Don’t borrow at high rates for recurring expenses, keep track of expenses against your monthly income
The lockdown has certainly made things perilous for people around the world. One such story is that of a family member of a colleague, Mukesh Shah, who had taken out a loan of Rs 3,000 from an instant loan app and had to repay Rs 7,000 to the lender in one week.
Struggling to make ends meet due to the lockdown situation, Mukesh had resorted to loans of up to Rs 1.5 lakh from not one, but 25 different lenders. The payback period granted to Mukesh to repay 70% of the amount owed was only one week. Mukesh, was unable to pay this large sum due to which lenders started calling his family, friends, posting his photos on facebook with ‘fraud’ tag on his forehead to create groups on WhatsApp with his friends and family – the lenders left no other way for him but to openly talk to his family about his loan.
Although the colleague’s family member helped Mukesh get rid of the loan trap, unfortunately, many people like Mukesh could not bear the denunciation and shame that led to many suicidal deaths.
The rise of fintech startups in India has led to the proliferation of many unregulated lending apps, causing people to be harassed and plundered by charging exorbitant interest rates. Last year, many dodgy loan applications with ties to China wreaked havoc on the lives of many borrowers, leading some of them to end their lives due to harassment, as well than to their family members. The aggressive recovery practices of tech-based loan sharks have caught the attention of the RBI, which has now stepped in to bring a strict code of conduct to lenders.
As a fintech lending entrepreneur, reports of young individuals who committed suicide simply because they could not repay small loans shocked me greatly. During the first Covid lockdown, the financial section of many newspapers was riddled with stories of how tech-based digital loan sharks have upended the lives of borrowers and their families. These sharks have not only resorted to relentless harassment of borrowers, but also to name and humiliate them by reaching out to their families by accessing their contact lists, posting pictures of the borrower on social media and by creating application groups with friends and family of the borrower. To keep things straight, these loan sharks operate the same or worse than illegal pawnbrokers. Although they do not threaten through physical means, they subject borrowers to mental torture
How do tech-based loan sharks work?
These entities first launch an app on the Play Store or have a website request process. Aggressive marketing is done on social media platforms like Facebook, Instagram and large-scale email and SMS marketing campaigns to spread the word. Instead of offering whatever amount the borrowers want, these apps lend small amounts, expecting faster repayment i.e. within 3-15 days, without giving any idea to the borrower of what he signs up for.
The amount of the loan granted to the borrower comes from unknown individuals, mostly residing abroad.
The average loan amount offered ranges from Rs 3,000 to Rs 50,000 and is offered for a term of 3 to 15 days at an interest rate of 60% to 100%.
A lengthy documentation process is not involved and the lender just asks the borrower to submit a copy of his photo, Aadhar card and PAN card. Standard income and verification checks are not performed.
Although these illegal loan apps have been around for a long time, the matter came to light last year when several suicides linked to these apps were reported to Telangana police.
Being aware is the key to good borrowing
To ensure that borrowers do not fall prey to the unfair practices of illegal loan applications, they must be aware and choose the right lender.
Verify credentials: When seeking a loan, a borrower should first verify the credentials of the lender and only proceed with a lender, be it a bank or an NBFC registered with the RBI.
Reviews and ratings are important When choosing a lender, it is also worth checking published ratings and reviews. This will help the borrower to get a fair idea of how the lender works and any unethical practices by the lender would be reported by their past borrowers.
Verification of Ombudsman Complaints: Also, one should not forget to verify publicly visible Ombudsman complaints filed by a borrower against the government, banks, etc. Complaints can be checked online https://rbi.org.in/Scripts/Complaints.aspx
Allow entry only if you find it trustworthy: Data is another aspect a borrower should check. Lending apps get full access to the borrower’s contact details, making it easy for them to name the borrower and shame them. Always check the data collected at the time of the loan application.
Ask yourself – Am I going to land in a debt trap?
When in need of cash, instant loan disbursement service would emerge as a preferred bet. However, this is not the case. The interest rate levied by the lenders is 60 percent -100 percent of the borrowed loan amount. In an emergency, we could borrow at high rates. But be clear if it’s a real emergency or a recurring expense. Don’t borrow at high rates for recurring expenses. Keep a clear track of your recurring expenses against your monthly income. Don’t fall for the temptation of an easy loan just because it’s available.
RBI decided to intervene
Taking cognizance of the issues in hand, RBI has already issued a warning to applications against unauthorized lending and emphasized a code of fair practices. To further rectify the situation, the regulator is expected to announce new regulations soon, controlling the operation of lending apps.
2020-21 has been a difficult year for many of us. There was a sharp increase in borrowing and defaults. While loan apps seem like a good source for getting instant funding, protecting yourself from these digital sharks is imperative to living a financially happy life. In these times, it is important for everyone to be financially conscious and digitally sound to stay out of illegal lending schemes and only borrow from RBI registered sources.
The author is Founder Credit Fair
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