Emerging global evidence shows that digital credit is making loans accessible, including to customers who do not usually borrow from formal lenders. Estimates suggest that the digital lending market could almost double in the next five years. If properly regulated, digital credit might help consumers better capture opportunities and manage economic shocks. However, in some regions, the rapid growth of digital consumer credit (a subset of the digital credit offering) has exacerbated customers’ vulnerabilities, especially poor customers.
The cautionary tale of digital credit in East Africa
Experiences in Kenya and Tanzania have highlighted the opportunities of digital consumer credit but also multiple challenges, such as over-indebtedness, lack of understanding of terms and conditions, and high interest rates. In 2018, CGAP conducted phone surveys with customers in Kenya and Tanzania and reviewed transactional and demographic data associated with over 20 million digital loans. Over half the digital borrowers in Kenya and Tanzania reported late repayments, and between 12% and 31% respectively had defaulted. The loans had other consequences as well. A significant proportion said they did not fully understand the costs and fees associated with their loans. Further, 20% of digital borrowers in Kenya and 9% in Tanzania reported that they had reduced food purchases to repay a loan.
Is there a chance that we may see similar pitfalls in other countries?
In 2020, CGAP also conducted a short study in three countries, including India, to understand the effect of debt moratoria on low-income borrowers. While speaking to various stakeholders in the sector in December 2020, and by analyzing social network data from Twitter, we became aware of emerging consumer risks related with digital consumer credit in India. In particular, it seemed that there were issues with debt collection practices and data privacy. Research out of the University of Zurich indicated that the number of digital consumer credit applications downloaded from Google Play had increased following the COVID-19 outbreak. However, most customer feedback was captured through stories in the media and provided anecdotal evidence. In partnership with Dvara Research, CGAP co-organized a roundtable with financial service providers, academics, researchers, industry and consumer associations based in India to better understand the situation.
While there is no official count of the number of digital consumer credit apps in India, CGAP’s ongoing research suggests that there are at least 157 apps operating as of July 2021. In the digital lending value chain, these apps follow one of two dominant models: one where nonbank finance companies (NBFCs) and banks lend directly to customers, and the other where fintech entities partner with NBFCs and banks to originate loans, assess borrowers’ creditworthiness and recover loans. Both categories generate distinct kinds of issues that affect customers, which are outlined in the roundtable proceedings. In addition to these two models, there are unregulated digital lenders that only use apps to lend out from their own funds.
Interest rates appear to be high and are estimated to range between 360% to 1,200%, on an annualized basis. Digital lenders in India also seem to be following a practice of “debt-shaming."
Since digital consumer credit apps are accessed through smartphones, and women in India are about 36% less likely than men to own smartphones, we hypothesize that the consumer segment is largely young men, residing in urban or peri-urban locations. Interest rates appear to be high and are estimated to range between 360% to 1,200%, on an annualized basis.
Digital lenders in India also seem to be following a practice of “debt-shaming.” While installing some loan apps, borrowers are forced to provide consent to loan apps to access contact lists, call history, SMS logs, Facebook location, phone gallery and a host of other information. Digital consumer credit apps then use this data in case of delayed or missed payments to pressure borrowers into repayments. An article earlier this year in the Ken offered a glimpse of the toll this is taking on consumers.
While digital consumer credit companies have made it easier than ever for people in India to borrow money, the official channels to report abuses have not become any more user-friendly. For filing a complaint against a regulated entity, the Reserve Bank of India (RBI) prescribes specific formats and communication protocol that are not always easy to access or follow. Instead of using these channels, customers often voice their experiences on social media where they have reported abusive collection practices.
It is critical to understand the scale of the digital consumer credit market in India and the risks they pose for customers, which Dvara research has proposed to do as part of its continuing focus on digital financial services.
There is also a need to understand the various customer segments and their experiences. At this stage, the financial inclusion community has access to complaints through social media but lacks visibility on instances when digital consumer credit has helped vulnerable segments improve their well-being.
Finally, as various channels of delivery emerge, we need to understand the main risks posed to customers and innovate on new tools that can help analyze customer complaints.
CGAP is currently partnering with Mubulushu International to understand customer experiences using natural language processing (NLP) to analyze complaints and feedback by customers on social media.
While we still have several questions about the state of digital consumer credit in India, we already know that actions will be necessary from different market players. One thing is certain — it is a good time for supervisors, consumer associations and industry leaders to use different channels to listen to the voice of consumers.
More specifically, supervisors would benefit from conducting regular market monitoring activities such as phone interviews to gauge their customers. A better understanding of the market and the risks for consumers will be essential for taking corrective action.