Author: Shreya Singh
College: Lloyd Law College, Greater Noida
Over the past few years, India has undergone a massive digital transformation. From booking flights to paying your bills, everything is possible with just a few clicks on our smartphones. Mobile applications have significantly made human life easy and provided them with everything at their fingertips. Recently money-lending applications have gain prominence. Digital lending services provide easy and fuss free access to short-term loans. These money- lending apps are quite attractive as they render instant credit to the borrowers without any delay and lengthy procedure as happens in the traditional system of availing loans. However, the truth is these platforms and apps offer predatory lending. Predatory lending refers to the unfair lending practices that benefit the lender at an overwhelming cost of the borrower. Despite the fact that they have enabled quick credit services to the needy borrowers, the lack of rules on these apps have resulted in unethical practices by the service providers. They promise loans within minutes without full disclosure of pricing, terms and conditions. Under the guise of attractive policies and swift procedures, these apps trap borrowers and leave them repaying more than the amount they borrowed. They gain access to the borrower’s personal information such as contacts, social media accounts etc., as a prerequisite for the lending process and later harass and threaten the borrowers if they fail to repay the loan within the stipulated time.
The dark side of digital lending became more prominent during the COVID-19 pandemic in the form of “digital loan sharks” [i] Digital loan sharks are new-age moneylenders who offer short-term loans at high interest rates using mobile apps or websites. They provide services using digital technology and do not demand actual assets such as security, like traditional moneylenders do. They target such vulnerable users and businesses in need of credit and advertise through sms, emails and ads. Borrowers fall prey to these debt traps charging excess interests disguised as service charges or additional fees such as taxes. They profit from the borrower’s lack of understanding about the terms and conditions of their service. Ultimately the borrower fails to repay the loan charged with high interests and ends up taking another debt. This leads the lenders to harassing and threatening the debtor, approaching their contacts and name shaming them on social media.
Response and Regulations
Digital lending platforms are not directly regulated by the Reserve Bank of India. They operate in a regulatory void. In most cases they cannot lend money on their own. So, they tie up with regulated entities like banks or Non-Banking Financial Companies. These regulated entities lend money to borrowers and are tasked with keeping the platforms in check. Which, in many cases, they failed to do.
In June 2020, the RBI reminded banks and Non-Banking Financial Companies that they must abide by the Fair Practices Code when they offer loans through digital lending platforms. And they must also ensure that their digital lending partners follow the Fair Practices Code while interacting with borrowers. But banks and Non-Banking Financial Companies failed to keep their digital lending partners in check. Which meant predatory lending platforms mushroomed, under the RBI’s nose[ii]
The Reserve Bank of India (RBI) warned people not to share their Know Your Customer (KYC) documents with finance apps that do not clearly identify the company behind them4. It advised the public to look up the names of the financial service providers who are supporting digital platforms and confirm on the RBI website that they are registered with the RBI or state/federal governments. It also urged people to report unauthorised apps to law enforcement agencies via the RBI’s Sachet Portal[iii], a website for filing complaints.
Digital technology has made it possible to identify a person’s need through their browsing history. In case of client default, these digital loan sharks resort to harsh and abusive methods to recover their money. They threaten and name-shame the defaulter openly and give them tags like ‘fraud’. This results in the mental torment of the borrower and some end up taking their life. Many suicide cases have been in highlight regarding this [iv]. However, as the predatory nature of these apps is revealed, there is a growing call for them to be strictly regulated.
How to save yourself from predatory lending? [v]
Not checking your ability to repay
Be it the traditional loan taking process or any digital platform, authorised money lenders will always check for your ability to repay the loan for instance your income, before granting any credit. They will assess the repayment history of your previous debts and thereafter they will trust you with their money. Predatory money lenders do not check for your credibility as they profit from the borrower’s vulnerability. They simply do not care and benefit from the debtor’s inability to repay.
Check the Credentials
Before taking any loan, always research about the lender. When looking for a loan, a borrower should first check on the credentials of the lender and only proceed ahead with a lender, be it a bank or an NBFC, which is registered with the RBI. Reviews and ratings help a lot and should always be checked. The Federal Trade Commission also offers scam alerts, while the Consumer Financial Protection Bureau has a complaints database that allows you to look up lending companies by state [vi]
Read the terms and conditions
Often predatory money lenders benefit from the borrower’s lack of knowledge and understanding about the terms and conditions of the loan agreement. There are hidden loopholes in them which are difficult to identify easily. The lender rushes the borrower into the agreement without giving him sufficient time to go through the loan agreement and ultimately the borrower ends up signing the contract hastily.
Additional Loan Services
Predatory lenders are also more likely to attach on unnecessary services and products to your loan in order to make more money up front. Predatory lenders, for example, are not uncommon in adding insurance to your loan amount. They can then add the insurance premiums to the loan amount, increasing the amount of interest you pay. The predatory lender earns commissions on these premiums or may require several years’ worth of premiums to be paid in advance.
Despite decades of progress in protecting borrowers, predatory lending continues to be a persistent and evolving risk. If you’re in need of money, it’s a smart option to do your research by looking into alternative funding options, reading the terms and conditions of the agreement and learning about consumer rights and protections as well as the range of interest rates for the type of loan you’re looking for.
[i] Predatory digital lending: How it affects economically disadvantaged borrowers in India – IFIP 9.4 BLOG (wordpress.com)
[ii] Opinion: Why digital lending needs self-regulation to prevent predatory use of customer data (scroll.in)
[iii] Sachet (rbi.org.in)
[iv] Be Aware! Don’t Let Digital Loan Sharks Bite You (outlookindia.com)
[v] What is Predatory Lending? A Complete Guide | Possible Finance
[vi] Fraud and scams key terms | Consumer Financial Protection Bureau (consumerfinance.gov)