The government is planning a crackdown on apps offering cash loans, exploring new regulatory options that could ban coercive recovery procedures, cap the rate of interest and require mandatory registrations after increasing reports from around the country of people falling into debt traps, with at least 12 cases leading to suicide since late last year.
Often acting as fly-by-night operations, these companies exploit a vacuum in tech and financial regulation that experts say now poses serious concerns that span privacy, data security, and consumer protection.
According to multiple officials aware of the matter, a report by the Reserve Bank of India on the issue is expected by mid-April following which the government will either use existing legal frameworks or bring in new legislation to make sure such lending is done by companies that are registered and have a dispute resolution mechanism in place.
“It is found that some of these unscrupulous online entities charge as high as 300% annual interest rates, which is not acceptable,” said one of these officials, asking not to be named.
To target potential customer, these services use a common lure: instant, collateral-free loans without due diligence such as creditworthiness checks.
But as part of the process, they gain access to sensitive personal information such as files, photos, emails and contact lists – according to the permissions request prompts of 10 apps available on Google Play Store reviewed by HT on Sunday.
In several of the cases that led to the customers dying by suicide, the companies involved purportedly attempted to socially shame them by reaching out to their contacts without authorisation. Some affected consumers, who on social media have used the hashtag OperationHaftaVasooli to draw attention to the problem, have also reported cyber-bullying and doxing and in one case, also shared screenshots of a recovery agent asking for nude photographs.
The central bank constituted on January 13 a working group on digital lending, including lending through online platforms and mobile apps, after such reports poured in.
“These entities are worse than the notorious moneylenders of yesteryear, something that was banned after Independence through state-specific laws as the Constitution confers them the power to legislate on this matter. Hence, similar activities cannot be allowed in the garb of digitalisation and online lending,” said a second person aware of the discussions in the government on the matter, asking not to be named. The problem has grown during the pandemic and the lockdown, when several people lost their jobs or had their earnings depleted, this person added.
“Usually digital lending apps partner with scheduled banks / registered NBFC who provide the capital. These entities are clearly identifiable, consumers can seek recourse through formal legal mechanisms like RBI,” said Srikanth in a blog post on Cashless Consumer, an advocacy group for consumer protection in fintech.
But, according to Cashless Consumer’s research, a large number of apps against which people have begun complaining have murkier ownership. “All these apps, appear to have no legal entity in India, are run by crooks who work as brokers/touts. It is quite possible that some money is laundered through this as well, as all these transactions will be outside the regulatory purview of RBI,” he added in his report. The first person cited above agreed that regulation needs to target the “unregistered and unregulated online moneylenders”.
Several applications appear to have funding or hosting from entities in China. “Chinese fintech over the years have created global conglomerates to expand into markets in South East Asia, India, Africa. What has been observed is they are actively shopping NBFCs to back their activity and funds are routed to shell companies via these and taken back — at least in one instance as ‘software fees’,” Srikanth told HT, while adding that “in reality, it is income from rogue lending activity”.
“This has completely hidden the scale of such lending activity from banking regulator which oversees NBFCs,” he said. Srikanth said there are also regulatory blind spots in areas that fall under the Registrar of Companies and the corporate affairs ministry.
According to a 2007 report of RBI’s technical group set up to review state legislations on money lending, all states require registration or license to carry out money lending. These rules fix maximum rates of interest, and intimidating debtors or interfering with their day-to-day activities are prohibited. State laws are applicable to individuals, firms, association of individuals and companies, barring RBI-regulated banks and financial institutions. Some state laws are guided by the rule of ‘damdupat’, the Hindu law of debt, which says the amount of interest recoverable at any point can’t exceed the principal.
“Digital lenders typically target customers who would not easily have access to credit elsewhere and thus have been playing a very important role in improving financial inclusion and assisting the economy’s growth,” said Gaurav Jalan, founder and CEO of mPokket, which provides loans to college students and young salaried professionals. Sanjay Khan, partner at law firm Khaitan & Co, said: “This [proposal] will create a clear segregation between genuine businesses and businesses that are purely opportunistic or ill intended