Enforcement Directorate wants RBI to block NBFCs on a Chinese string

Lists 40 NBFCs extending small-ticket loans but acting as a front for Chinese fintech firms

The Enforcement Directorate has prepared a list of 40 non-banking financial companies (NBFCs) involved in digital lending activities but acting as a front for companies linked to Chinese nationals. It has asked the Reserve Bank of India (RBI) to cancel licences of such shadow lenders.

People privy to the development said there are entities that have received an NBFC licence from the RBI and also tied up with digital lending apps (DLAs) extending small-ticket personal loans, and credit to small and micro enterprises, among others.

Investigations found that these NBFCs have no control over lending or recovery operations, which are actually managed by digital lending fintech companies, many of which are owned by foreign nationals, mainly from China. Several of these Chinese nationals are based in Hong Kong.

It is not difficult to obtain an NBFC licence because the net-owned fund requirement is only Rs 2 crore. Sources said as these entities are unable to garner resources to lend, they tie up with digital lenders, which often run the entire operations.

“There are instances when ownership of an NBFC has been transferred to such platforms owned by foreign nationals, with the RBI’s approval. However, the RBI has now stopped giving approvals for such transfer of ownership of NBFCs to entities owned by foreign nationals, mainly Chinese,” a source said. In November last year, an internal working group (IWG) of the RBI found that of the 1,100 loan apps available across 80 apps stores between January and February 2021, 600 were illegal. 

The internal group, which proposed tightening of norms for such digital lenders, observed NBFCs have a higher proportion of loans lent digitally than banks.

The IWG observed that platform-based lending -- done by marketplace lenders (MPLs) or marketplace aggregators (MPAs) -- essentially performs the role of matching the needs of a lender and borrower without any intention to carry the loans in their balance sheet.

Sources said the bigger issue with such practices is not the lending but access to customer data.

“The fintech gets access to the customer data -- KYC documents, and their Aadhaar number – whatever is available. They charge usurious rates of interest and customers get threatening calls if they fail to pay dues,” the source said. When a customer logs in to the loan app of an NBFC, it directs him/her to a different platform that the customer many a time fails to notice. That platform is operated by a fintech firm, which controls the operations and has access to all the customer data.

In November, the ED had arrested the CEO of Kudos Finance and Investment, an NBFC, over money laundering charges. A statement from the ED noted various fintech companies backed by Chinese funds have made agreements with these NBFC companies for providing instant personal microloans.

“Kudos has a paltry net owned fund (NOF), but it is taking huge amount as security deposits and then opening separate merchant ID (MID) with payment gateways for each fintech app and depositing these security deposits in the MID of the respective fintech app,” the agency said.

The IWG report had observed that while digital lending in India is still not significant in the overall credit pie, the growth momentum has compelling financial stability implications.

The group suggested that within a year, a nodal agency should be set up to primarily verify the technological credentials of DLAs of balance sheet lenders and lending service providers operating in the digital lending ecosystem. The group also recommended balance sheet lending through DLAs should be restricted to entities regulated and authorised by the RBI or entities registered under any other law for specifically undertaking lending business.