The growing menace of fly-by-night money lending apps comes as a grim reminder that digital technology platforms can be double-edged weapons if not regulated properly. The recent spate of suicides by customers, frustrated over the dehumanising tactics of the lending companies, must serve as a wake-up call to the regulators. There is an urgent need to crack down on such dubious firms harassing vulnerable borrowers. In Telangana alone, the police had booked over 50 cases after complaints of harassment and arrested 30 persons, including some Chinese nationals, for operating instant loan apps that do not have any approval from the Reserve Bank of India (RBI). These loan apps, when installed, gain access to the person’s contacts, gallery and other private information. The loan collectors operate call centres in Hyderabad, Bengaluru, Pune and Delhi to misuse the information available on the defaulter’s phone, to blackmail and shame them. In several instances, photographs of women were morphed with pornographic material and circulated to contacts on the defaulter’s phone. This is a classic case of misuse of digital technologies by unscrupulous elements, taking advantage of the loopholes in the regulatory system. On one hand, digital technologies have helped democratise credit and reach out to sections who are currently overlooked by the conventional financial system but on the other, there is a dark underbelly that cannot be ignored. The menace also underscores the need for a robust data security mechanism for citizens.
The RBI must probe whether some banks had allowed funds to flow into these apps without conducting mandatory due diligence as some of the instant loan apps are connected to overseas jurisdictions. The onus of verifying the end use of funds lies with the banks. In June this year, the central bank had directed that banks and non-bank financiers, irrespective of whether they lend through their own digital lending platform or through an outsourced entity, must adhere to fair practices guidelines in letter and spirit. However, these apps were found to circumvent the law by opening current accounts with banks without registering themselves as non-banking financial companies (NBFCs). The loan disbursement and the entire collection process is, therefore, happening through these current accounts. Since the transaction is going through a current account mechanism, these apps are bypassing the entire gamut of regulations, including KYC (Know-Your-Customer), and not reporting to credit bureaus. Typically, digital lending apps have a payout account, usually IMPS (Immediate Payment Service) provided by a bank, through which they disburse the loan, and a collection interface. A citizen collective called Cashless Consumer, engaged in raising awareness around digital payments, has released a list of 1,000 lending apps which showed that the majority of them did not have any payment gateway integration.
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