To undo the deadly noose of loan apps, RBI’s occasional warnings won’t do

The Reserve Bank of India (RBI) recently imposed a Rs 1 crore penalty on HDFC Bank for violating guidelines related to the practices adopted by its recovery agents. The agents were found to have contacted customers in a manner that disrupted their privacy, causing inconvenience.

Moreover, the RBI also found that HDFC Bank had violated the central bank’s directives on ‘Interest Rate(s) on Deposits’. The world beyond the pale of the licensed banking system seems far murkier, far grimmer.

As we flip through the pages of newspapers, we come across horrific instances of harassment and threats by loan recovery agents, forcing many to take their own lives.

Trapped in loan app cycle

Bhupendra, a resident of Bhopal, took a final selfie with his family before poisoning his two sons, aged eight and three, and then he and his wife hanged themselves. In a four-page suicide note, he mentioned being trapped in the loan app cycle.

He explained that recovery agents had been torturing him for months. Their final threat message was: “Tell him to repay the loan; otherwise, today, I will strip him naked and upload it on social media.” This tipped him over the edge, leading him to die by suicide along with his family. The incident occurred in 2023.

Pratyusha, a resident of Chinnakakani village in Guntur district, Telangana, had borrowed Rs 20,000 from a loan app to tide over a momentary crisis. Even after repaying several instalments, the exorbitant interest rates made it impossible for her to clear the debt.

Meanwhile, loan recovery agents began harassing her, even threatening to post her morphed nude pictures online, forcing her to take her own life. This incident took place in 2022.

Another case from 2022 that shook the nation was from Jharkhand. Monica Mahato’s father, a resident of Hazaribagh, had taken a loan from a finance company to buy a tractor. He was supposed to repay the loan in 44 instalments. He had six instalments left when the pandemic wreaked havoc.

Recovery agents of the NBFC barged in and forcibly seized his tractor. Monica tried to block them by standing in front of the tractor but was crushed to death. At the time, Monica was pregnant.

Modern-day moneylenders

These modern-day moneylenders are essentially non-banking financial corporations or NBFCs. An entirely new ecosystem, based on apparently easy-to-use loan apps, has mushroomed across the financial landscape of the country over the last decade, preying on those abandoned by the formal banking sector.

While they provide services similar to banks, they are not actual banks and do not hold full banking licences. They specialise in offering instant home loans, personal loans or car loans with minimal documentation and within a short timeframe. Their dominance is particularly evident in rural and semi-urban areas, where established banks are scarce.

They primarily target marginalised sections of society. While the ease of loan processing is the bait, the much higher rate of interest is the trade-off that borrowers must bear. However, as the cases above illustrate, they are notorious for their high interest rates, short repayment periods, and inhumane recovery methods.

Once a payment is missed, recovery agents begin publicly shaming the borrower, issuing threats over the phone, and humiliating them in front of neighbours and relatives, often pushing them towards extreme steps.

Recovery agents leave no stone unturned

From threatening legal action to using obscene language, they leave no stone unturned. They even illegally access borrowers' phone books, harassing family members and colleagues. They don’t hesitate to manipulate photos from the borrower’s gallery or social media and use them for explicit content, which often leads to suicides or severe mental stress.

Such harassment saw a sharp increase after the pandemic. Complaints about digital lending received by SaveThem India Foundation, for instance, increased from 29,000 to 76,000 between 2020 and 2021. Loan app scams are on the rise. Fraudulent operators have floated hundreds of such illegal apps that violate one’s privacy and gain access to bank accounts and other personal data with the lure of easy money.

The RBI has been urging people to be wary of such traps and to register complaints. According to the latest National Crime Records Bureau’s report, there was nearly a 25 per cent increase in registered cybercrime cases between 2021 and 2022, and about 65 per cent of the cybercrime cases registered were for fraud (42,710 out of 65,893 cases). In metropolitan cities, this increase was even more staggering (43 per cent).

Exorbitant interest rates

A survey conducted by LocalCircle from July 2020 to June 2022 showed that 14 per cent of those surveyed utilised instant loan applications. While this has come down to 9 per cent in the latest survey, those encountering exorbitant interest rates remain worryingly high.

Forty-five per cent of users said the rate of interest charged was over 25 per cent per annum; 10 per cent got it at 50-100 per cent interest; and one-fifth of those surveyed obtained loans with interest rates in the 100-200 per cent range.

Moreover, the latest survey also found that more than three-fifths of the respondents complained about extortion threats or data misuse.

