Digital platforms claiming to offer hassle-free loans to individuals, small traders and other borrowers are in the news these days.

On the sunny side, the loan processing is quick and entirely online under these apps. All that the user has to do is submit a photo ID, Aadhaar number and take a selfie for authentication.

However, there have been several complaints against some of these lending platforms, lately.

They primarily relate to exorbitant interest rates, non-transparent methods of calculating interest, harsh recovery measures and unauthorised use of personal data.

We look at the key attributes of these apps that should serve as a warning for anyone who wishes to tap this route for borrowing money.

1. Unauthorised operations

To be a digital lender, one has to register with a bank or a non--banking financial company) or abide by the money-lending laws in the respective State in which the services are provided.

Many of the spurious apps circumvent these rules, yet identify themselves as money lenders.

To plug the loophole, the RBI, in June 2020, directed digital lending platforms to disclose the name of the bank/NBFC they have partnered with, so that users will be able to identify if the platform is covered under the regulatory framework. This will also give users access to grievance redressal avenues, in case of any discrepancies.

The RBI also instructed banks and NBFCs to disclose their digital lending platforms on their websites, so that the user can cross-verify the authenticity of the platform.

However, this hasn’t worked much. As per a n RBI press release in December 2020, the number of unauthorised digital lending platforms/mobile apps which promise loans in a quick and hassle-free manner has only been growing. The central bank cautioned users once again to verify the antecedents of the company/firm offering loans online or through mobile apps.

Further, according to reports in the public domain, most of the apps have been found to be crediting loans and receiving the payments through digital wallets using UPI and not through any bank account.

This can be viewed as another red flag as genuine digital lenders generally use a registered bank account to carry out disbursal of loans.

Other warning signs of unauthorised digital lenders may include minimal or no KYC (Know Your Customer) before sanctioning a loan and no signature of the registered entity (bank/NBFC) on the loan agreement.

Not everything we see has to be true and genuine. So, beware.

2. High and hidden charges

Digital lending apps generally charge higher interest rates than conventional banks and NBFCs. This is partly due to the additional risk these players take by serving users digitally and instantly, and also to those who may not have a credit score or those whose income pattern make them ineligible for a bank/NBFC loan.

But a few apps are found to be charging usurious interest rates of even up to 50 per cent per annum (sometimes, even more than that) with unreasonable conditions to repay the loan in a very short period such as a week.

Meanwhile, hidden charges and high processing fee (even up to 20 per cent) of some of the apps come in as surprise to the borrowers.

To give a perspective, most of the genuine lending apps charge a processing fee of 2-5 per cent.

According to a recent report in The Hindu , a person named Ganesan, 35, had availed himself of ₹5,000 from a loan app. However, only ₹3,500 was credited to his bank account. Within a week, he was asked to repay the full amount.

This is clearly discriminatory — based on the RBI guidelines — and there have been many such instances reported.

Further, reviews of a few of the instant money-lending apps in app stores suggest that some apps ask borrowers to pay the processing fee to sanction a loan but don’t make any further communications after that.

Ergo, one should be very careful and not fall prey to easy loans and unscrupulous activities of some of these digital lending apps.

Generally, banks or NBFCs furnish a copy of the loan application to the borrower before the time of sanction or disbursement of loans. As per RBI guidelines, banks are advised to transparently disclose to the borrower all information about fees/charges payable by borrower in the loan application. Credible money-lending apps dislose most of these details transparently in the ‘About the app’ space in the app store. This can serve as another check for users to identify if the app is genuine or not.

3. Unacceptable recovery methods

According to the RBI’s ‘Guidelines on Fair Practices Code for Lender’, in the matter of recovery of loans, the lenders should not resort to undue harassment such as persistently bothering the borrowers at odd hours and use of muscle power for recovery of loans.

Clearly, this hadn’t been followed by a few of the digital money lending service providers, going with the recent news reports on this issue.

Most of the digital apps seek access to your contacts, gallery and details of other apps in your mobile phone, on installation.

Says Satyam Kumar, CEO & Co-Founder, LoanTap (a digital lender): “Although we do not capture these details, a few apps seek it to create a credit profile of the borrower, as most who use these services do not have one”. For example, based on the number of digital lending apps in the user’s phone, the risk will be assigned to the borrower.

There have been reported cases of unacceptable and high-handed recovery methods by misuse of agreements to access data on the mobile phones of the borrowers.

