This story begins sometime in 2020. Mr. JA needed a small amount for a one-time expense. He only needed the money till the month-end and wanted to pay it off at the end of the month.
He chanced upon these instant loan apps. All the apps showed that he could borrow a small amount, repay it after 15 days, and pay a small amount as interest.
How to get a loan through the app:
- Download the app
- Share your Aadhar and PAN Card
- Give the app access to your contacts and messages (who reads app permissions anyway!)
- Apply for a loan and get the loan within a short time
Easy? Maybe not
But, there were some problems that users faced:
- If the loan approved is 1000 rs, the person gets only about 700 rs (on average), the rest being deducted as “Processing Fees” or some such expense.
- If there is a delay of even one day in repayment, collection agents start calling up.
- If there is a further delay for any reason, people on your contact list are called up and payment is demanded from them.
- There is a steep payment for late payment.
- When you go to repay, you realise that the interest rate is actually much higher. Let’s take this example from an actual app (FairMoney):
Amount: 5000
Processing Fees: 250 + GST = 295
Interest (quoted interest is 24% per annum, pro-rated to 60 days): 200
Amount that will be disbursed: 4705
Amount to be repaid: 2600 (after one month) + 2600 (at the end of second month) = 5200
Let’s do these numbers again using middle school maths:
Principal: 4705; Amount: 5200
Interest: 5200-4705 = 495; Interest % = 495/4705 = 10.5%.
If interest for 2 months = 10.5%, Interest for 12 months = 63%, not 24%.
- Part-payment is made at the end of the first month. This means that the customer should not be charged the interest on that amount in the second month. But the customer is charged that interest.
- The customer’s data can be easily stolen or sold. In August 2020, security researcher Anurag Sen found the database of Chinese instant loan app, Moneed, on an online server. The Enforcement Directorate (ED) is researching data theft by Chinese loan companies.
The pursuit and the hunt
By December 2020, the police started to find out about these loan apps. Some bank accounts were frozen after complaints. Some users complained of harassment by the loan apps. Bit by bit, a fairly scary picture emerged.
They then started looking for details.
To their surprise, they found that many of these apps were run by Chinese companies. Some of them had Chinese employees in India, some had hired Indians to do the local work. Most of these apps had no offices, or had empty spaces listed as office addresses.
As of January 14, many Indian and Chinese nationals had been arrested by the police. One of them was about to board a flight out of the country when he was arrested.
On December 23rd, the RBI also issued a notification and warned people against using these apps.
Google steps in
In mid-January, Google delisted some instant loan apps from its play store. Google did not share how many apps have been delisted.
Sidenote / Tangent
Payday loans are loans that are taken for a very short period of time. They carry a very heavy interest and are for the short term.
So, the business model in itself is neither new nor unique. What is new and unique is:
- The Chinese ownership of this business. The apps are almost uniformly from a single country of source – China. The data is stored on Chinese servers, and the money flows to China too.
- The harassment for late payment, even by a day, is not a regular feature of payday loans.
- The absolute control of the borrower’s device and its data. There is no need for a payday loan company to steal that much data from the borrower.
- The way it operates – Payday lending is legal in some states in the US. But in India, it is illegal to offer loans unless one has permission from the RBI. To sidestep this requirement, these companies create a tie-up with a Non-Banking Financial Company (NBFC). The loans are given using the license of the NBFC. The NBFC gets more business, and these companies can avoid the regulatory approval and scrutiny that lending institutions in India are subject to.
- India does not appear to be the only victim. In the apps that we surveyed, some of the feedback comments were from countries like Malaysia.
Endnote/Current state
When we checked today, we found over 100 such apps still present and appearing in the top 10 search results on Google Play store.
The best part is, the more you search, the shadier the apps get. The first time we searched for instant personal loan apps, we got some results from Hero FinCorp. But 2-3 iterations later, only the shark apps made an appearance. The NBFC apps, if any, were not even visible.
On most of these apps, the reviews are brief and recent. Majority of these could be paid reviews.
The strange thing is, that at 30%, India’s saving rate is among the highest in the world.
Saving rate is how much a family saves out of its income. Indians are, essentially savers. Even outside India, Indian communities are known to have a high saving rate.
When a community saves, they should obviously need to borrow less. But the amount of loans that these companies appear to have disbursed (and continue to disburse), is very high.
This leads to an interesting question – why are loan shark apps flourishing in a culture that has a high saving rate? A culture that has never needed anything like payday loans?
While the police and other authorities are working to get to the bottom of this, our security is in our own hands. Payday loans, by themselves, are designed to put the borrower in a debt trap. The added risks in this case should make us think very hard about the need for short term loans.