Credit penetration must not become a nightmare
Wider loan supply is a vital economic pursuit in India, but app-driven lending is exposing people to coercive recovery tactics. The depravity these have sunk to gives credit a bad name
That credit is good can be taken as a given. It plays an important role in any economy. Loans given out foster economic expansion by enabling commerce, typically done by banks making use of people’s savings held as deposits. Credit also helps uplift those at the bottom of India’s pyramid who lack the monetary means to make a better living, which explains our policy emphasis on financial inclusion. Rural self-help groups for microfinance are a key part of that mission. Yet, some parts of the country lag others on credit uptake. A study published last year by our bank regulator that covered 56 eastern districts of the 117 designated as ‘aspirational’ (for their backwardness), for example, found that bank credit as a proportion of deposits varies from under 11% in West Singhbhum to over 96% in Chandel. Data analysis showed that the supply of banking services was the main driver of an aspirational district’s credit-deposit ratio. For more loans to be extended, this suggests, banks must reach farther into under-served areas. This was also the stated goal of bank nationalization back in 1969. The outreach afforded by the internet, however, has placed digital apps in the spotlight for taking credit far and wide. In theory, this is a loan multiplier like none other. In reality, it entails a risk we must not under-estimate: Of credit taking a blow as a concept.
Credit markets operate under the central bank’s watch. On Monday, as part of its effort to stamp out unfair practices, the regulator warned lenders not to levy interest charges calculated from the day of a loan’s sanction instead of its disbursal. This was done on behalf of retail borrowers. Last year, it had tightened capital back-up norms for collateral-free lending, a move aimed at keeping a fintech boom of appgiven personal loans within prudential limits. This was done to reduce the chance of bank cushions being hollowed out by a default crisis. But a sharp reminder of the other scars that the credit business can leave was served in April, when nine employees of loan-enabler Finsara were arrested in Gurugram on allegations of using extreme tactics for loan recovery. As reported, the police had acted on a complaint filed by a labourer who said digitally-made obscene images of her were posted online after she failed to repay a loan of ₹3,000, taken through the company’s app. The seizure of devices during a raid on Finsara’s office is said to have revealed a scandal of sexual shaming in wide deployment as a threat. The police claim that links with 1,577 cases across the country have been traced, involving loans of almost ₹5 crore. Even if these numbers seem small in the context of all-India lending, that such practices exist at all is an outrage. And since not everyone speaks up, how rampant they are is a guess.
The depravity of even a few can hobble an entire market. For centuries, unregulated lending has had an exploitative image among the needy—if not for usurious charges, then for the arbitrary extraction of assets and services by moneylenders with no scruples. India fought hard to end bonded labour, a form of slavery that debtors would be forced into. It’s a sad reflection of today’s tech-enabled times that small-ticket borrowers can be deprived so luridly of dignity for their debts. Credit being a good thing is far from clear to the vulnerable. We must crack down hard on ugly recovery tactics before credit gets a bad name among those who need it most.