Digital Lending Companies – II: Skirting the Law & Creating an Insta-loan Bubble
The operational structures of such loans are in defiance of many requirements of RBI's (Reserve Bank of India's) directions. Following are the areas where most of the NBFCs (non-banking financial companies) act in their own sweet ways:
KYC Process: The KYC (know your customer) master directions specify that an authorised representative of the lender NBFC must physically visit and see and verify the original KYC details of the borrower. There are further requirements of maintaining the KYC records and carrying out customer due diligence (CDD) which the NBFCs fail (refuse) to comply with in their hurry of their 'superfast processing'.
Fair Practice Code (FPC): The FPC requires lender NBFCs to display annualised interest rates in all their communications with the borrowers. However, most of the NBFCs show monthly interest rates as part of their 'marketing strategy'.
Risk Management: The directions require NBFCs to assess the risk before granting loans to borrowers which is overlooked while providing speedy disbursals.
Recovery Process: NBFCs do not even have a properly defined recovery process. They are just making rapid disbursals, without a thought of whether or not these loans will be repaid.
Risk to Personal Information: Many NBFCs obtain access to personal information such as text messages and social media profile of the borrower by way of incorporating clauses in this regard in the detailed terms and conditions of the loan agreement.
RISKS TO THE BORROWERS
The borrowers face several risks under such loan transactions, ranging from personal to financial such as:
Many borrowers usually don’t read the entire set of terms and conditions and end up granting the NBFCs access to their personal information.
Privacy of the borrower is at stake as information trading is yet another business that the NBFCs may secretly engage in, posing a threat to borrowers’ personal information.
The lucrative advertising strategies of these NBFCs might make a borrower take loans for purposes which otherwise would not have been a necessity or priority for the borrower. Hence, the borrower tends to borrow without any actual requirement because a demand has been created by the lender NBFCs.
The interest rates are very high on such loans. In case the amount of loan is high, the borrower is unable to pay the huge amount of interest and, thus, has to take another loan to repay the first.
The credit score of the borrower may get affected at the slightest delay in repayment, even if the amount of loan is as small as Rs500. Thus, the creditworthiness of the borrower is at a risk of degradation.
THE BUBBLE OF ATTRACTION: PLAYING WITH THE PSYCHOLOGY
Despite such high interest rates, why is a borrower more attracted to loans from NBFCs? The only answer one finds is the ease and the fact that they are instant. In an era when everyone wants everything in a jiffy, be it food or health solutions, being attracted to instant loans is a very natural thing.
For example, if you meet with an accident and don’t have money for the treatment, just take a loan. You are shopping and suddenly realise you forgot your purse, take a loan.
The most crucial thing is that these NBFCs do not monitor the end-use of the loan amounts disbursed. So a borrower may specify any purpose for the loan which he might not actually use the loan for.
Moreover, the high interest rates are not noticed by the borrowers as most of the NBFCs show monthly interest rates rather than the yearly rates in their communications on the app or the website.
The NBFCs are playing the psychological game by becoming a friend in need for the borrowers. No matter how high the interest rates maybe or how risky the transaction maybe, it is a handy help whenever needed.
Furthermore, the advertisements made by these NBFCs are so catchy that they may lure a person who might not really be in need of finance. The catchy phrases like “make your dream wedding come true”, “let the wanderlust in you come alive” create a 'need' for the customer to become a borrower.
Marriage functions, travel and luxuries are the Indian way of displaying wealth and the the above strategies wraps people in a comfortable blanket of justification to remain under the debt burden.
ALL OUR MONEY INTO THE BLACK HOLE
While lending to businesses results in more capital formation and growth of the economy, personal lending mostly results in wasteful expenditure. Further, the interest rates being so high, the borrowers often obtain another loan to pay the previous loan and get trapped into the vicious circle of obtaining and repaying loans.
The increasing lending volumes are not an indication of overall growth of the economy. Most of the purposes for which such loans are availed are consumption-based and less productive.
While on the one hand, such loans are helping us in need, on the other they are luring us to take unnecessary debt burden. The lender NBFCs are under the risk of regulatory action by the regulators since many of them are in non-compliance with regulatory requirements. The borrowers are under the risk of pressing themselves under unnecessary debt burden and huge interest costs.
The recovery procedures of these NBFCs are very lenient but due to the high interest costs, the cost of funds is readily recovered by the lender NBFC. Even when banks have tried to provide quick loans under 59-minutes loan scheme, they have failed to do away with the procedural requirements such as document submission and are still regarded as 'slow-loans' considering the super-fast loans being provided by NBFCs within five minutes.
Lenders and borrowers are happily floating in the bubble of 'instant loans' which is definitely going to burst in no time.
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(Rahul Maharshi and Kanakprabha Jethani work at Vinod Kothari & Co)