The Centre is mulling a crackdown on apps offering cash loans along with working on ways and means to ban coercive recovery procedures, cap the rate of interest and require mandatory registrations.
The move comes after increasing reports from around the country of people falling into debt traps, with at least 12 cases leading to suicide since late last year, according to a report by Hindustan Times.
The central bank constituted on January 13 a working group on digital lending, including lending through online platforms and mobile apps, after such reports poured in.
These entities are no different from illegal moneylenders who have been operating in India for ages and typically lend against land or gold ornaments to low-income groups. They too, like typical moneylenders, engage in coercive lending practices to get their money back. Naming and shaming the borrower among his/her contacts is common.
According to industry observers, there are many Chinese apps which are active in the digital lending space allegedly leaking personal data and often harass their borrowers and family members at the first sign of loan default.
These entities source money from somewhere (mostly unknown individuals) to on-lend to borrowers at usurious rates of interest for a very short tenure starting from 7 days to 15 days. The average loan amount varies from Rs 3,000 to Rs 50,000.
The interest rate charged can vary from 60 percent to 100 percent as against a regular microfinance loan where lending rate is typically in the range of 22-25 percent and a bank loan with 7-12 percent lending rate.
According to a 2007 report of RBI’s technical group set up to review state legislations on money lending, all states require registration or license to carry out money lending. These rules fix maximum rates of interest, and intimidating debtors or interfering with their day-to-day activities are prohibited. State laws are applicable to individuals, firms, association of individuals and companies, barring RBI-regulated banks and financial institutions. Some state laws are guided by the rule of ‘damdupat’, the Hindu law of debt, which says the amount of interest recoverable at any point can’t exceed the principal.