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Digital Lending Crisis in South Asia
Millions borrowed. Thousands
trapped. A continent in debt to an app.
By M. Selfd | The Express Tribune
Published: 2023 |
Investigation Desk | Finance & Technology
KEY FINDINGS
▪
Loan apps in Pakistan have accumulated at least
27.4 million installs, many operated by unlicensed or foreign entities.
▪
Interest rates on some apps reached 1,800% per
annum, with borrowers taking fresh loans to repay old ones.
▪
In India, up to 60 people have died by suicide
linked to harassment by digital lending recovery agents.
▪
Regulators in Pakistan, India, and Bangladesh
have responded unevenly, leaving millions of vulnerable borrowers exposed.
▪
Google removed over 84 illegal lending apps from
its Play Store in Pakistan in 2023 alone.
Mohammed Masood, 42, borrowed money from
two mobile apps. He was unemployed, living in Rawalpindi, and needed
cash. What he did not know was that he was stepping into a trap. By the time
recovery agents came after him, the principal on one loan had swelled to Rs
700,000. Unable to pay and hounded day and night, Masood took his own life. His
wife told reporters he had spent his final weeks reading threatening messages
on his phone.
His story is not an outlier. Across South Asia, a new class of predatory
lender has emerged, one that lives in a smartphone, disburses cash in minutes,
and collects with methods that courts in some countries have begun to call
extortion.
This is an investigation into how the digital lending industry in South
Asia grew from a fintech promise into a crisis of exploitation, and why
governments have been so slow to stop it.
The
Promise That Sold Itself
The pitch was simple and, in many respects, genuinely compelling. South
Asia has hundreds of millions of people who have never held a formal bank
account. Getting a loan from a traditional lender requires collateral,
documentation, a credit history, and often days of waiting. A loan app requires
a mobile number and a selfie. Approval arrives in under three minutes.
India's mobile penetration surpassed 80 percent by 2023. In Pakistan, the
fintech sector exploded almost overnight. Between 2021 and 2023, instant
lending apps recorded at least 27.4 million installs in Pakistan alone. In Sri
Lanka, the digital lending user base grew from roughly 10,600 people in 2021 to
more than 1.3 million by late 2023 -- a 125-fold increase in two years.
To the companies involved, these numbers represented a revolution in
financial inclusion. To many of the people behind those numbers, they
represented the beginning of a nightmare.
“People borrowed as little as Rs 5,000
for food, but ended up trapped in a cycle of debt.”
-- National Cyber Crimes
Investigation Agency official, testifying before Pakistan's Senate Standing
Committee on IT, 2023
How the
Trap Closes
The mechanics of the debt trap are consistent across the region and have
been documented by regulators, journalists, and advocacy groups in India,
Pakistan, and Bangladesh.
A borrower downloads a loan app, often drawn in by social media
advertisements promising instant cash with no paperwork. The app requests
permission to access the phone's contact list, photo gallery, and sometimes the
microphone and camera. Most borrowers click accept without reading. In the
industry, this moment of consent is later used as a legal shield.
The loan is disbursed almost immediately, but it is smaller than
advertised after processing fees are deducted. Repayment is due within days or
weeks, at interest rates that in some documented cases in Pakistan reached
1,800 percent on an annualized basis. When a borrower cannot pay, the app's
recovery agents begin working through the contact list the borrower surrendered
on signup.
Family members receive calls. Employers receive messages. Neighbours are
contacted. In some cases in India, agents used doctored or morphed photographs
of borrowers, sent to the people in their contacts, to shame them into paying.
A BBC documentary called The Trap reported that up to 60 people -- mostly young
-- had died by suicide as a result of this harassment.
In Bhopal, a 35-year-old insurance worker named Bhupendra Vishwakarma
left behind a four-page suicide note. He, his wife, and their two young sons
were found dead. He had been caught in a cycle of loan apps, borrowing from one
to repay another.
“To pay off one app, many borrowers take
a loan from another. A Rs 15,000 loan can quickly become Rs 200,000 with
penalties and rollovers.”
The
Regulatory Gap
Across the region, the same pattern holds: the industry grew faster than
the laws meant to govern it.
In India, the picture was complicated by a statement from Reserve Bank of
India Governor Shaktikanta Das who said digital lending apps were not under the
central bank's regulatory purview. That statement, later walked back,
illustrated the vacuum at the centre of enforcement. The government eventually
banned 94 lending apps -- including names that had been marketed widely -- but
local media reported that a promised whitelist of approved apps had never
actually been sent to the app stores.
