Digital dangers

Unauthorised lending apps must be stopped

The Reserve Bank of India (RBI) last week cautioned the public against unauthorised lending apps offering quick loans, after reports of harassment by such lending platforms. The banking regulator also emphasised that people should not share their documents with such unauthorised entities. Public lending in the country is undertaken by banks and non-banking financial companies (NBFCs) registered with the RBI. Besides, there are lending entities regulated by state governments under laws such as money-lending Acts of respective states. The RBI has instructed digital lending platforms to disclose their bank and NBFC affiliation upfront. On its part, the Digital Lenders Association of India has revised its code to guard against unscrupulous entities.

However, some entities are still not following the norms. Investigation into some of these platforms has also revealed Chinese links. There has been a significant income loss because of Covid-related disruptions and people may be attracted to these platforms, which are offering quick loans, without understanding the risks involved. These apps tend to charge very high processing fees, along with a high rate of interest and more. Once the borrower is unable to pay — the possibility of which is reasonably high in the given circumstances — recovery agents of the lending platform start harassing. Calls are first made to the borrower. If that doesn’t work, friends and family members are called because these apps have access to the borrower’s phonebook. Borrowers may not be able to handle the humiliation and blackmail by recovery agents.

While the RBI has done well to issue an advisory, it will not be enough. The regulator will need to work with the government to weed out such entities. There is also a technology angle, which might make the job more difficult. For instance, even if the app stores mandatorily show which platform is connected to which particular bank or NBFC, some of these apps may bypass that by sending direct links to potential borrowers. Thus, stringent rules are needed to deter unlawful lending activity in this area. Besides, the regulator should launch a big awareness drive to sensitise people to the downside of dealing with such lending platforms. This is necessary because, with the rising penetration of smartphones, it would not be difficult for such platforms to reach a larger base of potential targets. Even if some apps are linked to entities from abroad, particularly China, people working on the ground should know what they are doing is illegal and punishable.

It is also important to streamline lending laws. All lending activity should be regulated by the RBI. Money-lending laws at the state level could leave gaps and result in unfavourable outcomes. Further, the RBI will need to be more alert. It should be able to monitor whether its regulation and guidelines are being followed or not. The present situation shows that technology can also make regulation more difficult. A significant part of legitimate lending may move to digital channels in the near future. The regulator should be prepared to protect the interests of common borrowers and savers.