Sunday, December 3, 2023

Mobile lending apps: Digital debt traps

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In a shocking development, online fraudsters are offering easy loans and using forceful ways to humiliate customers so that they cough up the cash borrowed, leading many to commit suicide in desperation.

By Shivanand Pandit

Even as India celebrates the arrival of vaccines against Covid-19, there is another bug from China that may create havoc if not killed by judicial medicine. This is the “digital loan microbe”. There were five suicides within a span of seven days recently in Telangana which were connected to persecution by app based loan swindlers and moneylenders.

This has increased worries about governing breaches being misused by online fraudsters. The app scam got murkier when the Telangana police identified around 14,000,000 dealings worth Rs 21,000 crore and detained a Chinese national in connection with it.

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

The suspect, 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 Pin print Technologies Private Limited. The Telangana police is 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 authorisationfrom the RBI and obligatory linkups with banks and registered non-banking financial companies (NBFCs).

Although these problematical digital loan applications are not solely made in China, the Telangana police detected a huge number of such apps made by the Chinese. As a result of a 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 alerted citizens against imparting personal information to such apps and advised them against borrowing what appeared to be trouble free money from unsubstantiated sources.

Any entity that advances money to the public must be authorised by the RBI. Nevertheless, many organisations in India function as lenders without proper licences through apps that can be effortlessly downloaded. A few of them connect with banks or NBFCs and act as their subcontracting associates for promoting and on-boarding customers. The trouble starts when the apps are not crystal-clear and do not reveal complete information to the users. Customers should be aware that it is not the app which is loaning, but the bank or an 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 sources, there are several Chinese apps which are active in the digital lending sphere. They allegedly disclose personal statistics and harass their borrowers and family members at the first sign of loan evasion. These unauthorised establishments are on a par with illegitimate financiers who advance against the security of land or gold ornaments to lower and middle class families. Such lenders have been operating in India for ages. 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 practice. These entities offer trouble-free credit through unregulated apps which varies from Rs 1,000 to Rs 1 lakh at exorbitant rates of interest which may range between 18 percent and 50 percent. Besides, the digital loan givers grab consumer records when the app is downloaded.

To promote lending, they employ various methods such as advertising in marketplaces to sending bulk messages and email communications. They also bypass the methodical documentation, customer background inspection, income verification and Know Your Customer (KYC) procedure. Thus, they provide trouble-free quick loans and give money in a few minutes after the app has been downloaded. There are no checks or assessments and this deceives innocent people. The understanding between the borrower and the lender is that the money will be returned within a stipulated time with interest. But the story changes when the borrower defaults on the loan amount.

When the mortgagor fails to repay, lenders send a text communication to every person on the borrower’s phone book, humiliating them. They also call up women in the borrower’s contact book and abuse them. They damage the customer’s privacy and no rules are imposed on such acts. These are fly-by-night operators.

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

On December 23, 2020, the RBI warned people about becoming victims of the new digital virus and dishonest doings. 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 were also advised to report such apps or bank account details linked with them to concerned law enforcement agencies or use the Sachet portal ( to file a grievance electronically. The RBI mentioned that there were many complaints recently against lending units which imposed excessive interest rates, had 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 issued a code of conduct to its members and instructed them to follow it strictly. The Fintech Association for Consumer Empowerment (FACE) also broadcast the “Ethical Code of Conduct” to encourage the finest systems in digital lending and to protect consumer privileges and welfare. The founding member of FACE also mentioned that the code of conduct had been issued to provide awareness to consumers about the correct rates of interest and other top practices.

Earlier, in June 2020, to make the digital lending process more transparent, the RBI issued guidelines and instructed banks, NBFCs and digital lending boards to honestly reveal complete information on their websites and stick to truthful practices in letter and spirit regardless of whether they advance money via their own digital lending platform or through a delegated lending platform. The RBI issued this mandate after noticing that loan offering platforms manage to describe themselves as lenders without revealing the name of the bank or NBFC at the backend. As a result, customers were not able to use remedial methods available under the governing frame. Yet, with swelling reports of harassment and suicides, digital lenders who function within the RBI purview worry that the budding industry could be eternally scarred.

The ruthless practices followed by digital loan sharks have triggered worry and melancholy. There is a shortage of regulations to monitor them and this is a big concern in the banking sector. Presently, lending activities are carried out by individuals easily. The main problem arises when apps supply money from doubtful bases, including from money laundering and even proceeds from heinous crimes like drug-running.

It is a wake-up call for regulators to crack down on these lenders. The crisis of unlawful loan lending apps will continue till supervisory cracks exist. In spite of the government’s statements on security of personal data, these criminals have stolen borrowers’ data, including bank account details and deposits and borrowings from other conventional financial institutions.

Although banking regulations stipulate a tough stance for granting permits to lend to the general public or to accept the deposits, these digital lenders escape judicial scrutiny. Earlier, Prime Minister Indira Gandhi had clamped down on unlicenced moneylenders during the Emergency, but the matter has endured into the 21st century.

If the speed with which Indians have embraced digital financial transactions is a positive development of Covid-19, it has also had an unpleasant outcome in 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 handle these apps.

This is what happened in 2010 when a few of these institutions got together to handle the Andhra Pradesh microfinance crisis. Here, several micro lenders operated outside legal boundaries and forcibly recovered money that had been lent to borrowers at excessive interest rates, leading to many suicides.

Also Read: Madhya Pradesh High Court issues notice in case of obtaining govt job with fake caste certificate

Thus, the government and the RBI need to do more than issuing caveats to the public about illegal digital lending applications and crack down on them.

—The writer is a financial and tax specialist, author and public speaker based in Margao, Goa

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