The rise of proxy-driven predatory lending we have witnessed in India has its roots in China’s recent peer-to-peer (P2P) lending crisis.
On 5 February, MeitY (Ministry of Electronics and Information Technology) banned 232 betting and lending apps on the recommendations from the Ministry of Home Affairs (MHA). New Delhi is trying to find a solution to the problem of predatory lending by Chinese nationals operating from locations either in the Chinese mainland, Hong Kong or Southeast Asia.
The P2P scams became a matter of public discussion in China between 2015-17, but Chinese authorities haven’t been able to address the problem of shadow financing entirely.
In China, these scams have become a nexus of criminal activities, including online betting, online gambling, crypto-currency transactions, lottery, and other activities. Much like the predatory lending scams in India, the operators of these online lending schemes have escaped to Hong Kong or other Southeast Asian destinations. They continue to target Chinese citizens from here, with easily accessible loans which leave some entrapped.
In 2019, Chinese police froze the assets of 380 P2P lenders, almost $1.5 billion, in an investigation called ‘Fox Hunt’ that spanned 16 countries in operation, It led to the detention of 16 individuals.
These individuals who were initially running the P2P companies in the Chinese mainland initially moved their operations abroad or were on the run from the law. Though operation Fox Hunt has been used by China’s anti-corruption entities to target officials or dissidents who allegedly escaped Chinese mainland, the action against P2P scams was driven by a public outcry by those who lost their savings to these dubious lending operations.
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China’s problems
In 2017, the P2P lending industry recorded transactions amounting to $445 billion, which was the peak of the industry’s expansion in China before the government crackdown began. China became one of the biggest P2P lending markets in the world before the demise of the industry. It led to an over $1 billion scam involving major Chinese banks and systematic risks that had gone unnoticed for a while.
In 2016, Ezubao, a P2P lending company, was declared a Ponzi scheme after failing to repay $5.5 billion to the investors. The company’s operations involved taking as much as $7.6 billion from investors, including the misappropriation of funds by the employees of the Agricultural Bank of China for the promise of getting between 9 to 14.6 per cent interest.
The following months saw a crackdown against the underbelly of unregulated P2P lending by companies operating like financial institutions without much oversight.
In 2017, the Chinese state media tried to explain the rise of the unregulated financial lending industry.
“China has not established a sound social credit system, and credit cards are not as popular as in some advanced economies. Online payment has instead emerged as a well-received alternative to cash. Crowdfunding has picked up momentum as a wave of entrepreneurship has hit the country,” wrote Xinhua News Agency.
But the years of unregulated lending practices resulted in financial hardship for many families.
“When P2P was prevalent, some lending institutions put their eyes on profit, causing many families to break up and die, which is still hard to forget today. To this day, how many young people are still on their way to paying off their debts, and even more so, how many people’s lives are still in the shadows after the P2P tide has ebbed and this life is roughly ruined” said a Weibo user commenting on the aftermath of the P2P scandals.
Even with the crackdown on P2P lending scams, the problem hasn’t entirely disappeared. In 2019, the Chinese fintech firm 51 Credit Card was investigated by police for harassing borrowers and using underhand tactics
“The Hong Kong-listed company, which operates a credit card management app that matches borrowers and lenders for small loans, hired external debt collectors who pretended as government officials to threaten borrowers, police said in a statement on its Weibo social media site late Monday”, reported South China Morning Post.
In 2019, the company had 83 million registered users and managed over 138 million credit cards, and a large P2P lending operation which had used coercive tactics to recover the money lent.
The crisis of P2P lending has also been followed by the myriad world of cryptocurrency, which has made it easy to hide financial transactions. The Chinese government’s strict actions against cryptocurrency in 2021 completely crippled cryptocurrency mining in Xinjiang province.
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What can India do?
The latest action by MeitY to ban the Chinese lending applications results from a growing frustration with mobile apps with servers in China and Southeast Asian countries. These loan apps used a loophole by tying up with NBFCs (non-banking financial companies) through a Memorandum of Understanding (MoU), which allowed these companies to engage in predatory lending – outside of the oversight of regulation.
Some Indian nationals have been made directors of these dubious lending operations, and some even learned Chinese to become part of the business operation.
The Reserve Bank of India (RBI) had to tackle the growing menace of Indian nationals forming NBFCs and transferring their ownership to foreign nationals with official approval. The practice has allowed the Chinese loan apps to operate in India with the help of local directors, who are often used to harass borrowers.
Some borrowers in India have even died by suicide when harassed by lenders.
According to the new RBI guidelines, the lenders can’t increase the customers’ credit limit without their consent, and there should be upfront disclosure of the annual interest fee. The guidelines also state that the digital lender should take explicit consent from the customer before collecting any data.
The issue has become so serious that Finance Minister Nirmala Sitharaman had to make a statement in the Rajya Sabha.
“We have taken concentrated efforts. RBI, MeiTY, MCA and Ministry of Finance are working to ensure the common man is not cheated by any apps,” said Sitharaman in December last year.
But banning the apps is a short-term solution to the lending mafia, which has many tactics under its sleeve. Given the current phase of difficulties in India-China relations, we can’t expect much help from the Chinese government in fighting the menace of predatory lending either.
The solution will emerge from a more careful analysis of the actors behind these operations.
The government will need to map the network of these lending apps, trace their operational location, and approach the jurisdiction with the request to prosecute the individuals behind them. Until the government uses its authority to find individuals operating from offshore locations, new apps with the promise of millions will continue to lure Indians.
The author is a columnist and a freelance journalist. He was previously a China media journalist at the BBC World Service. He is currently a MOFA Taiwan Fellow based in Taipei and tweets @aadilbrar. Views are personal.
(Edited by Theres Sudeep)