Representative image of lending money
Credit: iStock photo
The Union Government has proposed a bill on Banning of Unregulated Lending Activities (BULA) in view of the alarming increase in household debt and harassment of borrowers by unlawful lenders. Stringent measures like five to ten years’ jail term, a penalty of Rs 5 lakh to Rs 50 crore, non-bailable warrant, and CBI actions are proposed in the bill. Borrowers are pushed to unlawful lenders because of multiple factors – price rise, aggressive consumerism, long and complex procedures followed by regulated credit agencies, and easy availability of loans from the unregulated entities.
More than 50% of the country’s population living in small towns and villages are most affected by unlawful lending. During and after Covid, there was a steady growth in the number of unlawful lenders. These entities disburse loans to borrowers on the basis of cash flow statements. They impose exorbitant interest rates varying from 35% to 60%, in addition to processing fees and hidden charges. Borrowers end up losing their homes, gold and other assets, and sometimes their lives. The lenders typically collect the borrowers’ personal data from various digital payment platforms and from NBFC agents; they track down the defaulters and recover their dues with force. The story of loot, extortion and harassment of borrowers and even non-borrowers has been continuing over decades.
Between January 2020 and March 2021, borrowers had lodged 2,562 complaints with RBI against unregulated lending agencies. Babu Lal, a digital volunteer, has reportedly identified over 1,507 fraudulent apps on Apple store and 5,700 apps on Google Play. He said scammers exploit established brand names from unrelated fields to appear legitimate. Google promptly revised itspolicy for financial services apps in India; it asked the lenders to either provide RBI licences or confirm that they are facilitating lending through licensed partners.
Digital lending surges
The digital lending sector has witnessed a 49% surge in 2023-24 from 35% in the previous year; it has disbursed Rs 1.46 lakh crore in loans to 10 crore borrowers. This has contributed to the increase of the debt burden on the Indian household. According to RBI sources, the householddebt stood at Rs 127 trillion in Q1 FY25, almost double of Rs 65 trillion in mid-2019, and triple of Rs 40 trillion in mid-2015. The debt rose to 42% of the GDP in Q2 CY24, from 35% pre-pandemic and a stable 30-32% between 2011 and 2016. Rising costs of house, education, health care facilities, transportation, food and various services contribute to this debt burden and the surge in digital lending.
A paper published by the Bank for International Settlement (BIS) has estimated the total global alternative credit in 2019 at $795 billion. The paper indicated how China, the US and the UK have grabbed a huge share of the alternative digital credit market. As per Statista, the digital lending size swelled to $110 billion in 2019 in India from $9 billion in 2012. The ground reality in India was not favourable for digital lending. Unlawful digital lenders take advantage of people’s financial illiteracy and lack of awareness. The government failed in initiating strong measures to counter them and preparing ground for regulated lenders.
The value of the FinTech market in India is estimated at R 8.35 lakh crore by 2026. If regulated well, digital platforms can help banks lend at a far lower cost. Regulated banks should make scientific potential surveys of each economic sector and reach out to potential borrowers. It is essential to enhance the credit utilisation capacity of the borrowers; they need to understand the importance of repayment ethics and develop savings habits.The 160,501 scheduled commercial bank branches, 9,306 MBFCs and 1.02 lakh Primary Agriculture Credit Societies in the country need to be digitally savvy to expand their lending capacity. The banks should redesign their loan appraisal mechanism, audit and inspection skills to safeguard the loans.
People in villages and semi-urban areas engage in multiple economic activities, add high value to products and contribute 25-30% of the GDP. A 15-sq feet classic palm leaf painting from Odisha and a genuine Kashmiri carpet of the same size carry a price tag of Rs 14 lakh each in the Swadesh handicraft mall of Hyderabad; there are hundreds of unexplored economic activities across the country. The government and the banks need to adopt a credit plus approachThe government, while banning unlawful lenders, should also create credit absorption capacity in semi-urban and rural areas by preserving fertile agricultural land, water bodies, crop diversity, traditional skills, forest wealth etc.
(The writer is a sustainable micro-economic activities analyst)