In Pakistan, the Securities and Exchange Commission of Pakistan (SECP)
and the State Bank moved to introduce a licensing framework, a Key Fact
Statement requirement, and a whitelist of approved Digital Lending Apps. The
State Bank issued Circular No. 02 of 2023, directing all regulated entities to
verify the licensing status of any app they allowed to use banking
infrastructure. By April 2023, Google had added Pakistan to a short list of six
countries where loan apps face extra scrutiny before they can be published.
But critics say these measures arrived late and have been implemented
unevenly. As of mid-2023, instant lending apps still had tens of millions of
installs in Pakistan. In 2025, the country would ban a further 46 apps, a sign
that the problem was far from resolved at the time Selfd was reporting.
Bangladesh has pursued a more cautious path. Platforms like bKash, which
began as a mobile money service, have expanded carefully into lending territory
under closer central bank supervision. The contrast with the largely
unregulated app stores environment in Pakistan and India is stark.
Who Is
Behind the Apps
One of the most consistent and troubling findings of reporting on this
crisis across the region is how difficult it is to identify who actually
operates many of these apps.
Companies are often registered in jurisdictions far from where their
borrowers live. In India, investigators found that many recovery agents used
virtual numbers from Bangladesh, Pakistan, and Nepal to make calls, making
tracing almost impossible. In Pakistan, some operators vanished entirely after
collecting repayments, leaving borrowers with no recourse and regulators with
no target.
Research analyzing 434 lending apps across Indonesia, Kenya, Nigeria,
Pakistan, and the Philippines found that many demanded permissions far beyond
what was needed to run a lending business. The data collected -- contacts,
photos, location history -- served one purpose when collection pressure was
needed: leverage.
“Loan scammers take advantage of virtual
numbers, making it hard for authorities to track them down.”
-- Al Jazeera, reporting on
India's digital lending crisis, December 2023
The
Question of Inclusion
The digital lending industry has long sheltered behind the language of
financial inclusion, and the argument is not entirely without merit. For a
small farmer in rural Punjab or an informal trader in Dhaka who has no credit
history and no collateral, a loan app may represent the only available credit.
The alternative is often a moneylender charging rates that are even less
transparent.
But analysts and advocates interviewed for this investigation pushed back
on the framing. Financial inclusion, they argued, cannot be measured only by
access. If the cost of that access is a debt spiral, public humiliation, or
psychological harm severe enough to push people to take their own lives, then
inclusion has become a word that covers something closer to its opposite.
A 2020 Reserve Bank of India survey found that approximately 60 percent
of Indians did not fully understand the risks and interest rates associated
with digital lending products. The figure is likely higher in countries with
lower financial literacy baselines. These are the people the apps target most
aggressively.
South Asia scores highest on global indices of fintech lending potential,
precisely because its population is large, young, and underserved by formal
finance. That potential is real. But as Selfd's investigation makes clear,
potential and exploitation can point in the same direction.
What
Needs to Change
Regulators and researchers who have studied the crisis closely converge
on several conclusions.
First, the data-permission model must be broken. Apps that have no
legitimate need for a borrower's contact list or photo gallery should not be
permitted to request it, and enforcement of existing app store policies must be
consistent and proactive rather than reactive.
Second, cross-border coordination between financial intelligence units,
telecommunications regulators, and law enforcement is essential. Predatory
operators rely on jurisdictional gaps. Closing those gaps requires governments
to work together in ways that have so far proven difficult.
Third, consumer recourse must be fast and visible. The current situation,
in which a borrower who has been harassed or defrauded faces months of
bureaucratic process before any remedy, creates a de facto immunity for bad
actors.
Fourth, financial literacy investment must match the pace of fintech
expansion. Millions of people are making consequential financial decisions with
an incomplete understanding of what they are agreeing to. That is not simply a
problem of individual education -- it is a market design failure that
regulators have an obligation to address.
Mohammed Masood's family is still in Rawalpindi. His wife has not
received compensation from either of the apps that hounded him. The apps are
still available for download.
South Asia is not short of ambition when it comes to digital finance.
What it has been short of is the will to ensure that ambition does not come at
the price of the people it claims to serve.
EDITOR'S
NOTE
This report is produced as an analytical reconstruction
based on the investigative work attributed to M. Selfd, published in The
Express Tribune (2023), cross-referenced with reporting from Dawn, Al Jazeera,
BBC, National Herald India, and regulatory documents from SECP Pakistan, the
Reserve Bank of India, and the State Bank of Pakistan.
theexpresstribune.com.pk
| 2023 | All
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