CHENNAI: Chinese-owned Fintech companies offering short-term loans to lakhs of Indians through mobile apps are making a net profit margin of Rs 5.2 crore in just three months with just an investment of Rs 1 crore, an investigation by the Enforcement Directorate has found.
According to sources, this is made possible by charging 30%-40% of the sanctioned loan amount as an upfront processing fee and collecting interest rates as high as 36%. This pushes those taking loans into a debt trap and they end up taking fresh loans to pay off previous ones.
The processing fee makes the effective rate of interest on these loans as high as 2,000% per annum, eventually making repayment extremely difficult. This fee is charged every time a borrower takes a loan. These short-term loans are for anywhere between a week to four months.
For example, when a person takes a loan of Rs 5,000 through the app, the company charges Rs 1,500 (30%) as a platform fee and only disburses Rs 3,500 to the borrower’s account. However, an interest of 36% is charged on Rs 5,000, though only Rs 3,500 was disbursed.
ED investigation shows that with an initial investment of Rs 1 crore, which is given as short-term loans to several people, the company can earn a processing fee of Rs 15 crore and disburse loans worth Rs 50 crore to one lakh people in three months.
If just 80% of these loans are recovered, the company still makes a revenue of Rs 6.2 crore in 13 weeks, sources said. After the initial investment, it becomes a self-financing model, as the money keeps rolling over on a weekly or fortnightly basis, sources added.
Recovery of these loans plays an important role in their profit margins. If the recovery rate drops by just 1%, the earnings from the processing fee reduces to Rs 13.4 crore, and the net margin reduces to Rs 4.2 crore, sources added.
This is why these companies take extreme measures to recover loans - call centres employing more than 100 people are run to call borrowers incessantly for repayment. In case of default, friends and families are contacted by the call centres. This data is accessed by the app when the borrower accepts the app’s terms and conditions, without which loans are not sanctioned.
The borrowers and their contacts are also sent fake legal notices, messages labelling them as thieves, apart from adding them to Whatsapp groups where abusive messages are sent. Women contacts are harassed with obscene messages, sources quoting the investigation said.
ED sources said that though such Fintech companies have Indian employees, the ultimate owners are Chinese who take the decisions. In the recent case of PC Financial Services (PCFS) which ran the Cashbean app, ED found that Rs 429 crore was sent to Chinese owners allegedly through bogus transactions which are violations under FEMA.
The agency has also found that these Fintech companies get into the lending business after entering into agreements with non-banking finance companies (NBFC) which have valid RBI licences. The NBFCs themselves earn a guaranteed return without investing anything by virtue of just holding the licences.