Former General Secretary of the All India Bank Officers’ Confederation, Thomas Franco, warned that if public banks do not expand their presence, India’s poor and unorganised sectors will remain dependent on NBFCs, micro-finance institutions, and unreliable loan apps. While this would result in rising suicide rates, the rising cost of credit would also make small and informal units uncompetitive compared to larger ones.

Crucial role

However, NBFCs are still seen as playing a crucial role in making loans easily accessible to marginalised citizens. Therefore, the NBFC ecosystem has received active encouragement from policymakers over the past few years. Banks have even been directed to provide adequate funds to NBFCs to help them expand their operations.

In the name of making the microfinance terrain a level playing field for all, the RBI’s new framework in 2022 has meant that the market share of banks has reduced considerably, while that of NBFC-MFIs has grown to claim the top spot. NABARD’s Status of Microfinance in India 2023-24 shows that banks are losing ground, as their share in total loans outstanding fell from 43.67 per cent to 32.53 per cent during 2020-21 to 2023-24.

The space vacated by the banks has been occupied by NBFCs, MFIs, and Small Finance Banks. During FY 2024, all MFIs collectively mobilised Rs 91,789 crore, of which NBFC-MFIs and NBFCs constituted 97 per cent. The RBI has also removed the cap on interest rates charged by NBFCs, allowing them to lend to small and rural borrowers at exorbitant rates.

Too little too late?

The RBI has recently expressed concern about the usurious interest rates charged by NBFCs, the non-transparent methods of calculating interest, and the harsh recovery practices they deploy. RBI Governor Shaktikanta Das has issued warnings, stressing that NBFCs must not misuse the regulatory freedom they have been given in setting interest rates.

Concerns have been expressed even about the over-exposure of banks to NBFCs, which has climbed sharply in recent times, despite the RBI increasing the risk weight on such exposure. The RBI Governor, in fact, has signalled the possibility of contagion risks posed by the high concentration of borrowing in the linkage between non-bank lenders and the mainstream lenders that finance them.

Very recently, the central bank imposed a monetary penalty of Rs 10,40,000 on Hewlett Packard Financial Services (India) Private Limited for non-compliance with certain provisions. This includes its failure to disclose and explicitly communicate the rationale behind differential rates of interest to borrowers.

The RBI has also cancelled the registration certificates of a few NBFCs, while others have surrendered their certificates or left the business altogether; all of this underlines the volatility of the NBFC ecosystem.

Even the National Bank for Agriculture and Rural Development (NABARD), in its latest report, has sounded the alarm that “the significant presence of lenders and removal of caps on lenders have led to some pockets of indebtedness” that need close monitoring. It also advocated a close watch to ensure that “interest rates to clients, which are now de-regulated, are within acceptable limits”.

Balance needed

Noting the need for “striking a balance between expanding outreach and responsible lending”, it recommended robust credit assessment processes for NBFC-MFIs that specialise in microfinance. It also addressed India’s poor track record in meeting global standards on responsible digital finance to ensure the protection of client data and a robust system of checks and balances to prevent frauds, apart from pinpointing other risks.

The combined effect of demonetisation, GST, the COVID lockdown, accompanied by continuing rural distress, stagnant wages and the slump in incomes, have fanned the flames of risky borrowings made easy by the unregulated mushrooming of loan apps.

But in the context of the overall celebratory tone around the apparent Indian success story of “financial inclusion” and favourable policy prescriptions, the occasional warnings or expressions of concern by the RBI and NABARD about NBFCs appear rather perfunctory.

No effective remedy

There seems to be no effective remedy against these loan sharks; indeed, a cursory assessment would reveal that the sharks have thrived particularly because of the lax regulatory and permissive lending regime.

Citing the “doctrine of eclipse”, wherein a central law overrides a state law, the Supreme Court has rendered state governments powerless in regulating NBFCs. In its ruling against the Kerala government, it held that state laws against moneylending do not apply to NBFCs. Therefore, the responsibility of protecting borrowers from falling into loan traps, controlling recovery agents, and ensuring reasonable interest rates charged by NBFCs rests entirely with the central bank and the Union Ministry of Finance.

If they fail in this task, there is a growing concern that as economic distress deepens, more people will be driven to suicide by mounting indebtedness and the vicious cycle of loans.

(The Federal seeks to present views and opinions from all sides of the spectrum. The information, ideas or opinions in the articles are of the author and do not necessarily reflect the views of The Federal)