Rina Chandran
Digital lending platforms in India have come under greater scrutiny recently for their methods, including the collection and alleged misuse of borrowers’ data, underlining the risks to driving financial inclusion with newer technologies.
Mobile lending apps have mushroomed in India and elsewhere in recent years as smartphone use surged, and financial technology (fintech) companies rushed to fill the gap in access to banking services.
Unsecured loan apps, which promise quick loans to even those without a credit history or collateral, have been criticised for their high interest rates, short repayment cycles, aggressive recovery methods and misuse of borrowers’ data.
Yet they have become a mainstay, particularly during the coronavirus pandemic as job losses mounted, said Tarunima Prabhakar, a researcher at the Center for Long-Term Cybersecurity at the University of California, Berkeley.
“The goals of rapid financial inclusion, consumer protection and data security are often in conflict,” she said, citing concerns especially around unlicensed firms, and getting meaningful consent of users on digital lending platforms.
“Lending apps have the potential to generate consumer benefits, but require strong institutions and financial literacy. It is difficult for individuals to develop a full understanding of the consequences of sharing personal data.”
Globally, about 1.7 billion people do not have a bank account, leaving them vulnerable to usurious moneylenders and at risk of being excluded from vital government and welfare benefits, which are increasingly digital.
When Bhumana Prasad lost his housekeeping job during India’s coronavirus lockdown and could not keep up with his rent, he took out a loan of 3,000 rupees ($41) after receiving an instant loan offer on his phone.
Within weeks he found himself locked in a cycle of debt, pawning his family’s jewellery and borrowing from friends to repay mounting costs — adding up to 400,000 rupees since his first loan in November.
“I was called a thief and would receive at least 1,000 calls a day from agents, who would constantly abuse me,” Prasad, 27, said in a phone interview from his home in Telangana state. “I contemplated suicide because the harassment was not ending.”
Personal lending apps — which in India are mainly intermediaries connecting borrowers with lending institutions — fall in a regulatory grey zone, as the central bank does not oversee intermediaries, and does not stipulate terms.
But after reports of several suicides linked to harassment by loan providers, the Reserve Bank of India (RBI) warned against unauthorised digital lending platforms, and formed a working group to draw up an “appropriate regulatory approach”.
“Digital lending has the potential to make access to financial products and services more fair, efficient and inclusive,” the RBI said in a statement this month.
But lending apps have raised “certain serious concerns,” it said, adding that the working group will identify risks and suggest measures for greater consumer protection, and “robust” data governance, data privacy and data security standards.
With about 190 million unbanked adults, India has the most number of people outside the formal financial sector after China, according to the World Bank. Prime Minister Narendra Modi’s government has made financial inclusion a priority as part of its Digital India Mission.
Mobile lending apps in India, which give small-ticket loans for short tenures, have been quickly embraced by the newly salaried, college students, informal workers and others who are just below the income margin at which banks would serve them.
— Thomson Reuters Foundation
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