) issued an advisory warning potential borrowers against unauthorised digital platforms. It was also made mandatory for digital lending platforms operating on behalf of banks and Non-banking Financial Corporations (NBFCs) to disclose the latter’s name upfront. “Legitimate public lending activities can be undertaken by banks, NBFCs registered with RBI and other entities regulated by state governments under statutory provisions, such as the moneylending acts…. (The) public is hereby cautioned not to fall prey to unscrupulous activities and verify the antecedents of the company/firm offering loans online or through mobile apps,” the RBI said. It also warned people not to share copies of KYC documents with unverified or unauthorised persons and apps, and to report such apps to law enforcement agencies or file an online complaint with the RBI.

The central bank has also cracked into action in other ways. In January 2021, responding to the “serious concerns” with “wider systemic implications”, it decided to set up a working group on digital lending to come up with specific regulatory measures for the sector. The idea is to have “a balanced approach” that could “support innovation while ensuring data security, privacy, confidentiality and consumer protection”. The working group will study all aspects of digital lending in the regulated sector as well as in the darker waters beyond. The law is also catching up. The last ten days of December saw nearly 30 arrests, including 10 from Hyderabad, 11 from Gurgaon. There were two Chinese nationals among them. Raids were also conducted at call centres across India from where recovery agents harassed defaulting borrowers.

Madhusudhan E, Co-Founder and CEO of KreditBee, rues how the rogue apps are bringing disrepute to fintech lending, a very legitimate activity. “Media coverage of a few unscrupulous apps has put the entire sector under the scanner, increasing consumer scepticism. But existing consumers understand the compliant practices that responsible lending platforms follow,” he says.

There’s a checklist for aware consumers. First and foremost, check if a digital lending service has an NBFC licence. “Then you can be assured that its practices are regulated by NBFC guidelines,” says Matthew Flannery, CEO and Co-Founder, Branch Personal Finance App. Mehrotra adds some more: What is the data the app seeks access to? Who is the real lender? Did you receive a sanction letter clearly mentioning it? Also, try to understand the cost structure—if it’s complicated, just walk away, Flannery advocates. Do a “thorough research of the overall rating and reviews” of any lending app, you may be eyeing on the PlayStore itself. “Digitisation of lending comes with real promise if the process is diligently followed. However, these interactions leave digital footprints. It’s imperative for both lenders and borrowers (to be) even more accountable,” Flannery adds. If in trouble, go to the RBI. Most of all, try to get a no-dues certificate. Pay up.

***

The World of Digital Apps

• Download instant loan apps from Android Playstore and Apple App Store
• Permissions required for user data to determine borrower’s creditworthiness
• Apps can read mobile messages, and access contact details and photo gallery
• Risk profile decided on the basis of other apps installed and SMS content
• Borrowers are psycho-profiled – gamblers if use gambling apps, serious investors if use stock market apps
• Need to submit details about KYC, PAN, bank account, and salary
• Options to withdraw fixed amount, or manage running credit
• Instant approval, few hours to few days, based on AI algorithms
• Credit score and ability to take future loans impacted in case of default

***

App Trap

• Steer clear of dubious and unauthorised apps that are not registered with RBI
• Privacy issues, as apps read SMSes related to financial deals to gauge money habits, and monitor other mobile activities
• An app may direct borrowers to other apps to pay back previous loans; this leads to a vicious debt cycle
• Recovery agents can harass and shame borrowers among families and friends as apps can access mobile contact details

vishav@outlookindia.com