By Vishwa Naik and Soumya Ahuja
Payday loans sound like nothing short of a godsend. Imagine living paycheque to paycheque, trying to cut it in today’s world when suddenly you’re hit by an emergency. In 2020, an emergency hit us all. As the pandemic hit and lockdown ensued, the demand for payday loans began to skyrocket.
For a lot of us, the concept of payday loans might be foreign.
Put simply, payday loans are single instalment loans that act as bridge financing between pay periods, helping to cover immediate money needs before your next paycheque. It is a short term solution for solving for the velocity of pay, not for the quantum of pay. Upon receiving your paycheque, the instalment and interest become due.
Before we dive into the murky underbelly of payday loans in India, let’s quickly highlight the positives. In a country where wages are already too poor to combat rising inflation, the coronavirus shutdown impacted cash flows adversely, reducing the already scant volume of money reaching the majority of our workforce. One might imagine that banks and credit cards should be able to help them in this situation. However, institutions deem most of these people ‘non-lendable’ or ‘sub-prime’ because of unsatisfactory credit history and their inability to provide collateral. Most importantly, they often have very little savings to keep with the bank, making it difficult for banks to monetise the idle savings balances.
Conversely, payday lenders say yes to everyone. In today's digital iteration, after a few document upload screens, money is credited to the borrower's account instantly, temporarily relieving some of the hurt caused by the pandemic. Payday lending has always done a great job of being a lender of last resort to millions of hard-working people. However, behind the veil of financial inclusion and accessibility is a ruthless predator that has been preying on the economically vulnerable for years.
The Payday Lending Problem in India
In India, predatory lending actually dates back to the Vedas, which speak of ‘kusidin’ meaning usurer. It’s still disturbingly prevalent in villages and such, where there have been reports of families losing their lands and farmers being forced to prostitute their wives to clear debts. Their modern counterparts run amuck on the Play Store, most of them unregistered, unregulated money lending apps that mushroomed in India during the pandemic. Targeted towards lower-income borrowers - the segment of people who have enough technological awareness to operate an app but not enough of an understanding to double-check sources and read the fine print, these apps are often designed to trick users and take advantage of their vulnerability. Some cleverly operate under names similar to legitimate fin-techs that offer similar services in a safe and legal fashion.
Many operate without the tie-ups with NBFCs or banks digital lenders usually need, as per the co-lending model. They’re able to reel users in by gamifying eligibility amounts. At first, users are only eligible for INR 500. Once they've paid back INR 500, their eligibility is increased to INR 5,000. They keep increasing the eligible amount without necessarily assessing capacity to repay (Assessing a borrower's capacity to repay is one of the key tenets of lending, with legal precedent dating back to 1934).
Capitalising on the general public’s sense of desperation during the pandemic, these digital lenders’ rates touched 800-1,000% on an annualised basis.
According to reports, 1.4 crore transactions amounting to INR 21,000 crores took place until December, when several of these apps were flagged and taken off the Play Store.
Authorities also arrested the Indian and Chinese nationals at the head of the scam. According to representatives of Cashless Consumer, many of these apps operate using the same white-label app and server developed in China. In fact, most of India’s payday lenders are in fact heavily inspired by shadow banking in China.
What's even more dangerous than the usury committed by these apps is the fact that they routinely hack into your phone through a backdoor that is established upon downloading the app. This ‘backdoor’ is then used to mine user data and access private information like photos and contacts without any layer of consent whatsoever. Not only is this data stored on unknown servers, but also used to ‘name-and-shame’ schemes, as a means of social sabotage - their form of collateral. This collateral forms the basis for horrific harassment on borrowers for repayment, with female borrowers often bearing the brunt of the worst practices.
The Threat to Women’s Financial Independence
The financial journey of women borrowers has been one of tremendous optimism. Between March 2014-2020, the number of women borrowers went up from 2.4 crores to 7.8 crores. Most of these loans were smaller ticket loans. CIBIL reports indicate that as of 2019, the share of women borrowers went up to 26% compared to 21% in 2013. Even awareness and credit consciousness among these women borrowers has improved, with 62% growth in self-monitoring women consumers between 2018-2019, far greater than the 30% growth of male borrowers. This optimism has seen a steady rise in the number of women-led/women-focused fintech companies too. This is a massive change compared to the past, where women borrowers were primarily spouses, used as co-borrowers to lower stamp duty costs in the purchase of property.
