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RBI and Google Take Action Against Digital Lending Loan Apps

Editor, TRANSFIN.
Jan 16, 2021 6:08 AM 4 min read
Editorial

Google earlier this week removed an undisclosed number of digital lending apps from its Play Store to safeguard users.

“Google Play Developer Policy requires [lending apps] to disclose key information such as the minimum and maximum periods of repayment, the maximum Annual Percentage Rate, and a representative example of the total loan cost...we only allow personal loan apps with full repayment required in greater than or equal to 60 days from the date the loan is issued...the apps that were found to violate our user safety policies were immediately removed from the Store.” - as per a Google blog post.

This event throws yet another spotlight on digital lending (mal)practices in India which in recent weeks has come under the regulatory scanner as well.

On January 13th (a day before Google’s announcement), the RBI formed a Working Group (press release) to create a regulatory framework for these non-bank online lenders. Back in December, the Central Bank had cautioned consumers against usage of these apps, and was also considering an investigation into whether some banks allowed funds to flow into these platforms without conducting mandatory due diligence.

What are Digital Lending Apps?

Digital lending or in many cases “payday lending” platforms have become very popular in the country over the past year as a source of quick and easy credit. The pandemic and lockdowns led to many job losses and pay cuts, which forced many consumers to turn to often unauthorised online lenders for quick credit.

Now, to be fair, digital lending in India as a whole is a robust and promising sector. It has attracted over $2.4bn from VC investors since 2014. India is home to c. 1,263 digital lending startups, and with formal employment and credit channels growing, outlook towards the sector remains bullish.

The problem lies in those unregulated platforms whose fraudulent business practices have cast a cloud on the sector as a whole.

Some of these micro lenders follow an ominous modus operandi of providing small loans swiftly and with no questions asked - often with no regard to the borrower’s credit history. These loans are usually offered at exorbitant interest rates - sometimes as high as 500%! Additionally, when borrowers install these apps, they are forced to share an abysmal amount of personal data including all their contacts, their location, gallery images etc. This data in turn is used by the apps to coerce repayments.

 

How Does the Coercion Work?

If the borrower is unable to pay back the loan with interest on time, the loan apps harangue and threaten them endlessly. There are cases where the borrower’s friends or family members were called and told that he/she was not repaying the loans taken. And even instances where pictures of women defaulters were taken from their phone galleries, morphed with pornographic material and shared with the contacts of the defaulter and through WhatsApp groups.

The problem isn’t an isolated one. As many as 45,000 complaints where borrowers were being harassed by loan apps were received by one non-governmental organisation alone - Save Them India Foundation, which has also filed a petition in the Supreme Court against these coercive platforms.

Unfortunately, such harsh loan recovery tactics have driven some borrowers to take their lives in recent months.

 

Made in China?

In 2020, a large uptake in the registration of instant loan apps was observed in India. Many of these apps (the exact number is debated) were found to be storing user information, such as facial recognition data and personal data, on Chinese servers.

The explosion in non-bank small-scale digital lenders in India mirrors similar trends in other countries - most notably China, which until three years ago was facing a massive $100bn loan repayment crisis. Chinese regulators launched a strict crackdown on payday lenders, which has been largely successful, although unauthorised lenders continue to operate in the shadow economy.

Faced with a hostile regulatory environment back home, Chinese online lending platforms began looking to foreign markets for opportunities. Many set up camp in Southeast Asia...and India, which was a ripe market for fraudulent lenders thanks to the lack of stringent regulations and the slowdown- and pandemic-induced credit crisis.

 

From Inaction to Action

At long last, regulators in India seem to have woken up to the threat posed by unauthorised digital lenders.

In June 2020, the Central Bank tightened norms for digital lenders and warned against unscrupulous practices, asking all lenders to adhere to Fair Practices Code in letter and spirit.

On Wednesday, the regulator constituted a six-member committee to monitor digital lending and draft regulations for the same. The group includes four RBI members + two external members from a fintech firm and a cybersecurity firm. They are required to submit their report within three months.

Alongside the RBI’s actions, Google removed some micro loan apps from the Play Store. It also reportedly contacted some platforms giving them five days’ time to provide “valid existing approvals or licences from the RBI to act as an NBFC”, failing which they could be removed from Google Play.

PS: There are many predatory loan apps out there. As a borrower, here are some precautionary measures you need to follow if you’re looking for a quick loan.

FIN.

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