Increase in digital lending use a warning sign

People are seen using their mobile phones on Claro M. Recto Avenue in Divisoria, Manila on Dec. 27, 2022. PHOTO BY MIKE ALQUINTO

ACCORDING to a report released last week by a consumer credit agency, the use of digital lending apps by Filipinos increased significantly in 2022. This is certainly good news for the digital lending business, but for everyone else, it should be viewed with deep concern.

Online cash loan services are companies that offer small cash loans with very minimal requirements, and handle the entire process of application and approval through a smartphone app or in some cases, via SMS. Their offerings are appealing because of their easy accessibility; the requirements are usually just a valid ID and working cell phone number, approvals are granted within minutes, and they offer incentives in the form of eligibility for higher loan amounts for borrowers who repay their loans on time.

It is believed there are about two dozen digital lenders operating in the Philippines; the number is a bit uncertain, which is itself a problem. The recent study focused on just 10, which are properly licensed and have applications available for download from Google Play and the Apple Store.

The instant cash relief a digital lender can provide a customer who may be in desperate straits comes at an extremely high cost, even under the best of circumstances. First-time borrowers, who are generally limited to loans of P1,000, can expect a repayment period of as little as seven to 14 days, at an interest rate of between 21 and 48 percent — rates that are actually worse than the illegal “5-6” informal lenders. For larger loans with longer repayment periods, available to customers with good repayment records, interest rates average about 27.4 percent, with some lenders charging as much as 65 percent.

Determining what the interest rates of online loans are is actually quite difficult; unlike banks and other more formal lenders, most digital lenders blatantly skirt regulations that require the clear disclosure of interest rates.

Along with high costs, many digital loan borrowers have found themselves on the receiving end of predatory and abusive collection practices. An in-depth investigation by the Philippine Center for Investigative Journalism (PCIJ) last year revealed some of these in graphic detail: cases of customers who, having fallen behind in their loan payments, were subjected to severe harassment, including the lenders harvesting their phone contact records and contacting their friends, families and work colleagues, and in a few shocking cases, even death threats or threats of other physical harm.

These practices are, of course, highly illegal, and the agency most responsible for combating them is the National Privacy Commission (NPC). To its credit, the NPC has been aggressive in pursuing abusive digital lenders, but admitted in the PCIJ story that it is fighting a losing battle; the agency simply does not have the manpower or resource1s to respond to all the consumer complaints quickly enough, and is further handicapped by slow court processes.

What govt can do

In order to protect the public, we believe there are four steps that the government should pursue. First, if ever there was an issue to which Congress could productively apply its fondness for conducting an “investigation in aid of legislation,” this would be it. The proliferation of the digital lending business seems to be facilitated by gaps in existing laws and regulations; whether this is due to poor enforcement or a lack of applicable laws must be urgently studied.

Second, the banking industry needs to be more proactive in offering alternatives to the large market for small consumer loans that it is clearly ignoring at the moment. It is understandably a risky business segment from the banks' point of view, but on the other hand, it is a segment for which high demand is clearly evident.

Third, the NPC needs to be provided the resource1s it needs to better carry out its consumer protection mandate.

And finally, consumer education needs to be improved. It seems quite evident that many borrowers simply “do not know what they're getting into” when seeking an online loan. If properly informed of digital loans' true costs, their rights to information from lenders, and the complaint or dispute resolution services available to them, consumers could make better choices and avoid falling into an even more distressing situation.

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