When ‘loans for porn’ ran rampant in China, the Beijing Daily highlighted the story of a young woman who took out a loan to start a small business. Over four months, her debt nearly doubled due to interest rates. Initially, to tide over the interest payments, she was forced to send sensitive pictures, before having to reach out to her family for help. Such practices have started to reveal themselves in India. One case was of a female borrower from Tamil Nadu. When she tried to reason with the collection agent following a missed payment, he offered her leeway in exchange for her video calling him naked. The same woman attempted suicide in November 2020. Another account followed a Hyderabad-based media professional who found herself cash-strapped because of the pandemic. A delayed payment, for which she offered to pay late fees, led to abusive and threatening phone calls and WhatsApps from recovery agents. The weeks of constant harassment, which only kept getting worse, put her in a suicidal state.
Several borrowers didn’t make it out of the cycle of constant shame and embarrassment. A Pune-based recovery agent was arrested in January 2021 for abetting the suicide of a 25-year-old woman from Visakhapatnam. According to the police, she hung herself to end the mental agony and humiliation over defaults. At the time of suicide, she had paid back 80% of the loan with interest. However, she was still being bombarded with voice messages and humiliating messages, putting her in a state of severe depression.
There have also been cases of the apps and agents sending messages and creating group chats with the borrowers’ contacts. A Kerala-based businessman reported that agents sent out a personal photo of his to people he knew, branding him a fraud. Another borrower said that recovery agents threatened to make abusive calls to all the women on his contact list. Again, even in the case of male borrowers, it's the women that are harassed in the process. Users have also noted their bank accounts being used for transactions they didn’t approve. At the time of writing, we have seen many more instances of harassment of women for repayment of payday loans, but far too many women are afraid to speak out. To get a sense of how much hurt has been caused by these apps, search ‘#Scon20077’ or ‘#SaveThem’ on Twitter.
The problem boils down to the under-penetration of traditional financial institutions in segments that need them. Women represent a substantial subset of this segment. As borrowers take on more and more debt to service the initial loans, the hole in their pocket burns deeper - further dissipating paths to formal credit. The vicious cycle of predatory lending, exploitation and abuse continues. The importance of availing legitimate credit cannot be understated, especially for the new generation of working women in India. The 21st century represents a seminal moment in the financial independence of women, and predatory payday lending poses a major threat.
In order to efficiently tackle the problem, it is important to classify them into buckets. The first bucket involves regulation and authorities. We have already seen the RBI respond in a sizeable way, cautioning the general public against instant loans. The statement warned citizens to verify the origins of the companies offering these loans, and not to share KYC documents with unidentified entities who should, instead, be turned in to the police. There has been a major investment in investor education by the RBI on primetime TV, with advertisements alerting users to be ‘savdhaan’ & ‘satark’. Additionally, the noose must be tightened on ghost NBFC’s. Far too many entities merely hold on to the NBFC license without having any operations. All licenses need to be reviewed thoroughly, with a renewal process every 3 years. It is these licenses that allow malicious platforms to set up shop with their capital in India. Talked about previously in ‘Data Colonialism’, the need to enact robust data privacy and protection laws has been advocated. These payday lending apps have made the need for these laws far more dire.
The second bucket is more about prevention and less about a cure. It is clear and apparent that the velocity of pay is a major contributing factor in rampant payday lending. In a country as large and as poor as India, receiving your pay every 30 days is not merely enough. The USA runs payroll every 2 weeks, and they still have a huge problem. Companies need to step up and acknowledge that the 30-day pay cycle is putting their employees at risk. On-demand access to earned pay should be the new normal. Our start-up - Haasyl, aims to solve this problem for companies by providing earned wage access with no impact on the company’s cash flow. Having access to what they’ve earned on-demand, rather than having to wait 30 days would help combat emergency expenses, and reduce the dependency on loans - eventually promoting financial health and security.
About the author
Vishwa Naik is the Founder of Haasyl- a company dedicated to building financial resilience for India's workforce. While working across Finance and tech firms, he saw the major flaw in how money flows- the wealthy get money cheap and the poor get preyed on by usurers. Through Haasyl, he wants to give millions of low-income workers across the world a fighting chance. Vishwa holds a Masters in Entrepreneurship from Bayes (formerly known as Cass) Business School, London.
Soumya Ahuja leads Enterprise Content Strategy at Haasyl. Previously she worked at Adfactors, where she realized that the best form of PR is storytelling. She extensively studies the relationship between women and money as she sees Financial literacy as one of the major drivers in women empowerment. Soumya holds a Diploma in Business Management and Entrepreneurship from the Indian School of Management & Entrepreneurship.
You can find them on Instagram: @haasyltech