Exercise due diligence, avoid digital lenders that make borrowing too easy

The absence of due process-KYC, issuance of sanction letter and loan agreement-should act as red flags

Of the 1,100 digital lending apps available in India, 600 are illegal, according to a paper published recently by a working group of the Reserve Bank of India (RBI). Before the working group’s wide-ranging suggestions are adopted by the regulator, borrowers need to watch out for their interests. This they can do by exercising due diligence, instead of rushing in to borrow money from any entity that makes alluring promises.

Does the app follow a process?

The biggest indicator of the genuineness of a digital lending app is whether it follows a process. The app must fulfil KYC (know your customer) requirements before it lends any money. “It could be an e-KYC or offline KYC. A genuine lender will always ask for proof of identity and address. It will also ask for proof of income to determine credit worthiness,” says Mahesh Shukla, founder and chief executive officer (CEO), PayMe India.

Next, the digital lending app should issue a sanction letter. Remember that the app only facilitates the origination of loans. There is always a bank or a non-banking finance company (NBFC) at the back end that provides the money. The sanction letter will contain a summary of the key elements of the loan: the name of the lender bank or NBFC, the loan amount, the interest rate, and the processing fee.

The digital lender must also provide you with a loan agreement. This is a detailed document of five pages or more. “Go through the loan agreement so that you get to know all the details of the terms and conditions of the loan, the repayment schedule, the action the lender could take if you don't repay, and so on,” says Shukla.

If the digital lending bypasses these steps, that should raise a red flag.

Who’s the lender at the back end?

Borrow only from a player that has an RBI-regulated entity—a bank or an NBFC—at the back end. If there are problems, you will have recourse to the regulator. “Lenders that don’t have a bank or NBFC at the back end but are lending are engaging in an illegal activity,” says Gaurav Chopra, founder and CEO, IndiaLends, and founding member of Digital Lending Association of India (DLAI).

Borrowers must make sure they receive direct communication from the bank or NBFC. “There have been cases of illegal apps misusing the names of banks/NBFCs, which makes it essential that you receive direct communication from the player at the back end,” says Madhusudan Ekambaram, co-founder and CEO, KreditBee and co-founder, FACE (Fintech Association for Consumer Empowerment).      

Don’t get trigger-happy with permissions  

Once you have downloaded the app, don’t give blanket permissions. “Only give permissions that are relevant to the lending process,” says Chopra. For instance, you may give access to the camera for the KYC, or to your gallery if you have to upload a document stored on your phone.

If you share your data with the legitimate apps, and not obscure ones, you are likely to be safer.  

“The app must offer the option of withdrawing access. The absence of such an option is also a red flag,” says Shukla.

Don’t accept misbehaviour

The RBI has laid out clear guidelines regarding the practices recovery agents can follow, and what they can’t do. If a customer feels the recovery agent has crossed these well-defined boundaries, he should file a complaint with the bank/NBFC. “Many banks/NBFCs outsource recovery to a collection agency and may not be aware of their practices,” says Ekambaram. If the bank/NBFC does not resolve your issue, file a complaint with the ombudsman. In extreme cases, file a complaint with the cybercrime department.

Avoid grief with these precautionary measures

• Before downloading a loan app, check how many times it has been downloaded; avoid those that have been downloaded only a small number of times  

• Avoid apps not available on Playstore—which have to be downloaded from a link emailed to you

• Read the reviews and check the ratings on Google Playstore to get a sense of the prevailing consumer sentiment about the app  

• When following the steps for taking a loan, take screenshots, which will prove handy if you have to file a complaint

• Also download the loan agreement and save it with you for the same reason