Loan Apps Scam: Experts raise concerns about regulatory gaps being exploited

Five suicides within a week in Telangana allegedly linked to harassment by app-based illegal loan sharks and extortionate moneylenders have raised concerns about regulatory gaps being exploited by online scamsters. Telangana Police is investigating more than a dozen payday lending apps such as Loan Gram, Super Cash and Mint Cash.

An organisation that lends money to the public must be approved by the Reserve Bank of India (RBI), but scores of lenders in India operate unlicensed through apps that can be easily downloaded. Some of them tie up with banks or NBFCs and act as their outsourcing partners for marketing and on-boarding customers.

“The problem comes when the apps are not transparent and do not disclose the full information to customers. The customers should be well informed that it is not the app which is lending but the bank or an NBFC. Any follow-up action that is assisted by those who run the app for the bank or NBFC will also have to be within the banking norms,” said R Gandhi, former Deputy Governor, RBI.

Stealing phone data

Unregulated payday lending apps offer easy credit, sometimes in a matter of minutes, from as little as ₹1,000 to ₹1 lakh. The interest rates range between 18 per cent to a whopping 50 per cent. The online lenders capture user data when the app is downloaded.

When a borrower defaults, the lender sends a text message to every number in the borrower’s phone book shaming them. Family members of some who recently committed suicide in Hyderabad allege that the companies went to the extent of calling up women in the contact book of the borrowers and started abusing them.

“There will have to be regulations when they impinge on customer protection and privacy. There were similar problems in P2P platforms as well and now they are regulated entities. These apps are the next step and here also, there is the same set of questions,” Gandhi noted.

Peer-to-peer or P2P is a form of direct lending of money to individuals or businesses without an official financial institution participating as an intermediary. P2P lending is generally done through online platforms that match lenders with the potential borrowers. As on July 16, 2020, RBI lists 21 registered P2P NBFCs.

RBI warnings

Even last week, the RBI issued a statement cautioning the public “not to fall prey to such unscrupulous activities and verify the antecedents of the company/firm offering loans online or through mobile apps”. “Consumers should never share copies of KYC documents with unidentified persons, unverified/unauthorised apps and should report such apps/bank account information,” it added.

In June 2020, the RBI issued guidelines to make digital lending more transparent and had directed banks, NBFCs and digital lending platforms to disclose full information upfront on their websites to customers and adhere to the fair practices code guidelines in letter and spirit.

With increasing reports of harassment and suicides, digital lenders who operate withing the RBI purview worry that the nascent industry could be permanently tarred.

“Most of these apps are fly-by-night operations that charge high processing fee and interest rates. The borrowers are also often unable to get a loan elsewhere and are forced to turn to them,” said Gaurav Chopra CEO, IndiaLends, an online lending platform, and Executive Committee Member, Digital Lenders Association of India (DLAI)

DLAI has issued a code of conduct that its member firms must follow.

Earlier this month, the Fintech Association for Consumer Empowerment (FACE) also published the ‘Ethical Code of Conduct to promote best practices in digital lending and to safeguard consumer rights and interests.

“We want to make sure our consumers are aware of the correct rate they have to borrow at and the best practices. They are not supposed to get a call at 11 pm. We don’t capture contacts from your phone book, so friends and family will never get a call,” said Akshay Mehrotra, Founding Member, FACE and Co-Founder and CEO, EarlySalary.