The digital age has seen the emergence of artificial intelligence, automation, access, and affordability. The effect of these 4As are considered so critical for developing economies that some governments have espoused digitalisation more fervently than they ever have other causes like education, civil liberties, or law and order. Yet, these very benefits seem to have facilitated the rise of that other ‘A’ which invariably accompanies rapid economic growth: artifice. Indeed, the rate of growth of fraud in India, specifically financial fraud through digital lending apps, is unprecedented.

Since the lockdown, India has witnessed a rash of “suspect” apps in the marketplace, which have magnified predatory and fraudulent digital lending practices. An app named Pratibimb, which tracks cyber criminals in Jharkhand’s hotspots, recently concluded that illegal lending apps drove 23 per cent of all financial scams. What makes these threats more intimidating, however, is that the RBI seems to have chosen a reactive strategy to deal with this menace when a more deliberate policy could yield more tangible results.

The peril of digital lending apps first caught public attention in December 2020, following a slew of suicides in Telangana that resulted from harassment linked to lending-app debt collection efforts. This prompted the RBI to first warn the public “not to fall prey to such unscrupulous activities” and then, in January 2021, to constitute a working group to study the digital lending landscape. Subsequently, in September 2022, the central bank issued digital lending guidelines that made it difficult for unregulated players to operate in India, while promising to circulate a “whitelist” of approved digital lending apps in the near future.

Instead, in February 2023, the Ministry of Electronics and Information Technology (MeitY) took the unusual step of banning 94 quick-loan apps — some of them rumoured to be of Chinese provenance — under Section 69(A) of the Information Technology Act, 2000. According to the Finance Ministry, the RBI had furnished the list of digital lending apps (DLAs) being used by regulated entities (REs) to the MeitY which, in turn, had shared the list with Apple and Google “to ensure that only the apps figuring in the list are hosted on their app stores.”

But this is not the same as making a whitelist of approved apps publicly available. As a result, unauthorised DLAs continue to plague the sector, and unsuspecting borrowers continue to fall prey to their machinations. Realising this, the government is supposedly contemplating a blanket ban on digital lending by unregulated entities to protect people from the vagaries of online lending platforms.

A whitelist needed

Why did the RBI not publish its whitelist in the first place? The central bank’s claim that the information provided to MeitY was “confidential” and that disclosure would “prejudicially affect the economic interests of the State”, is a bit unconvincing since the economic interest of the people constitutes that of the state. Another theory is that the regulator’s reluctance to unequivocally take a stand may have stemmed from prior experience, wherein it had asked banks to sever their relationships with crypto exchanges. The RBI’s circular had been questioned by the apex court on grounds of disproportionality of response and lack of empirical data. In this case, however, stern action is warranted, and empirical evidence exists in spades.

A more realistic, and worrisome, explanation could be that the RBI is undecided on playing the role of a regulator — with all the maintenance and management of oversight and enforcement infrastructure that such a role demands. Whitelisting a lending app, for instance, entails frequently monitoring, periodically approving, and issuing a regulatory prescription to apps from time to time. This would necessitate careful validation of specific parameters — eligibility norms, data access permissions, KYC requirements, rates of interest, default penalties, collection mechanisms, use of third parties, etc. — of hundreds of lending apps. This activity is fraught with significant reputational and legal risks which are exacerbated every time a whitelisted app tweaks its own operating criteria, putting the onus on the regulator to track such revisions in real time.

But the reputational risks associated with whitelisting digital lending apps by the central bank pale in comparison with those connected to fraud and malpractice suffered by the citizenry. As a start, the RBI should look to at least publish an alert-list periodically — akin to those it has published in the past to contain unauthorised forex electronic trading platforms (ETFs) — of unauthorised lending apps. This will certainly be more consumer-centric than a blanket ban that may turn off access to credit for many consumers. But for this to happen, the regulator may have to invest in and utilise high-frequency app data and machine-learning techniques efficiently to flag apps exhibiting suspicious behavioural characteristics on a 24x7 basis.

Going by the recent pronouncements, the RBI is probably considering delegating the responsibilities for white-listing to self-regulatory organisations (SROs), as is evident from the draft omnibus framework for recognising SROs for REs, circulated last month, followed by a similarly worded framework exclusively for the fintech sector, posted this month. The frameworks expect REs to devise “suitable surveillance methods for effective monitoring” and “address larger concerns of the industry and financial system as a whole.”

Inviting and coaxing society to embrace digitalisation also entails protecting it from the unseen risks of enthusiastic participation. The government, aware of low financial and digital literacy, particularly among first-time users of formal financial services, cannot afford to ignore the proliferation of retail financial fraud — a peril that, if left unchecked, can lead to a lack of trust in digital finance.

The only proof against artifice, as has been demonstrated in other parts of the world, is proactive vigilance and constant supervision.

Tankha is founder-CEO, ALSOWISE Content Solutions, Rath is a former central banker