Lending app scam: Experts worry about exploitation of regulatory loopholes

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

An organization that lends money to the public must be approved by the Reserve Bank of India (RBI), but dozens of lenders in India operate without a license through apps that can be easily downloaded. Some of them partner with banks or NBFCs and act as outsourcing partners for marketing and customer onboarding.

“The problem arises when applications are not transparent and do not disclose all information to customers. Customers should be well informed that it is not the app that lends but the bank or an NBFC. Any follow-up action assisted by those managing the application for the bank or NBFC will also need to comply with banking standards,” said R Gandhi, former Deputy Governor, RBI.

Steal phone data

Unregulated payday loan apps offer easy credit, sometimes within minutes, from ₹1,000 to ₹1 lakh. Interest rates vary between 18 percent to 50 percent. Online lenders capture user data when the app is downloaded.

When a borrower defaults, the lender sends a text message to each number in the borrower’s phone book to shame them. Family members of some who recently committed suicide in Hyderabad say companies went so far as to call women into the borrower directory and started abusing them.

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

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

RBI Warnings

Even last week, the RBI issued a statement warning the public “not to fall prey to such unscrupulous activities and check the background of the company/company offering loans online or through mobile apps.” “Consumers should never share copies of KYC documents with unidentified people, unverified/unauthorized apps and should report those apps/bank account information,” he added.

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

With reports of harassment and suicides on the rise, digital lenders operating under the RBI fear the fledgling industry may be tarred for good.

“Most of these applications are overnight operations that charge high processing fees and interest rates. Borrowers are also often unable to secure a loan elsewhere and are forced to turn to them,” said Gaurav Chopra, CEO of IndiaLends, an online lending platform, and executive committee member of the Digital Lenders Association of India (DLAI).

DLAI has published a code of conduct for its member companies to follow.

Earlier this month, the Fintech Association for Consumer Empowerment (FACE) also released the “Ethical Code of Conduct to Promote Best Practices in Digital Lending and to Protect Consumer Rights and Interests.”

“We want to make sure our consumers know the correct rate at which to borrow and best practices. They’re not supposed to get a call at 11 p.m. We don’t capture contacts from your phone book, so your friends and family will never receive a call,” said Akshay Mehrotra, founding member of FACE and co-founder and CEO of EarlySalary.

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