These lenders are said to call up borrowers’ contacts for naming and shaming them, and even harassing women contacts.

Not just that, some of these lenders had also sent fake legal notices and FIRs threatening borrowers to repay the loan in a specified time, as per various news reports. This is a blatant violation of the Fair Practices Code of the RBI.

In November, Google is said to have removed five digital lending applications from the Play Store which offered short-term credit at high interest rates and harassed borrowers and also tried to pass off as authorised lenders. Hyderabad Police has identified 280 apps whose companies are found to be harassing and defaming borrowers.

Customers should never share copies of KYC documents with unidentified persons, unverified/unauthorised apps.

Also, users should be cautious of what contents of the phone the app has access to.

4. Risk of snowballing debt

When Ganesan (mentioned earlier) was unable to pay up, the staff handling the app asked him to download another loan app to get the cash to repay the loan.

Over a period of time, Ganesan took loans from 45 app-based companies, and his dues went up to ₹4.5 lakh.

This is a clear examples of how people may find themselves in a debt trap, if one starts depending heavily on these digital lending apps.

Due to high interest rates and short tenures, a borrower may be led in to a cycle of rolling over their loan payments because they are unable to afford the scheduled payment on the principal of a loan.

And as the loan comes instantly with a touch on the phone, one may also become addicted to this form of credit, which may eventually become unmanageable and land the user in hot soup.

5. Poor grievance redressal mechanism

As per RBI guidelines, digital lending apps should make adequate efforts towards spreading awareness about the grievance redressal mechanism.

The loan agreement must clearly disclose the options available for the borrower to redress any grievance — be it customer care support, bank/NBFC’s support or the regulator’s redressal mechanism.

A lot of users complain about the poor customer care support in the user reviews for most of these money-lending apps.

A few reports in the public domain suggest that some of these apps even do not provide any contact details for redressal of grievances.

A proper grievance redressal mechanism, especially for dealing with monetary matters, is of paramount importance.

If you come across any unauthorised digital lenders or mobile apps or are a victim of such apps, you can file a complaint on the RBI’s Sachet website portal .

Safer options for quick loans

Unforseen circumstances may lead to unexpected financial burden. If you don’t have savings either in your bank account or in the form of investments to tide over a crisis, here are a few options you may borrow from. The following options are stated considering the loan requirements of those who might not get personal loans from banks/NBFCs due to various reasons such as irregular income and lack of credit track record.

P2P lending platforms

They are web-based platforms that bring lenders and borrowers together. They facilitate matches between lenders and borrowers who agree on the loan amount and the interest rate on the loan.

In general, interest rates can vary from 10 per cent to 36 per cent annualised, and the maximum tenure of the loans on these platforms can be 36 months. Lack of credit score or low income levels may not become much of a deterrent on these platforms. Also, these are regarded as banks and regulated by the RBI to protect the borrower from unfair interest rates, unfair credit provision and false advertising.

Genuine digital lending platforms

These may come handy in hard times. But given the bad apples in this space, one has to be extra cautious before selecting the lender. Check for banks or financial institutions with which the digital lender is tied up for funding purposes and cross-verify if the app name is mentioned on the associated institute’s website.

Examine if the interest rates, processing fee and other charges are disclosed transparently and how the app fares when compared with others on charges. Look out for greivance redressal mechanism and, finally, read the user reviews for the app.

Gold loan

It is a simpler and a quicker way of raising funds from financial institutions and banks, at short notice. The documentation, too, is simple. Generally, personal identity and address proofs are the only primary documents required.

Income documents or credit score do not weigh much in the process of sanctioning gold loans. Most banks and NBFCs disburse gold loans as soon as the purity of the gold is checked. Generally, banks and NBFCs give loans up to 75 per cent of the value of the gold pledged.

Loan against life policy

Loans can be taken against insurance policies such as endowment, money-back and whole-life plans. One can get the loan either from a bank or the respective insurer. The documentation requirements are simple and involves submitting identification and address proofa, and original documents of the insurance policy.

Normally, 80 per cent of the surrender value of the policy is offered as the loan amount. A policy is said to have acquired surrender value when the premium is paid for a minimum period (usually three years). In terms of rates of interest, on an average, banks charge 9.25-13 per cent as interest while the insurers’ interest rates are slightly lower.

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