Immobilise unregistered digital lending apps

“Sir, the police are here with a notice for you,” my building’s security guard informed me in a scared voice. His fright rubbed off on even an educated person like me for a minute before my rational mind confirmed that there could not possibly be anything to worry about. When I went downstairs to meet the policeman, I discovered he had bought a notice for a court hearing for a case filed by me against a former domestic worker who had stolen some things from my residence. I had completely forgotten about the case as the stolen goods had been recovered and restored to me. 

Forget lack of faith, there is fear of the law enforcement machinery even among educated, sophisticated, middle-class people. This is so even in a state like Maharashtra where the law-enforcement machinery is in far better shape than in the rest of the country. The context is the spate of suicides committed by borrowers of digital lending apps. The borrowers felt pressured by the forged notices of 'FIRs' or 'court cases' sent by the collection teams of these apps. The lack of faith and even fear of the law enforcement machinery is so pervasive that the borrowers readily believed the police would not only register FIRs for loan default of a few thousand rupees but also act on such FIRs. 

These digital loan apps also collected on defaults by social shaming within the borrower’s circle of friends and relatives. Their contacts were taken from the borrower’s mobile at the time of lending. 

All lending entities need to register either with the Reserve Bank of India (RBI) as a non-banking finance company (NBFC) or under the money lending Act of the respective state government. The digital lending apps in question are reportedly not registered either with the RBI or with the respective state government. 

The demand for such small loans is normally met by locally well-connected people who act as unregistered moneylenders. They have a strong influence over local law enforcement agencies who look the other way as the lenders use a mix of threats and intimidation to collect overdues. Digital lending apps have simply taken the next step. When the threat itself is enough to collect on overdues, why pay the local law enforcement agencies anything at all? They forge the required documents. The perception that the law enforcement agencies work hand in glove with such unregistered lenders is enough to force the defaulting borrowers to pay up.  

Digital lending platforms, if well regulated, have the potential to provide convenient and much-needed access to small loans in an efficient manner at reasonable costs. The RBI has now set up a working group on digital lending, including lending through online platforms and mobile apps. 

The working group will not be able to do anything about the law enforcement machinery, but it can and should look at ways and means to identify, isolate, and immobilise unregistered digital lenders. The identification of digital lenders should occur at the point where it intersects with the regulated banking or payment app systems. Most banks and regulated payment apps have sophisticated software systems that use artificial intelligence which can identify money lending activities by clients. If, on enquiry, it becomes clear that those clients are not registered with either the RBI or a state government, their access to the banking and payment systems should be cut off. This step will go a long way towards reducing the issues being faced by borrowers from unregistered digital lending apps without affecting the genuine, registered lending apps.

The writer heads Fee Only Investment Advisers LLP, a Sebi-registered investment adviser