Digital lending apps provide loans in minimal time and are convenient. However, they often lead the borrower into a borrowing frenzy. These apps target people who are under financial duress, and thus in need of a quick loan. Such people may not have been able to avail the loan facilities easily from banks and other legitimate sources, as these institutions require the borrowers to have a high credit rating – the formalities required are time-consuming as well. On the other hand, lending apps don’t require such lengthy procedures and the loans are approved immediately without any due diligence. These apps are growing at a fast pace and the total amount given out as loans is around 1500 crore per year, which is 30% of the total digital lending business. The majority of the borrowers are millennials who fall under the annual income group of Rs. 1-5 LPA. Such borrowers are new to credit and hence easier to deceive.

Black

App operators are not Non-Banking Financial Companies (NBFCs). They provide loans for extremely short durations: in some cases, the loan may be given for less than a month. The interest rates charged are usually higher than 20% p.a and the processing charges are atrociously high as well. These companies usually change their name in 10-15 days and 90% of the investors are Chinese entities. Most of them are Chinese white-labelled apps with Indian names. These companies operate through shell companies and disburse loans only through escrow accounts, making them untraceable. However, this isn’t all. Even if one payment is missed, they start harassing and humiliating the borrowers. They force borrowers into a state of dread and anxiety. Collection agents start incessantly calling borrowers, their relatives and friends. They start abusing them as well. Some people are unable to cope with the pressure, and there have been cases where some people have resorted to extreme measures and harmed themselves. These companies have been working on proverbial steroids since the coronavirus pandemic and the nationwide lockdown began. Unethical lenders are feeding off of people’s distress and are flourishing at a threatening pace.

White

Fundamentally, these companies can act as viable alternatives to major financial institutions, and can bring about a financial revolution. For that to happen, there is a need for compliance from their side. Formation of companies as registered NBFCs and strict adherence to RBI’s collection rules will go a long way, yet it is the first step. App operators should have a formal loan procedure with proper documentation, Know Your Customer (KYC) verification, and provide grievance redressal mechanisms on their apps itself. They should not ask for irrelevant permissions in the borrower’s phones. The future is bright for legitimate digital lenders who respect their customers’ privacy and never resort to practices such as social shaming and harassment.

Grey

Consumer awareness is of utmost importance when it comes to digital lending apps. Before downloading any of these apps, one should look at the reviews and ratings of the app. Consumers should demand loan sanction letters and loan term sheets for proper diligence. Moreover, authorities should be contacted if threat calls from recovery agents are received. An encouraging development in this regard is that the RBI has made an internal working group on digital lending to recommend regulations regarding the same. Yet these apps do not comply with the rules made by RBI and the Digital Lending Association of India. In December, Google removed hundreds of such apps from the play store. These fraudulent entities have been operating in the shadow for a long period of time and now it is time for them to either shut shop or walk the legal path.

By Chirag Banka