The Dangers of Easy Credit: Why Financial Wellness Knowledge is Essential

There is a microfinance company, ‘X,’ that has set up groups of 1 to 10 women in every village to disburse a lump sum amount. The women act as agents of the company, providing loans to villagers who request them. The responsibility for collecting the EMIs from the villagers lies with these women. The company has appointed a collection agent who travels to each village to meet with the women and collect monthly EMIs. The company provides salaries and incentives to these women for managing loan disbursement and collection. The better the collections, the higher the incentives. Because they are women, the psychology works in their favor, making collections easier without resorting to force, often referred to as ‘bouncers.’

When villagers approach the women’s group to apply for a loan, they submit KYC (Know Your Customer) documents. An agent from the company ‘X’ collects these documents and hands over the loan amount in cash to the women, who then give the money to the borrower. The borrower and the company’s agent do not meet face to face; their sole point of contact is the women’s group. The loan is completely unsecured—no guarantees or proof of income are required. Getting the loan is as easy as counting 1-2-3. Easy peasy, lemon squeezy!

Monthly EMIs on the unsecured loan must be paid to the women, mostly in cash. The agent collects the money every week. If the borrower fails to pay, the local women’s group visits the borrower’s home and won’t leave without collecting the money. If they fail to collect the EMIs, the agent will collect from them. Therefore, these women must collect EMIs at any cost, often using tactics such as insults and emotional appeals. Sometimes, they pressure the borrower’s close relatives to repay the EMIs.

If the borrower repays the initial loan amount, he or she becomes eligible for a larger unsecured loan. Since the borrower has no source of income, how will the initial loan be repaid? Suppose a person took a loan of ₹50,000 and needs more money. What will he or she do?

Here is a playbook that is now commonly practiced and destroying financial wellness of the people. The borrower approaches company ‘Y’ and gets a new unsecured loan of ₹50,000 using the same earlier process. No guarantee required. They repay the first loan and then become eligible for a larger loan from company ‘X.’ So, they apply for a new loan of ₹100,000 from company ‘X’ and easily get it also. The total loan amount for person A is now ₹150,000 (₹100,000 from ‘X’ and ₹50,000 from ‘Y’).

This cyclical loan process continues until 7 to 10 loans are taken, all of which are unsecured. Everyone wants bigger loans. Nowadays, lavish weddings are trending everywhere in the country. People borrow money against property papers to secure loans ranging from ₹500,000 to ₹2,000,000 and spend extravagantly on weddings.

What do people do with small loans? Some buy cars, some purchase expensive phones, some enter stock market trading, and others engage in online betting games.

The number of people participating in F&O trading has exploded at an annual rate of 40% over the past two years. Easy access to online platforms, quick execution, low brokerage and margin requirements, and smaller lot sizes have drawn people from all social groups, especially from lower-income groups (76% of traders come from income groups below ₹5 lakhs annually), into trading without understanding the associated risks. We are witnessing a Robinhood moment in F&O trading right now. At some point, this juggernaut will have to stop, though it’s difficult to predict when. One thing is certain: many more will face losses before sanity returns to the markets.