Authorities in Asia are clamping down on digital lenders, stepping up to rein in a sector that has charged ahead with little oversight in credit-hungry large economies such as India and Indonesia.
Apps and websites offering easy loans have proliferated in India and south-east Asia, where hundreds of millions of people are unable to access the formal credit system. In India, 190m people did not have bank accounts as of 2017, according to the World Bank, along with 95m in Indonesia.
But officials have struggled to control the fast-growing sector. While many apps are licensed, thousands operate illegally. They are notorious for preying on consumers with limited financial literacy by charging exorbitant interest rates and harvesting data from phones, used for example to embarrass debtors by calling family members.
Trying to police illegal online lending apps is like playing “a game of Whac-A-Mole”, said Niki Luhur, chairman of the Indonesia Fintech Association, who said “bad apples” continue to get through.
The Reserve Bank of India last month set up a panel to strengthen oversight of the sector. Mounting public alarm about the proliferation of hundreds of such apps, whose aggressive tactics were linked to a number of suicides, also sparked Indian police investigations and arrests.
Google, which faced criticism in India for hosting the apps, also said last month it was removing non-compliers from its app store.
“The way it is growing, obviously there’s a need to bring some regulation or sanity in the market,” said Anuj Golecha, an angel investor in Mumbai who has invested in about a dozen fintech companies including lenders.
Indonesia’s Financial Services Authority (OJK) has also stepped up its regulatory efforts. It drew up draft proposals late last year to toughen existing rules by boosting paid-up capital requirements and mandating more frequent board meetings.
It may also force online lenders to secure funds from offshore investors that are already involved in the financial services sector.
The OJK had already taken measures to curb illegal apps and lenders, working in 2019 alongside other ministries to block or ban hundreds of entities.
But the prospect of a broader clampdown prompted frantic lobbying from regulated fintech companies and their investors, who worry they would become collateral damage.
“The RBI and government will do anything and everything to protect the consumer. I just hope they don’t go so far that it kills the proposition,” said Upasana Taku, co-founder of Sequoia-backed Indian fintech company MobiKwik, which offers consumer loans.
Eddi Danusaputro, chief executive of Mandiri Capital Indonesia, the venture capital arm of Bank Mandiri, the country's largest state-owned bank in terms of assets, said more regulation was a “good thing”. Mandiri Capital has backed a number of local lending start-ups.
But he warned that some of the proposed requirements by OJK were “too strict” and could stifle a crucial industry, citing the leap in required paid-up capital as an example.
The steps follow a crackdown on the fintech industry in China, where the rise of online consumer loans spawned a thriving culture of fintech apps such as peer-to-peer lenders.
Beijing cracked down on the P2P industry in 2018, suspending the issuance of licences for new lenders. More recently it has also hobbled homegrown fintech players such as Ant Group, a dominant force in consumer lending in the mainland. The company’s initial public offering was scuttled by regulators last year as authorities emphasised the need to regulate financial technology.
That crackdown, in turn, led the Chinese operators shut out of their home market to set up shop elsewhere in Asia. A 2018 OJK report found that half of the 227 unlicensed P2P lenders in Indonesia originated in China. Analysts in India say many of the illegal apps there are also run indirectly from China.
Akshay Garg, chief executive of fintech start-up FinAccel, which operates credit lending app Kredivo in Indonesia and has more than 2m customers, said the situation has improved with the OJK’s increased policing but there was “no easy solution”.
“Unless there is a deep level of co-operation between tech companies and governments to start more proactive surveillance of the app stores, not much can be done,” Garg said. “And tech companies globally have taken a hands-off approach to policing online.”
A lot of the apps, the majority of which are Chinese, are just “working math”, he said. “They don’t need to worry about the 10 per cent of borrowers that default. They charge such a high interest rate that the 90 per cent that do more than covers the 10 per cent you lost.”
Officials and executives alike agree that digital lenders can help address a chronic shortage of credit for the region’s fast-growing, young population — a need that has only increased during the pandemic.
Yet in India, even legitimate digital lenders have so far operated in something of a grey area. They are not directly supervised by authorities but must partner with an RBI-accredited non-bank financial company, though some secure an NBFC licence themselves.
India’s FinTech Association for Consumer Empowerment, an industry body, is looking to pre-empt heavy-handed intervention by lobbying the RBI for a self-regulatory model. It has proposed a set of best-practice standards, such as placing curbs on data that can be harvested from a borrower’s phone.
“The impact of a reckless and unregulated ecosystem could be horrendous,” said Akshay Mehrotra, chief executive of start-up EarlySalary and a founder of FACE. “The learnings are pretty common from both China and Indonesia. The lending process needs to be above board.”
Ashish Fafadia, a partner at India’s Blume Ventures, which has invested in several fintech lenders, said he believed a tighter regulatory leash was inevitable — and would ultimately serve the industry’s interests.
“I can’t imagine that we’ll be able to grow with ad hoc planning and systemic blow-ups every 10 or 20 years,” he said. “One needs to have an architecture which is transparent and immunised.”