Digital loan apps: The new digital monsters

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By Shivanand Pandit

Recently Telangana witnessed five suicides within a span of seven days connected to persecution by app-based unlawful loan swindlers. Post the suicides the Telangana police force identified around 1,4000,000 dealings worth Rs 21,000 core and detained a Chinese national in connection to the app-based loan deception.

According to the Telangana police huge transactions have taken place during the last six months and executed over payment gateways and bank accounts linked to fraudulent  companies and  large number of international transactions have also occurred through bitcoins.

The suspected, Zhu Wei alias Lambo was in charge of operations for many instant loan app entities such as Aglow Technologies Private Limited, Liufang Technologies Private Limited, Nabloom Technologies Private Limited and Pinprint Technologies Private Limited.

The matter is being examined by the Telangana police and they are investigating more than a dozen payday loaning apps such as Loan Gram, Super Cash and Mint Cash. As per police sources, there are more than 72 apps which are offering loans online without appropriate authorizations from Reserve Bank of India (RBI)  and obligatory linkups with banks and registered NBFCs.

As a result of series of suicides and mistreatment of defaulters who had borrowed at inflated interest rates, numerous states have imposed restrictions on such apps. Moreover, the RBI has alerted citizens against imparting their personal information with such apps and against borrowing what appeared to be trouble-free money from unsubstantiated sources.

An entity that advances money to the public must be authorized by the RBI. Nevertheless many organizations in India function as lenders without proper license through apps that can be effortlessly downloaded. Few of them connect with banks or non-banking financial corporations and act as their subcontracting associates for promoting and on-boarding customers. The trouble arises when the apps are not crystal clear and do not reveal the complete information to the users. 

The customers should be aware that it is not the app which is loaning but the bank or a NBFC. Importantly those who run the apps for the bank or NBFC will also have to be within the ambit of banking customs and norms.

According to industry watchers there are several Chinese apps which are active in the digital lending sphere that bully their borrowers and family members at the first sign of loan evasion. These unauthorized establishments are at par with illegitimate financiers who advance against the security of land or gold ornaments to low and middle class families.

In addition, these establishments like conventional moneylenders are involved in forced lending customs to get their money back. Naming and shaming the borrower is their usual job. These entities offer trouble-free credit through unregulated apps which varies from Rs 1,000 to Rs 100,000 at exorbitant rates of interest which may range between 18 per cent to 50 per cent. Besides, the digital or online loan givers grab consumer records when the app is downloaded.

To attract customers such lenders employ voluminous methods starting from advertising in market places to sending bulk messages and email communications. They also bypass the methodical documentation, customer background inspection, income verification and KYC procedure. Thus, such illicit loan apps provide trouble-free quick loans under the lure of rapid money in a few minutes after downloading the app with no checks or assessments. The understanding between the borrower and the lender is that the money will be returned within stipulated time with the interest component. But the story changes when borrower defaults on the loan amount.

When mortgagor fails to repay the amount borrowed, lenders send text communication to every fellow in the borrower’s phone book humiliating them. Many times they also call up women members of the borrower’s contact book and abuse them. They damage the customers’ privacy and no rules are imposed on such acts. These are fly-by-night operators and on the basis of the apps itself it is not transparent as to what is their configuration.

Earlier peer-to-peer platforms used to lend directly to individuals or business units without an approved financial institute partaking as a mediator. They used to provide loans via online mode that pair lenders with the prospective borrowers. But at present they are regulated and in July 2020, the RBI listed 21 P2P NBFCs.

RBI warning to consumers on loan based apps

On December 23, 2020, the RBI released a report and warned the people not to become victims of new-age digital apps. It also cautioned them not to share copies of KYC documents with anonymous or illegal apps and urged them to examine the backgrounds of the entities providing loans through online mode or mobile apps. Customers are also advised to report such apps or bank account details linked with the apps to concerned law enforcement agencies or use the Sachet portal to file a grievance in an electronic method. The RBI in its report mentioned that there are many complaints against lending units which mainly associate to excessive interest rates, unclear methods of interest calculation, cruel recovery practices and unapproved use of personal records.

To assist the RBI in the process, the Digital Lenders Association of India (DLAI) issued a code of conduct to its members and instructed them to follow it strictly. The Fintech Association for Consumer Empowerment (FACE) also broadcasted the ‘Ethical Code of Conduct to encourage finest systems in digital lending and to protect consumer privileges and welfares. The founding member of the FACE also mentioned that code of conduct has been issued to provide the awareness to the consumers about the correct rates of interest and other top customs.

Earlier in June 2020, to make the digital lending process more transparent the RBI issued guidelines and had instructed banks, NBFCs and digital lending boards to honestly reveal complete information on their websites to people and stick to the truthful practices protocol guidelines in letter and spirit .regardless of whether they advance via their own digital lending platform or via an delegated lending platform.

The RBI issued this mandate after noticing that loan offering platforms manage to describe themselves as lenders without unveiling the name of the bank or NBFC at the backend, as a result of which, customers are not able to retrieve grievance remedial paths available under the governing frame.

Ruthless approach by the digital loan sharks has triggered concern. There is a shortage of regulations to monitor digital lenders. Presently, lending activities are carried by individuals easily without any rubrics and rulings. The main problem arises when apps supply money from doubtful bases including from money laundering and even proceeds of heinous crimes like drug-running and lend from their books staying out of directive. Latest incidents reveal this scenario and it is a wake-up call for the regulators. The crisis of unlawful loan lending apps will continue till the supervisory cracks exist.

In spite of the government’s statements on the security of personal data, the criminal loan apps have excavated borrowers’ data including their bank account details, deposits and borrowings from other conventional financial institutions. Although banking regulations stipulate hard method for granting permits to lend to general public or to accept the deposits, these digital lenders escape judicial parameter.

If the speed with which Indians have taken to digital financial transactions is a positive development of COVID-19, the unpleasant outcome is the mushrooming of unconstitutional digital lending apps. Hence without delay, the ministries of home, finance, information technology and law must interact with the RBI to tackle these digital lending apps, just as few years back institutions had got together to handle the Andhra Pradesh microfinance crisis. Thus, the government and the watchdog of the banking sector need to do more than issuing and tweeting caveats to the public about illegal digital lending applications.

The writer is a tax specialist, financial adviser, guest faculty and public speaker based in Goa. He can be reached at [email protected]