Digital lending apps

It’s a debt trap at the click of a button – beware!
Digital lending apps
"Though many owners of such companies were trapped in the legal net, the fact remains that the majority of these fraudsters still remain at large and untraced."Pixabay [Creative Commons]

There is a unique transformation in the Indian banking system. Digital lending practices are gaining momentum, pushing the traditional retail lending practices of the banks somewhat on the back-foot.

Even as the transformation is pandemic-induced, the technology revolution making sweeping changes in the financial landscape in pre-covid times was all set to roll out digital lending platforms. But the virus unprecedentedly accelerated its growth.

What makes the emergence of digital lending platforms a unique transformation? Let me explain. We were commonly coming across the stories of private deposit-collecting companies luring gullible public with higher rate of interest on deposits and later duping them of their hard earned money.

These private companies including chit fund companies swindled thousands of crores of public deposits. Though many owners of such companies were trapped in the legal net, the fact remains that the majority of these fraudsters still remain at large and untraced.

Precisely, in pre-covid times, the conman used to defraud the general public through tricky deposit schemes. Now, in covid-times, the people are defrauded through loans provided to them digitally.

In fact, the foundation of an era of digital lending platforms has been laid which is all set to transform the traditional lending practices, especially in the retail sector.

Today, we come across digital lending apps making way for almost everybody’s smartphone. Most of the apps are unregulated and operating illegally. Reports indicate that millions of Indians rely on lending apps and there are no guiding sources for the borrowers to pick a legal lending app.

Reports are continuously surfacing in the media about the huge network of unauthorized and unregulated lending apps, especially China based apps, which have networked a 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.

We have seen that these apps are tailored in a flashy way to hypnotize the browsers and net them into a debt trap. The pandemic time has been a merry-making time for these lending apps as they capitalize on the covid-triggered emergency needs of the people by promising quick cash in their accounts.

Here it’s the lack of financial literacy of the borrowers which gets them trapped in the web of digital lending platforms. You will be surprised that such borrowers are charged interest rates as high as 500 per cent annualized.

One of the inhuman tactics of these digital moneylenders has been heavy-handed collection tactics. Even a minor default in repayment of these loans leads to social aberration of the borrowers. Many borrowers committed suicide after facing humiliation publicly at the hands of the digital moneylenders.

The operations of these lending apps, mostly run in private capacity, are proving a new menace for the financial system. It’s a new kind of threat to the borrowers’ security as most of them operate outside the purview of the banking regulator – the Reserve Bank of India (RBI). To be precise, it’s a regulatory challenge to the RBI as borrower complaints against the lending apps are mounting with each passing day.

Notably, in response to the growing complaints, the RBI framed a committee in January 2021 with an aim to enhance customer protection and make the fast growing digital lending ecosystem safe.

The committee came out with its report in November 2021 and suggested to restrain digital loan platforms through a mix of regulations, including setting up of a nodal agency to verify their credentials and legislative measures to prevent “illegal lending”. The committee also found that more than half of about 1,100 digital moneylenders were operating illegally.

In view of the growing menace of identity thefts, the committee even suggested that each digital lending app should have publicly available policies regarding data storage, its usage and privacy; and data should be stored in servers in India.

“Data should be collected from the borrower or prospective borrower with prior information on the purpose, usage and implication of such data and with explicit consent of the borrower in an auditable way,” reads the committee recommendation.

The committee has found the trend still in a nascent stage, but lists some serious concerns, too. For instance, data privacy issues and unethical or illegitimate lending operations pose risks to financial stability given the pace at which digital loans are picking up.

A snippet of the committee report highlights the country’s lending space witnessing a ‘tech-tonic’ shift with loans increasingly being disbursed through digital means in recent years. It says that over 6% of all loans given by commercial banks in April-December 2020 were digital, a marked jump from less than 1.5% in 2016-17.

After these recommendations to regulate the lending apps, the RBI needs to act now and roll out tightened digital lending rules as early as possible to end the rule of illegal digital lending platforms. The timely action will only not save the country’s banking regulations from falling from grace but it will save human lives, as innumerable suicides by the borrowers of these lending apps have been reported in the past.

Here a report is worth mentioning which quotes SaveThem India Foundation, a non-profit organisation that assists victims of cyber-crimes that over the last year 17 suicides were connected to the harsh recovery tactics.

It’s also to be understood that India cannot miss the fintech revolution in vogue as it will be detrimental to the economic recovery in the post covid scenario. India has already been labeled as one of the fastest-growing fintech markets in the world, with digital lending projected to reach $350 billion by 2023. Experts peg much of this growth to short-term, unsecured loans rather than collateralized loans.

Meanwhile, the emergence of lending apps and the response they have been getting from people also speaks about the credit gaps which still exist 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 the huge push to 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 for small unsecured instant loans.

It’s here these online financiers picked up the opportunity and have been successfully reaching out to those who need quick finances to meet their short term needs. Let the ground situation change now and stop the illegal digital lenders, known as loan sharks, from prowling the gullible borrowers.

Disclaimer: The views and opinions expressed in this article are the personal opinions of the author.

The facts, analysis, assumptions and perspective appearing in the article do not reflect the views of GK.

Greater Kashmir
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