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Good news is in the air. India is celebrating the arrival of vaccines against the deadly coronavirus. However, there is another bug that may create havoc if not dealt with by the judicial machinery. Yes, it is the digital loan ‘microbe’.

Five suicides within a span of seven days in Telangana supposedly connected to persecution by app-based unlawful loan swindlers and bountiful moneylenders have elevated worries about governing breaches being misused by online fraudsters. The instant digital loan app scam got murkier when Telangana police identified around 14,000,000 dealings worth ₹21,000 core and detained a Chinese national in connection with app-based loan deception. According to the police department, huge transactions have taken place during the last six months - executed over payment gateways - and bank accounts linked to these companies and a large number of international transactions have also occurred through bitcoins.

The suspected 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 Pinprint Technologies Private Limited. The matter is being examined by the Telangana police and they are 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 authorisations from the Reserve Bank of India and without obligatory linkups with banks and registered NBFCs.

Although these problematic digital loan applications are not solely made in China, the Telangana Police has detected that a huge number of such apps are being industrialised by the Chinese. As a result of series of suicides and mistreatment of defaulters who had borrowed at inflated interest rates, numerous southern Indian states have imposed restrictions on such apps. Moreover, the RBI has cautioned citizens against imparting their personal information to such apps and against borrowing from unsubstantiated sources.

An entity that advances money to the public must be authorised by the Reserve Bank of India. Nevertheless, many organisations in India function as lenders without proper licenses through apps that can be effortlessly downloaded. Few of them connect with banks or non-banking financial corporations and act as their subcontracting associates for promoting and onboarding customers. The trouble arises when the apps are not crystal clear and do not reveal the complete information to the users. The customers should be aware that it is not the app which is loaning but the bank or a NBFC.

Dirty picture

According to industry insiders, there are several Chinese apps which are active in the digital lending galaxy allegedly disclosing personal statistics and frequently annoy their borrowers and family members at the first sign of loan evasion. These unauthorized establishments are involved with illegitimate financiers who advance against the security of land or gold ornaments to low- 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 job. These entities offer trouble-free credit through unregulated apps which varies from ₹1,000 to ₹100,000 at exorbitant rates of interest which may range between 18% to 50%. Besides, the digital or online loan givers grab consumer records when the app is downloaded.

To promote the lending process, such lenders employ voluminous methods starting from advertising in market places to sending bulk messages and email communications. They also bypass the methodical documentation, customer background inspection, income verification and Know Your Customer (KYC) procedures.

When the mortgagor fails to repay the amount borrowed, lenders send text communication to every person in the borrower’s phone book humiliating them. Many times, they also call up women members of the borrower’s contact book and abuse them. They damage the customers’ privacy and no rules are imposed on such acts.

Response

On December 23, 2020, the RBI released a report and warned people not to become 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. Customers were also advised to report such apps or bank account details linked with the apps to concerned law enforcement agencies or use the Sachet portal (https://sachet.rbi.org.in) to file a grievance in an electronic method. The apex bank recently mentioned in a statement that there are many complaints against lending units which are mainly associated with excessive interest rates, 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 (DLAI) issued a code of conduct to its members and instructed them to follow it strictly. The Fintech Association for Consumer Empowerment (FACE) also broadcasted the ‘Ethical Code of Conduct’ to encourage finest systems in digital lending and to protect consumer privileges and welfare. FACE sources also mentioned that the code of conduct has been issued to enhance consumer awareness regarding the correct rates of interest and other top customs.

Earlier in June 2020, to make the digital lending process more transparent, the RBI issued guidelines and had instructed banks, NBFCs and digital lending boards to honestly reveal complete information on their websites to people and stick to the truthful practices protocol guidelines in letter and spirit. The RBI issued this mandate after noticing that loan offering platforms manage to describe themselves as lenders without unveiling the name of the bank or NBFC at the backend, as a result of which, customers are not able to retrieve grievance remedial paths 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 tarred.

Vigorous efforts needed

Ruthless approaches followed by digital loan sharks have triggered extensive melancholy. There is a shortage of regulations to monitor digital lenders and this is the big concern of the banking sector. Presently, lending activities are carried by individuals easily without any rubrics and rulings. The main problem arises when apps supply money from doubtful bases - including from money laundering and even from the proceeds of heinous crimes like drug-running. Latest incidents reveal this scenario and it is a wake-up call for the regulators. The crisis of unlawful loan lending apps will continue till the supervisory cracks exist.

In spite of the government’s statements on security of personal data, these criminals have easily excavated borrowers’ data including their bank account details, deposits and borrowings from other conventional financial institutions. Although banking regulations stipulate a hard method for granting permits to lend to the general public or to accept the deposits, these digital lenders escape the judicial parameter.

If the speed with which Indians have cuddled digital financial transactions is a positive development of the Covid-19 pandemic, 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 digital lending apps. The government and the watchdog of the banking sector needs to do more than issuing and tweeting caveats to the public about illegal digital lending applications.

The writer is a tax specialist, financial adviser, guest faculty and public speaker based in Goa. 

 The opinion/s expressed in the article are that of the author's and do not necessarily represent or reflect the policy or position of this magazine.