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‘Like fraud, usurious’ — digital lending apps in spotlight for high interest rates & fees

Industry data show that economically weaker borrowers are being forced to take loans, due to personal or work-related circumstances, at rates well above what they can afford.

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New Delhi: Digital lending apps are becoming extortionate and usurious, and stand to inflict financial harm, especially on economically weaker sections, say experts working in areas of financial inclusion and with economically vulnerable Indians.

A 28 November report from the Fintech Association for Consumer Empowerment (FACE) shows that the processing fee and interest rates charged by these apps disbursing loans are extremely high.

A previous report by the same organisation highlights that the overwhelming majority of these small loans are taken for urgent purposes. Further, the data shows that the average loan size is just Rs 12,000.

Taken together, the data indicate that economically weaker borrowers are being forced to take loans, due to their personal or work-related circumstances, at rates well above what they would ordinarily be able to afford.

FACE is a non-profit industry body of fintech lenders, aiming to promote responsible digital lending practices through self-regulation and customer empowerment.

The November FACE report covers the July 2022 to September 2022 period and is based on a survey of 21 FACE members that include digital lending services and platforms such as Fibe (formerly EarlySalary), Kissht, LoanTap, and Paisabazaar. Its members are estimated to account for over 50 per cent of the retail non-bank fintech/digital consumer lending industry

The report notes that “in simple average terms, the processing fee spread (range between minimum and maximum) is 1.1 per cent to 5.3 per cent and the interest rate spread is 14.5 per cent to 38.3 per cent”.

“These loans have usurious interest rates but the interest rate calculation depends upon multiple factors,” Monami Dasgupta, head of research at Bangalore-based D91 Labs, told ThePrint.

D91 Labs is part of Bangalore-based Setu, a company building software infrastructure that allows for online financial services. Other companies can use this software to connect to potential customers, especially those in rural India who would otherwise not have access to financial services such as loans and savings accounts.

“From a consumer’s point of view, the cost of borrowing a Rs 12,000 personal loan at an interest rate of more than 20-25 per cent is more than the average industry rate, which is around 18 per cent (the rate charged by traditional banks for salaried individuals),” Dasgupta added.


Also read: Indian banks are heading into a trap. High inflation and interest rates are a deadly mix


‘Unhealthy practice’

An earlier FACE report, released in July, said: “Emergencies, medical and education/skilling were the top reasons for customers taking loans.”

“Two-thirds of customers reported their credit needs (as) critical, which have to be somehow funded… for many low/medium income customers, with choppy cash flows and not enough savings/safety nets/insurance cover, credit is key to meeting such needs,” it added.

In the context of loan-seekers who are in dire need of credit to survive and only seek micro loans, Praveen Khandelwal, secretary general of the Confederation of All India Traders (CAIT), also decried the interest rates and fees reported by FACE as too high.

“This is like a fraud and unhealthy practice being played on innocent money-seekers by the digital lending apps,” he said. “Generally, it is middle-class or lower-middle-class traders, etc, who are in need of funds for conducting their business activities, and since banks are not supportive in nature and also have roadblocks in the form of huge paper formalities, the traders look for companies owning digital lending apps.”

The interest rates (ranging between 14.5 per cent and 38.3 per cent), Khandelwal said, are too high and make the business vulnerable, non-profitable and at high risk of closure.

Dasgupta explained that the reason behind high interest rates was that such loans are not collateralised and the borrowers may not have a steady flow of income.

“In case of a default, the loan becomes a liability on the lender’s books,” she said. “The fee charged by the fintech company depends upon multiple factors, such as how difficult it is to reach the end customer. If the customer is residing in a remote location, then the cost of servicing the loan increases and so does the fee.”

However, she also said that for loans in Tier 1 cities and accessible areas, there’s little reason for the fees to be so high, adding that digital lenders have a responsibility to assess a borrower’s ability to repay a loan before disbursing it.

“The vulnerability of a borrower depends upon his/her ability or inability to repay the loan,” Dasgupta pointed out. “If the borrower’s underwriting (based on their current outstanding loans, their cash flows, and other expenses) has not been done properly and yet they have been disbursed an expensive loan, then the loan product has been mis-sold to the borrower.”

When contacted by ThePrint, FACE said: “This is risk-based pricing that companies have and FACE as an association would like to refrain from commenting on this (fee and interest rates of digital lending apps).”

(Edited by Nida Fatima Siddiqui)


Also read: Bank credit has bounced back, but rising interest rates & inflation can be new hurdles


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