India’s Rapid But Rocky Transition Into Digital Financial Services

While much of the world is profoundly different at the end of this decade than at the beginning, there are few places on the planet where that difference is more pronounced than in India — particularly when it comes to financial services. At the start of the decade a little under a third of Indian adults (35 percent) had a bank account. As the decade neared the halfway mark in 2014 that figure had improved to about 53 percent.

It was at that point the nation instituted the first of what would be many efforts at building a national digital financial infrastructure, the Pradhan Mantri Jan Dhan Yojana or “Prime Minister’s People’s Wealth Scheme,” (known today as the JDY) a program dedicated to providing all Indian citizens with no-frills, no-minimum-balance bank accounts — including the one-fifth of the population living below the poverty line and the large rural population with limited access to physical bank branches.

The program, to date, has been highly effective. As of 2017 around 80 percent of Indian adults had bank accounts, as the JDY had managed to sign on roughly 300 million users in three years.

But for all its successes, there remain issues in Indian financial services. Around 20 percent of the population remains wholly unbanked, which is a massive improvement but still leaves roughly 260 million of India’s 1.3 billion citizens outside the financial system. And even among India’s newly banked, the accounts themselves are in somewhat limited use. Among the issues with low-frills banking, local reports note, it doesn’t come with a lot of value-added services built in.

Which has created an opportunity for FinTech players worldwide — but also perhaps a series of unseen risks for Indian consumers.

Why Basics Aren’t Quite Cutting It

Gautam More, a Mumbai-based carpenter, told Al Jazeera that though he had been a cash-only person for his whole life, he signed on for a JDY account on the assumption that it would make it easier to take care of his family and borrow money in the future. He was disappointed on both counts when he headed to the bank to get a loan for his daughter’s wedding.

“I still can’t get a loan for my daughter’s wedding since I still have no savings,” he told the network. “What was the point of it all?”

Analysts worldwide have noted that in some sense the programs India has supported have been tremendously successful in connecting citizens with banks accounts. Those accounts — particularly when used in concert with the country’s unique 12-digit biometric identification scheme Aadhaar and the increasing proliferation of mobile phones — are very useful for certain types of services including direct payment of social security funds, reducing fraud and corruption and improving efficiency in India’s welfare system.

But when it comes to accessing credit, tools for planning or managing a financial future, the accounts come up short. As a result, according to the World Bank, roughly half of India bank accounts remain large inactive.

But where banks don’t provide, FinTech innovators rush to fill a vacuum. Last year, investors globally poured a record $9.6 billion into lending startups. Of that nearly $1 billion ($909 million) went to India-based lending startups making it the third largest market for investor dollars in this segment behind China and the U.S. And, according to Wall Street Journal reports, in 2018 U.S. investors backed around 40 percent of the 65 India-based loan companies that completed a funding round.

Prashanth Ranganathan is the founder of PaySense, a Mumbai based digital lender that brought in $18 million during its last funding round in 2018. He said the spike of interest among consumers is what is driving hundreds of millions in global investment — first because of the demand that exists today, but also because of the demand for services they are building for tomorrow.

What FinTechs offer and what is lacking in a developing economy where the majority of consumers had no access to banking or banking products as recently as a decade ago is the ability to accurately evaluate creditworthiness. FICO has been a work in progress for over 50 years, he noted, and has no analog in India.

Using algorithmic evaluation in tandem with the data generated by the boom in cheap smartphones means lenders like PaySense can learn an awful lot about a person’s income and spending patterns, among other factors — and use that data to instantly qualify consumers for credit.

But global experts are starting to wonder if that access to data has a downside that Indian consumers don’t see until they are experiencing it directly.

The Less Consumer Friendly Side of FinTech Lending

Sachin Kumar Soni needed cash to pay for exam preparation classes last year and got a 16,000 rupee ($225) loan from PaySense, and began making nine fixed, monthly 1,979 rupee payments, with an effective 2.25 percent monthly interest rate. Akshay Yedke took out a 121,000 rupee loan in 2017 to pay for his wedding with a similar rate.

Everything was fine, they said, until they paid one of their installment payments late. In Soni’s case, that late payment was reportedly due to an administrative mixup on the firm’s end, while Yedke reports he was only a few days behind the scheduled payment. Both reported incredibly aggressive calls to their parents, friends and family that included overtly hostile treatment and in some cases open threats if their relatives didn’t pay up.

Ranganathan did note that as part of its terms of service, PaySense explicitly receives permission from users to access their smartphone contacts in the event that a loan isn’t paid and they are unable to reach the primary borrower. The firm also apologized to Soni for the incident, after the aggrieved customer directly posted a complaint on Ranganathan’s LinkedIn page.

He  further noted in an interview that though the firm’s debt collectors must sign a code of conduct for collections, the incident has opened PaySense’s eyes to the issue — and pushed the firm to better monitor their activities.

“This issue is not unique to us,” he said.

And reports seem to indicate that is the case — in fact, many of India’s consumer-facing lenders have been hit with consumer complaints about overly invasive or aggressive debt collection practices. It isn’t that there aren’t regulations in India to prevent these kinds of abuses. Aggressive collection tactics are illegal in India, according to Reserve Bank of India rules. But one expert with the industry told the Journal that regulators are hesitant to aggressively push those rules for fear of driving away innovation and investment in the space.

“There’s no consumer watchdog with teeth,” said a person familiar with the FinTech industry.

It also should be noted that the current form of aggressive loan collection is a situation that some local borrowers view on a relative scale. Prior to the emergence of digital lenders, the best bet for rural and unbanked Indian citizens to secure a short term loans with a high-interest local lender. As a group, they rather famously employed local collection agents known for harassing debtors in person and threatening them with physical harm. Having one’s friends and family harassed over the phone is not a big improvement, but a noticeable one.

What will all of this mean for the lending industry in India and the rest of the developing world? That mostly remains to be seen. It seems unlikely that the enthusiasm for the market is going to die down, given the size and scale of the opportunity. Whether digital lenders will change their policies around debt collection, or whether their regulators take an interest in the issue is a story that will likely continue into 2020.