Saturday, October 23rd, 2021 14:46:38

Digital Loan Monsters

By Shivanand Pandit
Updated: January 12, 2021 2:10 pm

Good news is in the air. India is celebrating arrival of immunizations against deadly coronavirus. However, there is another bug from India’s northern neighbor that may create havoc if not killed by the judicial medicine. Yes, it is 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. Instant digital loan app scam got murkier when Telangana police force identified around 1,4000,000 dealings worth ₹21,000 core and detained a Chinese national in correlation with app-based loan deception. According to the police department huge transactions have taken place during the last six months and 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 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 authorizations from Reserve Bank of India and obligatory linkups with banks and registered NBFCs.

Although these problematical digital loan applications are not solely made in China, Telangana Police department has detected a huge number of such apps industrialized by the Chinese. As a result of series of suicides and mistreatment of defaulters who had borrowed at inflated interest rates, numerous States of India have imposed restrictions on such apps. Moreover, the Apex bank of India alerted citizens against imparting their personal information with such apps and against borrowing what appeared to be trouble-free money from unsubstantiated sources.

An entity that advances money to the public must be authorized by the Reserve Bank of India. Nevertheless many organizations in India function as lenders without proper license 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 on-boarding 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. Importantly those who run the apps for the bank or NBFC will also have to be within the ambit of banking customs and norms.

Dirty picture

According to industry onlookers, 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 at par 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, involve 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 enormous 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) procedure. Thus, such illicit loan apps provide trouble-free quick loans and entice of rapid money in a few minutes after downloading the app with no checks or assessments deceives innocent people. The understanding between the borrower and the lender will be that the money will be returned within stipulated time with the interest component. But the story changes when borrower defaults on the loan amount.

When mortgagor fails to repay the amount borrowed, lenders send text communication to every fellow 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. These are fly-by-night operators and on the basis of the apps itself it is not transparent as to what is their configuration. Earlier Peer-to-Peer platforms used to lend directly to individuals or business units without an approved financial institute partaking as a mediator. They used to provide loans via online mode that pair lenders with the prospective borrowers. But at present they are regulated and in July 2020 the RBI listed 21 P2P NBFCs.

Big boy makes the entry

On December 23, 2020 considering the public interest the RBI released a report and warned the people not to become victim 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 through online mode or mobile apps. Customers also advised to report such Apps or bank account details linked with the Apps to concerned law enforcement agencies or use Sachet portal (https://sachet.rbi.org.in) to file a grievance in an electronic method. The Apex bank mentioned in the statement that recently there are many complaints against lending units which mainly associate to 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 welfares. The founding member of the FACE also mentioned that code of conduct has been issued to provide the awareness to the consumers about 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. regardless of whether they advance via their own digital lending platform or via an delegated lending platform. 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 vaccine needed

Undoubtedly digital mice are at play although the cat is around. Ruthless approaches followed by the 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 proceeds of heinous crimes like drug-running and lend from their books staying out of directive. Latest incidents reveal this scenario and it is a wake-up call for the regulators to draw line instantly. The crisis of unlawful loan lending apps will continue till the supervisory cracks exist.

In spite of the government’s big 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 hard method for granting permits to lend to general public or to accept the deposits, these digital lenders escape judicial parameter. Earlier former Prime Minister of India, Indira Gandhi had introduced a clampdown on unlicensed money lenders during the Emergency, but the matter has endured into the 21st century.

If the speed with which Indians have cuddled digital financial transactions is a positive development of Covid-19, 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 Reserve Bank to handle these digital lending apps, just as few of these institutions had got together in 2010 to handle Andhra Pradesh microfinance crisis where several micro lenders operated outside the legal boundaries and followed forcible recovery ways and charged excessive interest rates which led to series of borrowers’ suicides. Thus, the government and the watchdog of the banking sector need to do more than issuing and tweeting caveats to the public about illegal digital lending applications

By Shivanand Pandit

(The writer is a tax specialist and financial adviser)

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