Digital loan app, the predator stalking India's young millennials

Exorbitant interest rates and heavy-handed, if not outright illegal, collection practices of digital lending applications (DLAs) have caused untold misery across the length and breadth of the country. In recent months, these agents have resorted to harassment, from incessant calls and messages to threats of physical harm, and even circulated morphed images of borrowers.

Such harrowing outcomes are hardly isolated incidents, as reported by the BBC in The Trap, its latest documentary based on the dark underbelly of instant loan apps in India. The documentary has claimed that up to 60 people, mostly young, have died by suicide owing to harassment by loan recovery agents, and their ignorance about predatory DLAs.

The government has been made aware of the menace, but DLAs continue to operate. Despite multiple crackdowns and growing regulatory intervention from government bodies including the Enforcement Directorate (ED), Reserve Bank of India (RBI), ministry of electronics and information technology (MeitY), and state-level cybercrime cells, DLAs continue to slip into the app stores of Apple and Google.

Industry observers say many people struggle to comprehend the nuances of loan risks and interest rates owing to a lack of financial literacy and understanding of complex banking terminology. This can lead to borrowers accepting unfavourable loan terms without realising their implications.

According to a 2020 RBI survey, approximately 60 per cent of Indians do not fully understand the risks and interest rates associated with loans, leading to borrowers taking on unaffordable debt and struggling to repay it.

Predatory loan apps offer ultra short-term unsecured loans, commonly known as payday loans. First popularised in the US in the 1980s, payday loans have short repayment tenures with relatively high interest rates, usually scheduled around pay day. In India, this innovation has become intertwined with the ongoing fintech boom. With just a few taps on a smartphone, borrowers can avail loans with minimal requirements — identity proof, residence proof, a bank account, etc.

Ease of access and quick disbursement have led many individuals to rely on these high-interest loans, with an annual interest rate of approximately 42 per cent. They are particularly popular among young millennials facing difficulties in the job market owing to high youth unemployment rates. Credit often steps in to replace income during a financial crunch.

However, as incomes and job prospects stagnate in a slowing economy, young borrowers are stuck with loans they can't repay. “The small-ticket, high-interest loan market remains small, but if household savings continue to decline, it could lead to a long-term macroeconomic problem of debt,” warns Madan Sabnavis, chief economist at CARE Ratings Ltd.

The lack of consumer protection, as seen in the US, where payday loans led to the creation of the Consumer Financial Protection Bureau, has made Indian citizens vulnerable to predatory lending practices. Data from Experian reveals a significant shift in the age profile of new borrowers, with millennials, particularly those between 25 and 30, driving the growth of small-ticket personal loans for consumer goods.

Fintech firms and non-banking financial companies (NBFCs) catering to borrowers with poor credit scores or those new to credit have also seen a surge in sub-prime and near-prime borrowers. Critics argue that this trend encourages borrowers to rely on loans for everyday expenses and discourages savings.

While these loans offered by fintech firms have annual percentage rates starting from 36 per cent, they can go up to a staggering 365 per cent per annum, say credit information services firms. The lack of clear regulatory guidelines from the RBI for these fintech firms, whose loans are ultimately booked by partner NBFCs, has raised concerns about consumer protection.

Highlighting only the interest amount instead of the interest rate is seen as a gimmick to attract individuals who prefer convenience over traditional bank paperwork. The debate between instant and credit card loans continues, with each offering pros and cons.

In this scenario, the risk associated with unsecured personal loans is under scrutiny, with experts suggesting that the RBI may increase risk weights on such loans, making them more expensive for borrowers. As unsecured personal loans continue to grow, reaching over 20 per cent in six of the last 12 months ending July 2023, the issue of predatory digital lending applications remains a pressing concern in India's financial landscape.