Stick to regulated entities for short-term personal loans: Analysts

Avoid online platforms that charge exorbitant interest rates

The issue of online lending platforms (OLPs) charging exorbitant rates of interest and upfront processing fees from borrowers, and harassing them through their recovery agents, is once again in the spotlight.
 
The Delhi High Court last week heard a public interest litigation, where the petitioner alleged that OLPs charge interest rates as high as 500 per cent per annum, and processing fee of up to 30 per cent.
 
Until some regulatory action is taken against these entities, borrowers need to watch out for their interests themselves.
 
Stick to regulated entities
 
Most problems arise in a category called payday loan. These are small-ticket size (say, Rs 10,000-20,000) loans given for a period of five to 30 days.
 
“Most legitimate banks or non-banking financial companies (NBFCs) do not give these loans. As far as possible, avoid them. If you do take this loan, make sure you repay on time,” says Gaurav Chopra, founder and chief executive officer, IndiaLends. 
 
Borrowers should also understand the industry’s structure. The OLP sources customers. Often, a sister company, an NBFC registered with the Reserve Bank of India (RBI), provides the capital. Many OLPs also source customers for banks, which are also regulated by the RBI. It is always better to go with entities that have an RBI-regulated lender in the back-end.

“The loan agreement you sign will have the name of the bank or the NBFC offering the loan,” says Chopra.
 
According to a June 24, 2020, circular issued by the central bank, NBFCs and banks, whether they lend through their own digital lending platform or an outsourced platform, are responsible for their partner’s conduct.
 
Safety lies in sticking to well-known brands.
 
“Do some research on the website you are borrowing from. Find out how much money it has raised from investors, whether it is well-capitalised and backed by a venture capital firm,” says Prithvi Chandrasekhar, president-risk and analytics, InCred.
 
What also emerged during the court hearing is that pure platforms are not regulated by the RBI. You will run the highest risk borrowing from such unregulated entities, especially the smaller, obscure ones. 
 
Besides ensuring you borrow from a legitimate entity, make sure you don’t overpay.
 
Choose app prudently
 
When you download applications (apps) of digital lenders, they ask for permission to access the data on the borrower’s mobile phone.
 
This is how they gain access to his contact list, which is sometimes misused to call up friends and relatives in an attempt to embarrass the borrower.
 
“In most cases, if you don’t give the permission, you will not be able to borrow the money,” says Udbhav Tiwari, public policy advisor, Mozilla.
 
The best you can do, according to him, is go through the app’s privacy policies and understand its data practices.
 
Read reviews on the internet  thoroughly to know whether the application is reliable, or if it has a track record of harassing borrowers.
 
“The best you can do is to be prudent in your choice of app,” says Tiwari.
 
Also, do not tolerate strong-arm tactics or abusive language from recovery agents. Complain to the bank or NBFC ombudsman.    
 
Maintain good credit score 
 
Avoid falling into such dire straits that you have to approach obscure lenders for short-term loans.
 
“Maintain good credit history and score, so that you can get a personal loan from a bank or an NBFC,” says Harshad Chetanwala, co-founder, MyWealthGrowth.
 
If you have borrowed from a regulated entity, then the RBI’s grievance redress channels are available at your disposal (file complaints here: https://bit.ly/3rR6mEz).   
 
Finally, consider loans from OLPs with as much seriousness as you would borrowings from a bank or NBFC, or even credit card dues.
 
Avoid over-leveraging just because these loans are easily available.