Imagine this. You are fast asleep after a long day of work from home and at 2 a.m. your mobile phone rings. The caller is loud, abusive and refuses to listen to anything you have to say. What do they want? Make a Rs 5,000 worth repayment by tomorrow afternoon to avoid further phone calls.
That’s just one example of the recovery practices being employed by non-bank lenders, many of whom have aggressively given out unsecured credit under products such as ‘payday loans’, among others. With the economy deteriorating, the proportion of defaults has risen for these lenders, many of whom operate digitally.
Aggressive recovery practices in the Indian retail loan market were last seen during the 2008-09 crisis. At the time, private lenders that had rushed into unsecured loans turned to questionable practices to recover dues as defaults. The episode prompted regulator Reserve Bank of India to lay down a strict Code of Conduct for recovery agents.
More than a decade later, defaulting borrowers are once again complaining about harassment, this time from digital lenders.
The Harassment
Sandeep Kumar, a 23-year old student who studies computer science in a college in Bhubhaneshwar, had borrowed Rs 1,250 from mPokket, an instant digital loan service catering to college students. Kumar claims that under the national lockdown he had to move back home with his parents in Jamshedpur and was not available on campus. Kumar could not repay his dues because of lack of funds.
After recovery agents started calling him for repayments, members of his family and his immediate friend circle also started receiving messages regarding his loan.
“These agents call 40-50 times a day and often are very rude. They have threatened me that they will make my CIBIL score fall, which will make it difficult for me to borrow money in the future,” Kumar said. He also claims that, in a separate call, a recovery agent threatened to manipulate Kumar’s credit score by seeking multiple credit information requests with CIBIL. This is typically seen as a credit rating red flag that a customer is trying to desperately borrow money.
Pravin Kalaiselvan, a 25-year-old Mumbai resident who had borrowed Rs 15,000 from digital lender CashBean, claims that the company called his father on the due date of repayment for missing the deadline. Since Kalaiselvan runs a travel agency, he faced some short-term cashflow issues in the middle of the national lockdown. He has since repaid all his dues, he said.
“I had not provided them with my father’s number as a reference and yet there were calls made to him. It is completely illegal to approach family members on the due date for delaying payment by a few hours,” Kalaiselvan said.
Another borrower, who spoke on the condition of anonymity, shared with BloombergQuint a copy of a “legal notice” sent to him by a recovery agent working for CashBean. The note, which carries an RBI stamp and states that he would be referred to the Central Bureau of Investigation, which will take action against the borrower under Section 488 of the Indian Penal Code.
“We are continually calling my client and so many massages (sic) so many notices issued but no response from customer side, we provided to the customer 15 days loan but fail to make the payment, and our recovery agent continually follow up, but we are not received customer payment,” the note said.
While the RBI has permitted lenders to offer a moratorium on repayments between March and September, these borrowers said the lenders had not agreed to extend the relief to them.
Together these borrowers have formed a group called Save Them India, which is aimed at providing support to borrowers who are facing some form of harassment from lenders. The group, consisting of around 300 such borrowers, also provides legal services necessary.
mPokket did not respond to queries mailed on Tuesday.
In an emailed response, CashBean, which is run by PC Financial Services, said that it had been conducting an internal investigation into complaints against recovery measures which did not meet the company’s standards.
“Company has already conducted a detailed investigation into the complaint relating to sending fake letters/notices and findings against the concerned outsourced employees have been shared with their employer (i.e. relevant third-party contractor) and termination proceedings and FIR have been done accordingly,” a representative for CashBean said in the email.
The company also submitted a detailed investigation report to the RBI on April 7, it added.
Turn In The Loan Cycle
These smaller non-bank lenders, including payday loan providers, have had a good run over the last few years as they served customers which banks and large NBFCs typically avoid. Self-employed borrowers, college students, those dealing with temporary unemployment, have all actively tapped digital lenders to finance their immediate needs. These companies tend to charge higher interest rates but provide small cash amounts instantaneously to customers for time periods as short as two weeks.
While large private banks and NBFCs have also been pushing unsecured credit aggressively, many of them rely on data of existing customers to make lending decisions. They also claim to lend to the better-rated customers, leaving smaller newer NBFCs to lend to first-time borrowers and those with weaker credit track records.
It is the younger, perhaps first-time borrowers that will face the brunt as the loan cycle turns.
Students and young professionals probably do not realise that borrowing short-term funds at huge interest rates has a compounding effect on their financial health. Young people who have urgent cash needs and no other option could use these applications to borrow money, but there has to be a clear repayment plan in place.Amol Joshi, Certified Financial Planner & Founder, PlanRupee
According to the head of a digital lender, who spoke on the condition of anonymity, defaulting customers can fall into two categories, either they “promise to pay” or “refuse to pay”. In the first category, the lenders have some hope of recovery in the near future and customers can be sent regular reminders. However, customers who refuse to pay have either switched off their phones or have moved somewhere they cannot be traced.
The number of customers who are refusing to pay has risen from 4-5% earlier to nearly 20% for the industry, the lender estimated.
No formal data is available either on the loan books of these lenders or default rates since most of them are unlisted.
Code Of Conduct
After the experience of the 2008-09 period, the RBI had put down rules on recovery practices.
The regulator allows non-bank lenders to collect repayments through external agencies under a fee model. However, as per guidelines the regulator issued in November 2017, the lenders need to have a board-approved code of conduct, which must be followed by such agencies. The lenders must also conduct due diligence into an agency, before employing its services.
The banking regulator, however, clearly says that the presence of a third party service does not absolve NBFCs of their duties and customers have the right to initiate legal proceeding against them.
To close loopholes which may remain, the Digital Lenders Association of India, an industry body, recently came up with a revised code of conduct to control aggressive recovery practices.
“...there is a need for industry participants to maintain a strong code of conduct in order to prevent the rise of unscrupulous practices that could cause harm to the industry by reducing the confidence of customers, regulators and other market participants,” the code said.
The code of conduct mandates that each of its members have a fair practices code which must be followed by people directly employed by the company and third-party agencies. It also requires members to adopt ethical practices across its product and operations that treat their customers with dignity and respect and not resort to harassment or intimidation.
According to Anuj Kacker, co-founder, MoneyTap, it was essential for the industry to come up with the code of conduct to ensure that the regulator does not end up painting the entire digital lenders community with the same brush.
“We want to ensure that if and when the regulator brings in any additional norms to curb such practices, it is not detrimental to the rest of the industry, which is following healthy recovery practices,” Kacker said.
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