(BLOOMBERG) - Technology has resulted in a new kind of financial scourge - digital loan sharks.
These unscrupulous lenders have started to inflict pain on many borrowers in countries which have allowed the proliferation of financial apps, such as in India.
Take Mr V. Rajapandian, who used to work in a heat treatment plant. He lost his job recently because the loan sharks started to demand payment from his company when he defaulted on a US$132 (S$177) loan from a mobile app.
As digital lending explodes across India and other developing economies, such cases have become increasingly common. Many apps capitalise on borrowers' lack of financial literacy, charging interest rates as high as 500 per cent annualised and in some cases employing heavy-handed collection tactics that Indian activists have linked to a string of suicides.
Globally, Google has blocked hundreds of apps to protect borrowers from "deceptive and exploitative terms". Officials in China, Indonesia and Kenya followed suit, shutting down scores of start-ups promising easy cash to the unbanked.
India, which has among the highest number of such apps globally, has also taken action. The Reserve Bank of India raised the prospect in November of new rules for digital lenders. A panel set up by the bank found that more than half of about 1,100 digital loan providers were operating illegally. Analysts say platforms are often owned by offshore entities, making it difficult for India to take legal action.
The Reserve Bank of India could tighten digital lending rules as early as this year. Guidelines under consideration include severe penalties imposed on non-compliant apps, with a particular focus on weeding out unregulated loan providers. Bigger digital payment companies such as Paytm have not been accused of similarly predatory behaviour.
The risk is that unscrupulous firms may step up manipulative practices as stress builds in personal lending. Delinquency levels for consumer credit rose in September from a year earlier, Reserve Bank of India data showed last week.
Activists say tougher regulatory action could also help save lives. Over the last year, SaveThem India Foundation, a non-profit organisation that assists victims of cyber crimes, has connected 17 suicides to harsh recovery tactics.
Mr Pravin Kalaiselvan, the organisation's director, said his staff fielded more than 64,000 calls last year from Indians complaining of harassment. That figure was up 31 per cent from 2020. Hundreds of police complaints have been filed against debt collectors, though one local court recently ruled that their methods could not be construed as abetting suicide. "Had they taken action a year ago," Mr Kalaiselvan said of regulators, "we wouldn't have seen so many take their lives."
For first-time borrowers like Mr Rajapandian, who worked as a manager at a heat plant in Chennai, approaching a digital lender in 2020 was his only option in lieu of credit for a traditional loan.
As the coronavirus surged across India, shutting factories and displacing millions of workers, Mr Rajapandian tried to prepare for the worst. CASHe, which he downloaded on his Android phone, offered a quick infusion of money to supplement his US$200 monthly salary and help him care for his wife and four-year-old son.
But he struggled to make payments on the loan, which had a 300 per cent interest charge. That's when the threats started, he said.
For months, he said, CASHe agents called him several times a week, "abused my parents and wife", and contacted the heat plant.
When his boss became increasingly irate, threatening dismissal, Mr Rajapandian left his job. Last month, he filed a police complaint.
A local police station in Chennai confirmed receipt of Mr Rajapandian's complaint against the app, which was filed on Dec 17. CASHe, a Mumbai-based firm founded in 2016, did not respond to a detailed list of questions. Mr Rajapandian said the calls have not stopped.
They've become so abusive, he said, that he tries to keep his new employment under wraps so collectors do not jeopardise that job, too.
"It's not about the money any more," he said.