KOLKATA — A spate of suicides linked to alleged harassment by digital lending companies is drawing increased government scrutiny of subprime lenders.

Three people in the southern city of Hyderabad committed suicide this month after allegedly being harassed by recovery agents of digital lending companies, which make subprime loans to those who lack the financial resources or the credit needed for a traditional loan.  As many as five deaths in several states have been reported, all allegedly due to harassing loan recovery methods, some media reports say.

After reports of the suicides, the Reserve Bank of India (RBI) cautioned people against using unauthorized loan apps, some of which have been found to be operating without a license.

“Members of public are hereby cautioned not to fall prey to such unscrupulous activities and verify the antecedents of the company/firm offering loans online or through mobile apps,” the RBI said in a notice. It warned that several individuals or small businesses have been falling prey to “a growing number of unauthorized digital lending platforms or mobile apps on promises of getting loans in ‘quick and hassle-free manner.’”

“Reserve Bank has also mandated that digital lending platforms which are used on behalf of Banks and NBFCs should disclose name of the Bank(s) or NBFC(s) upfront to the customers,” the central bank said in its notice, which includes links to access Nonbank Financial Companies and where to file disputes.

In Hyderabad alone, police recently received nearly 60 complaints of online harassment by digital loan companies. Police conducted raids at call centers in Hyderabad and Gurugram — where harassing and shaming calls allegedly were made — and froze 75 bank accounts holding approximately INR 423 crore ($57 million).

The companies whose assets were frozen were said to be charging up to 35 percent interest on lending apps not approved by the RBI. The companies are also accused of sending fake legal notices to borrowers, supposedly from the Central Bureau of Investigation.

The issue is not new. In 2010 in Andhra Pradesh state, several borrowers committed suicide after allegedly being harassed by lenders. The harassment included public shaming and threats of legal action. The government of Andhra Pradesh suspended all microfinance companies in the state and allowed borrowers to stop repaying their loans. The microfinance sector nearly collapsed.

“What is happening with the digital lending industry is very similar to what happened with the microfinance industry in 2008,” during the global financial crisis, said Rangan Varadan, co-founder of Microgram, a P2P lending platform. “Many lenders are able to get away by lending very high-interest rates. When the risks are high, the companies have to press for collection.”

With P2P, or peer-to-peer crowd lending, a website publishes a list of loan seekers, and a lender picks a borrower. Payments on the loan are made digitally. The average return to the lender is between 16 percent and 18 percent, but may be as high as 35 percent depending on the risk. There is no cap on interest rates that P2P platforms can charge.

Rajiv M. Ranjan, secretary of the Association of NBFC P2P Lending Platforms, said, “We have also cautioned our members to see that customers are not charged high interest rates or harassed over repayment.”

Any firm offering loans in India is required to register with the central bank or other entities regulated by the state governments as an NBFC, or NBFC P2P. Currently, there are 21 NBFC-P2P companies registered with the central bank. Subprime lending is big business in India as scheduled commercial banks often shy away from lending to borrowers with a poor credit profile or no credit rating.

“I believe, the Reserve Bank of India should look into new ways of regulating the P2P sector,” said Ramakrishna NK, co-founder and director of Rang De, a P2P firm. “Currently, RBI’s approach towards supervision of P2P companies is based on old-school thought. It has not kept pace with what has happened in the sector. RBI should use mechanisms like machine learning and artificial intelligence to detect anomalies in the companies.”

In December 2019, the RBI increased individual lending limits across platforms from INR 10 lakh ($13,539) to INR 50 lakh ($67,697).

The total transaction value in the alternative lending segment in India is projected to reach $117.3 million in 2020, according to data from Statista. The P2P lending market is expected to reach $4 billion to $5 billion by 2023, according to a study by Nasscom.

(Edited by Uttaran Das Gupta and Judith Isacoff.)

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