Are lending apps safe?

The damage unleashed by the outbreak of coronavirus from Wuhan in China to rest of the world has been huge not only on physical health of the people, but it has also wrecked havoc with their economic health. Not a single family has been left out without an impact on their domestic budget. As job losses and drop in incomes have been rampant in the corona crisis, most of the victims (in terms of losing financial resources) have found themselves in deep and devil sea. 

In pre-coronavirus crisis, these victims had taken loans from banks, financial institutions and other sources against their income. Now after loss of job or drop in their incomes, they have been forced to default in repayment of their loans and are now facing heat from their lenders as they are chasing them to repay.

Even as banks and other financial institutions have been asked by their regulator not to harass borrowers for repayment of their loans owing to disruptions caused by the coronavirus-induced pandemic, the situation is worst for those who have taken loans from unauthorized lenders. In the past few months innumerable incidents of harassment caused to defaulting borrowers by their unauthorized lenders are surfacing. These unauthorized lenders, in traditional terms called moneylenders, have capitalized on the power of technology and have flooded the markets with lending apps luring the people to obtain loans at lightening speed in a hassle free manner. 

Last week, a 28-year-old software engineer in Hyderabad was forced to commit suicide when his ‘unauthorized lender’ shamed him for failing to repay his debt. He had lost his job in the middle of the pandemic and defaulted on loans from money lending apps. The lenders hounded him and sent out messages about him to everyone on his contacts list, the consent for which he had given while availing loan facility through the app. 

Even a popular TV serial writer became victim of a lending app. He took his own life after being harassed for repayment by the loan app.

Reports are continuously surfacing in media about the huge network of unauthorized and unregulated lending apps, especially China based apps, which have networked huge chain of borrowers in India. Interestingly, these apps are clandestinely operating outside the ambit of radar of any regulatory authority in India. They have been lending money outside the formal financial system of the country. Even as their loan appraisal and disbursal is quick, almost real-time, they lose no time to invoke their aggressive recovery tactics on a small miss in repayment. Notably, these lending apps download contact lists, photos and other data from borrowers’ phones and the same is used against the borrower in case he defaults. There are chances that this data may be misused even when the borrower repays the money within the stipulated time.

Meanwhile, the emergence of lending apps and the response they have been getting from people also speaks about the credit gaps which are still existing in the formal financial system. In other words, our banks and financial institutions still have a long way to go to bridge the credit gap which has forced their customers to bank upon unauthorized lenders such as lending apps. Despite huge push to the financial inclusion in the country, the basic impediments to the formal lending structure continue to remain too clunky, time-consuming and costly to satisfy the vast demand in evidence for small unsecured instant loans. 

It’s here these online financers picked the opportunity and have been successfully reaching out to those who need quick finances to meet their short term needs. 

Even as the Reserve Bank of India (RBI) put in place rules to curb the menace unleashed by these online lenders, the ground situation remains unchanged as the digital lenders continue to remain on prowl. 

There are, of course, legal lending apps also. They work with leading banks and non-banking finance institutions and follow proper norms, These kind of apps, working on commission basis, manage loan agreement with banks and customers.

Let’s have a close look at this online lending menace which is turning into a death trap for borrowers as it has started taking precious lives.

What’s the current scenario of these lending apps?

These modern lending channels are called loan sharks and are illegally operating. They are as good as moneylenders who use coercive measures in recovery of loans. These new-age online lenders make best use  technology to lure borrowers, especially the young ones, to loans on exorbitant rate of interest. Once the borrower misses EMI date, these lending apps quickly resort to naming and shaming the defaulting borrowers in public, more particularly among their contacts. They oftenly harass family members of their borrowers just at the first sign of loan default.

Notably, media has highlighted many Chinese apps active in the digital lending space resorting to practice of leaking personal data. 

What’s the modus operandi of these app-based financers?

So far the exact style of operations of the lending apps is not known. However, a moneycontrol report reveals ‘these entities source money from somewhere (mostly unknown individuals) to on-lend to borrowers at usurious rates of interest for a very short tenure starting from 7 days to 15 days.’ The average loan amount varies from Rs 3,000 to Rs 50,000. The interest rate charged can vary from 60 percent to 100 percent as against a regular microfinance loan where lending rate is typically in the range of 22-25 percent and a bank loan with 7-12 percent lending rate.’

Who regulates these lending apps?

This is an informal way of financing and currently there are no regulations in place to put a check on these lending apps. Their structure and existence is not identified and are referred by experts as fly-by-night operators.

Why people fall in their net?

Mostly, they send messages and emails in bulk and lure gullible people in the name of instant loans with no documentation. They credit the loan amount instantly in the account of the borrower once he/she downloads the app and apply for the loan. This quickness in disbursal of the loan and that too without any KYC documentation and other formalities which otherwise are required at a bank or a financial institutions, tempts an individual to take the loan.

What is the response of RBI to the reports of harassment by these unauthorized lending platforms?

Reserve Bank of India (RBI) has urged citizens to be wary of unauthorised digital lending platforms and mobile apps for taking loans.   On Wednesday, the RBI expressed concern on high-interest rates, hidden charges and dubious recovery methods adopted by these platforms. The apex bank made it clear that legitimate public lending activities can be undertaken by banks, non-banking financial companies (NBFCs) registered with RBI and other entities who are regulated by the state governments under statutory provisions, such as the money lending acts of the concerned states. They

The regulators cautioned not to fall prey to such unscrupulous activities and verify the antecedents of the company, firm offering loans online or through mobile apps.

Moreover, the RBI has urged the consumers not to share copies of KYC documents with unidentified persons, unverified/unauthorised apps and should report such apps, bank account information associated with the apps to concerned law enforcement agencies or use this RBI portal (https://sachet.rbi.org.in) to file an online complaint.

How to identify a genuine lending app?

Reserve Bank has mandated that digital lending platforms which are used on behalf of banks and NBFCs should disclose the name of the bank or NBFC upfront to the customers. However, the regulator has warned people that if they are using these kinds of apps they need to be more careful.