After the sterling groundwork of Telangana police, officials from across India are arresting app-based lenders, often linked to Chinese companies. Their ruthless recovery tactics have led to a dozen suicides and finally goaded the police into action. These ruthless lenders, charging usurious interest, masquerading as processing fees (to beat the Usurious Loans Act) have wreaked havoc among desperate borrowers who lost their livelihood during the lock-down. The apps, which lend small sums between Rs2,000 to Rs10,000, target low-income and financial unsavvy Indians, who fail to realise how quickly their small borrowings can balloon into a huge loan. The harassment that follows has driven many young people to suicide, pushing the police to act. The Union government has still to respond with a clear policy, though.
Here is how investigating officer Sanjay Kumar explains the working of these apps. There are hundreds of apps registered on Google Play Store, which is used by most borrowers with android phones. After you download the app, it asks for basic personal details, bank details and two references to register with the app and get a password. It then seeks know your customer (KYC) documents such as permanent account number (PAN) and Aadhaar to be uploaded. It also seeks permission to access the borrower’s phonebook, while checking for credit eligibility.
Once done, it throws up icons for borrowing sums from Rs2,000 up to Rs10,000. On clicking, the app credits the loan amount after first deducting a hefty 25%-30% upfront as processing fees and goods and services tax (GST). The loan period is seven days or 15 days. Immediately after a week, on the 8th day itself, the app claims Rs100 as default charges and from the 9th day the penalty is 1% of the loan per day. The interest rate charged is 36%.
In effect, the apps have been mindful about the Indian Usurious Lending Act that was promulgated to keep rapacious borrowers in check, but like microfinance companies of the past, it has found a legal way to evade by charging processing fees.
How People Are Trapped
In most case, a person borrowing Rs2,000 or even Rs5,000 is unmindful of the fees and thinks she can arrange repayment in a week. Moneylife Foundation
our non-government organisation (NGO), receives several desperate pleas for help, which show a pattern to why people get trapped. First, a person who wants to borrow Rs5,000 for an emergency, may only get Rs2,000 sanctioned, based on her eligibility, and the actual amount credited would be 25% less than Rs2,000. So she borrows from three different apps in quick succession. She is now stuck with a massive interest in three sets of processing fees.
A big issue is poor financial literacy, inability to calculate the high charges and interest rate, not understanding the consequences of failing to pay and, in some cases, a real desperation for funds.
But we have also seen cases where younger borrowers have thoughtlessly availed quick loans just for immediate gratification and splurging.
Some have even taken new loans to repay older ones and failed to calculate the high cost of upfront fees that are deducted every time. In a matter of months, this small borrowing (sometimes from multiple apps) becomes a six-figure number, which small borrowers are in no position to pay at all.
The ease of borrowing is the primary culprit. Moneylife Foundation has received scores of emails from desperate borrowers, who have seven or eight app-based loans and are looking for one big loan (amounts are usually in lakhs of rupees) to repay all others and have a single equated monthly payment (EMI).
In most cases, they do not have the income to service the large loans but still think loans are easy to avail online. They also fail to realise that easy borrowing stops as soon as they default the first time. Most are not even aware of concepts like credit scores.
What Happens When You Don't Pay?
The calls to demand repayment start immediately after the due date. There are dedicated call centres, which train people to make filthy abusive and vulgar calls to family, friends, neighbours and relatives of the borrower. Some have even created WhatsApp groups of people in a borrower’s phone book, in order to shame them more easily.
According to inspector Sanjay Kumar, some have sent out morphed nude photographs of the borrower to embarrass them. The abuse and embarrassment, he says, had led to at least eight suicides in the 15 days between end-December and early-January alone. The total deaths are significantly more. It is only now that the matter has caught the attention of mainstream media and will hopefully lead to policy change.
The business of abuse and threats through call centres is huge. The Cyberabad police has raided nine call centres of companies they are investigating. They have identified another six call centres across India, including one more in Telangana, one each in Noida, Ghaziabad, and Goa and two in Delhi. Action against them is underway.
That tens of thousands of Indians are being trained to threaten, abuse and humiliate people at these call centres is a frightening social phenomenon that also manifests itself in the form of targeted online trolling by paid agencies and probably needs investigation.
The Reserve Bank of India (RBI) is watching the developments and points to rules in place to prevent misuse, which requires lenders to be registered as non-banking finance companies (NBFC). So the apps claim back-end links to NBFCs, but many of these are either not registered or lead back to Chinese lenders and others. On 23rd December, as public pressure mounted, RBI issues a press release cautioning digital lending platforms. (Read: RBI Cautions against Unauthorised Digital Lending Platforms and Mobile Apps
The Cyberabad Investigation
Ironically, while the ministry of company affairs (MCA) claims to have cracked down on shell companies and has imposed onerous compliance requirements, dubious entities seem to be able to mushroom with absurd speed. Mr Kumar cites the example of Skyline Companies Technologies Ltd, a top app-based lender, which floated 26 new companies within eight months. The directors are all inter-connected, he says. Links have been traced to Singapore-based Xikai Holding PTE Limited which has been funding the Indian operation under the guise of paying office rentals, salaries, employee benefits and so on; but the money is used for app-based lending.
The Cyberabad police, working under commissioner V Sajjanar, has registered 10 cases so far and arrested 14, including a Chinese national. They have also seized one bank account with Rs7 crore and were set to seize another 10 last week. They have also asked Google Play Store to remove over 170 loan apps.
On 13th January, the Rachakonda police in Telengana announced the arrest of another Chinese national and an Indian as well as freezing of bank accounts with Rs30 crore and seizure of 105 mobiles and laptops.
On 3rd January, the Chennai police reportedly arrested two Chinese nationals in Bengaluru. But a lot remains to be done.
A consumer collective, Cashless Consumer, has identified 426 lending apps on Google Play Store, but according to another estimate, there are about 4,000 loan apps. They are also used for online gambling which is banned in India. The total lending by such apps is already in excess of Rs20,000 crore through several million small loans, says a media report.
Google Purges Hundreds of Fake Personal Loan Apps in India
Meanwhile, alarmed at the growing harmful financial services products on its Play Store in India, Google has reviewed hundreds of personal loan apps in India and pulled down several of them found to be violating its app policies, says a report from IANS.
Quoting from a blog post of Suzanne Frey, vice president for product at Android security and privacy, the report says, Google has asked developers of the remaining identified apps to demonstrate that they comply with applicable local laws and regulations in India.
"Apps that fail to do so will be removed without further notice. In addition, we will continue to assist the law enforcement agencies in their investigation of this issue," Ms Frey says in the blogpost.
Google said that to help further ensure that users are making sound choices, "we only allow personal loan apps with full repayment required in greater than or equal to 60 days from the date the loan is issued."
The tech giant stressed that transparency of information around the features, fees, risks, and benefits of personal loans will help people make informed decisions about their financial needs, thereby reducing the risk of being exposed to deceptive financial products and services.
"To protect user privacy, developers must only request permissions that are necessary to implement current features or services. They should not use permissions that give access to user or device data for undisclosed, unimplemented, or disallowed features or purposes."
Developers must also only use data for purposes that the user has consented to, and if they later want to use the data for other purposes, they must obtain user permission for the additional uses, Google said.