New Normal, Digital Transformation, Industry 4.0
Trust | Transparency | Traceability
Loan Sharks and Blockchain
21 January 2021 | Blockchain
Retail Lending is a risky business; banks constantly tussle with wilful defaulters and risk losing significant capital in the process. There is a growth in Loan Sharks companies in India’s money market with due course of time. There is a need to remain vigilant and make provisions against bad loans proactively.
Hour of Need: Those who lend money to the poor, even at extravagant rates of interest, fill a market niche. And because capital markets are effectively closed to them, people have to turn to unregulated lenders. These illegal fintech app-based loans gained prominence because the money is transferred almost instantly, unlike other registered fintech apps.
By-effects Pandemic: During the pandemic, there has been a sharp rise in both borrowings and defaults. The awkward fact is that, in hard times, more and more people are going to need small amounts to tide them over and there will be pressure on regulators and state authorities to adopt to stringent vigil mechanism.
Market Gambit: Regulated lenders won’t serve people with poor credit because laws make it impossible to price the risk of default into the loan contract. The unlicensed lender, therefore, charges a hefty interest rate, not reflecting the actual risk. With minimal documentation, more borrowers are inclining interests towards microlending apps offering hassle-free loans. First and foremost, to lend, the apps must be tied up with an NBFC, but often these apps are start-ups with skeletal and bogus teams.
In India: According to reports, the loan sharks active in different cities has been demanding up to 40% monthly interests from the borrowers. The lenders can go to any extent to extort the hefty interest amount. From Abduction to torture before family members, all illegal methods are resorted to terrorizing the borrowers. As of the year-end, 2020 reports suggest only 14% of the loans are paid in full on time, 92% are eventually paid in full, in an average of 15 weeks. Some 47% of borrowers get the lender off their backs by going to another loan shark, and chain of harassment of customer continues.
Blockchain facilitates a new digital literacy era: ETgarage through its demonstration and live cases, build a retail loan products flow powered VeriDoc Global Blockchain Technology.This promotes the free flow of funds among the involved stakeholders. It combines the Blockchain with the trusted execution environment to realize the automatic determination of loan conditions and realize smart contracts’ automatic execution through every transaction’s traceability. Blockchain is a great option to guarantee security and trust in financial Lending, but it must avoid Loan Sharks’ entities’ plague entirely.
Therefore, Blockchain for a business built on a shared, immutable ledger increases efficiency among trusted partners. Enterprises need to use a blockchain designed for business, on the right infrastructure and with the right services.
written and compiled by Prateek Bebortha, Business Analyst ETgarage
Share Blog on: