A decade ago, to take a loan, you had to do some paperwork, a guarantor and perhaps visit a branch manager who knew your father. Now it requires three minutes and an Aadhaar number. Credit has become frictionless with dozens of digital lending apps, and that lack of friction is the issue. No CIBIL score? No problem. No salary slip? No problem. None whatsoever of a credit history? Still no problem. This is freedom to a 19-year-old college student in Nagpur or a 23-year-old gig worker in Bengaluru. It is, in fact, the start of a trap to many.

 

There are more than 80 million credit card users in India today, and surveys have consistently shown that a disproportionate number of new credit card and digital loan users are between 18 and 35 years of age. A 2023 TransUnion CIBIL report found that young people aged under 30 are the fastest-growing group of new credit users – many of whom have never been taught about compounding interest, penalty fees, or what constitutes a minimum payment. They took out a loan of ₹5,000 to attend a concert. ₹3,000 to get a phone case. ₹15,000 to gift someone they want to impress. Then, to pay off the first app, another app. Then there came a third application to administer the second. This is referred to as a debt spiral, and it never begins big enough to seem dangerous.

 

The pernicious aspect of small credit is that it lacks a sense of debt. Even a ₹2,000 buy-now-pay-later purchase is hardly a financial burden. However, most digital lenders impose effective interest rates of 30 to 60 percent after accounting for processing fees, late fees, and rollover fees. Missing an EMI, penalties ensue. Miss two, and recovery agents begin to call here and there, your parents, your college, your employer. The social stigma of debt recovery in India is no trifle. It is heartbreaking for many youths.

 

This is what does not feature in the business press, but ought to. During 2021-24, there were several instances in Telangana, Maharashtra, Karnataka and Uttar Pradesh of youths in their twenties committing suicide due to harassment by loan recovery agents. In some of the recorded instances, the initial loan was less than 50,000. The harassment was disproportionate, incessant and in certain instances, was directly aimed at the family and social network of the borrower in the form of WhatsApp contact-spamming and social disgrace. 

 

In 2022, the RBI was forced to release emergency guidelines limiting coercive digital lending practices, which, in turn, is a regulatory measure that, in itself, proves the magnitude of the damage. A combination of debt, shame and youth is a dangerous combination. It can be fatal when the mental health of a 22-year-old, his family relations, and social status all seem to be falling apart at the same time. The loan that initially cost ₹10,000 is in question.

 

It is this that we should be worried about as a society. In India, small digital loans do not require a minimum CIBIL score. This may appear consumer-friendly, and financial inclusion is a valid objective in theory. The Jan Dhan-Aadhaar-Mobile trinity is designed to bring the unbanked into the formal economy, which is truly a good thing. Inclusion, but not protection, is not inclusion. It’s exposure. Lenders have no duty to make sure that a first-time borrower comprehends compound interest or penalty arrangements. A 30-second video disclosure cannot be considered financial literacy. Small loans are not required to have a cooling-off period; there is no strong real-time system to ensure that a young borrower cannot take loans with five different apps at the same time, and the guidelines that exist are not consistently enforced, particularly on smaller NBFCs and the dozens of unregistered lending apps that exist in the grey market.

 

But what would really help this? It is not to close digital credit but to open it up and make it truthful. The simplest and first intervention is compulsory income verification before any loan is granted, regardless of the loan amount. When a platform can check your Aadhaar in 10 seconds, it can check basic income proof in 30. The minimum gate to grant any loan exceeding ₹5,000 should be a salary slip, a bank statement for the past three months showing inflows, or an ITR filing. This one condition would automatically screen out the most at-risk borrowers, students with no income and gig workers with highly erratic cash flows, from being given credit that they can structurally default on.

 

The second intervention is an Advanced Mandate System. The idea is simple. When the lender and the borrower establish the loan, they set up an auto-debit instruction linked to the borrower's salary account or primary transaction account, which becomes active on the repayment due date and requires no effort on the borrower's part. This eliminates the greatest source of unintentional default, not lack of willingness to pay, but forgetting or miscalculation or just lack of money sent in the right direction on the correct day. Variations of this are already in operation in countries that have mature consumer credit markets. India has a UPI infrastructure to ensure a smooth experience. The only thing lacking is a regulatory requirement that would make it mandatory, not optional, for lenders.

 

Put together, these two steps of tough income evidence at entry and a system of advance mandate at repayment would not kill the digital lending ecosystem. They would render it survivable for those who would use it. A youth who can show income and whose repayment is automatic is much less likely to spiral, much less likely to be pursued by recovery agents, and much less likely to get to the point where a ₹30,000 debt is the end of the world. Technology is already in place. There is already existing infrastructure. What is required now is the political will to ensure that borrower protection is as smooth as borrowing is now.