Unraveling the Scourge of Fraudulent Loan Apps on Social Media

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In the heartland of Ghosi, Uttar Pradesh, Bharat Singh embarked on the pursuit of a Rs 15,000 loan for his sister’s nuptials, guided by an Instagram discovery – UnicashX. The absence of clear indicators of authenticity left Singh vulnerable. Instagram and even the Reserve Bank of India (RBI) failed to signal any alarm. The app, seemingly supported by a non-banking financial company (NBFC) regulated by the RBI, appeared trustworthy. However, the reality unfolded swiftly as UnicashX not only imposed exorbitant interest rates but also subjected Singh to relentless mental torment. Demanding Rs 50,000, three times the borrowed sum, the app resorted to threatening messages on WhatsApp, inducing fear and anxiety in Singh, who became a victim of incessant harassment by unidentified individuals.

Singh’s ordeal is not unique.

Over the past 11 years, the digital lending landscape has expanded exponentially, projected to reach $350 billion by 2023, boasting a staggering compounded annual growth rate of nearly 40 percent, as reported by Experian, a credit information company. While legitimate fintech enterprises supported by NBFCs and banks drive a substantial portion of this growth, a clandestine realm of unscrupulous actors has also burgeoned. Although official estimates are lacking, industry insiders speculate that the illegal lending market could surpass $700-800 million.

Regulatory Void: The Breeding Ground for Fraud

Engaging with borrowers, fintech intermediaries, government officials, tech giants, and former RBI officials over the past four months, The Indian Express unraveled a common thread in victims’ testimonies. The absence of effective government and regulatory norms facilitates minimal due diligence on online platforms, allowing fraudsters to openly promote predatory loan apps. The RBI lacks a definitive list distinguishing genuine and fake loan apps, leaving borrowers susceptible to exploitation.

The unchecked growth of fraudulent entities aligns with the rapid expansion of digital lending, fueled by its inherent convenience. Despite reported cases of individuals allegedly succumbing to the traps set by illegal loan apps since 2020, the government has struggled to unite stakeholders in establishing countermeasures.

A Call for Regulation: KYDFA and Regulatory Inertia

In the latest meeting on October 13, involving the Ministry of Finance, the RBI, and the Ministry of Electronics and Information Technology (MeitY), a proposal surfaced. MeitY suggested empowering the RBI to formulate detailed know-your-customer (KYC) norms for lending apps, akin to the process required for opening a bank account, termed as Know Your Digital Finance App (KYDFA) by Minister of State for Electronics and IT Rajeev Chandrasekhar.

While the RBI did release digital lending guidelines in September 2022, they exclusively applied to regulated entities – banks and NBFCs. Consequently, fraudulent apps operating without bank or NBFC affiliations continue to exploit a vast pool of unsuspecting individuals, including students, small business owners, and salaried employees in Tier III and Tier IV cities.

Regulatory Hurdles: White Lists, Trust Agencies, and Corporate Greed

Past attempts to address the issue include discussions in a meeting chaired by Union Finance Minister Nirmala Sitharaman in September 2022. The plan involved the RBI creating a white list of legal lending apps, hosted exclusively on Google and Apple app stores, overseen by MeitY. However, the RBI has deemed this process “cumbersome,” stalling its implementation. Additionally, a proposed independent multi-stakeholder body called the Digital India Trust Agency, designed to verify digital lending apps, remains unrealized.

Queries directed at the RBI regarding these initiatives remained unanswered.

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With minimal oversight from the government and regulators, fraudsters exploit popular online platforms such as Meta, Google, Apple app stores, and WhatsApp to promote and distribute their dubious apps. Despite efforts by Google and Apple to block thousands of fraudulent apps, these malevolent entities find loopholes to re-enter the online space. Advertisements on platforms like Instagram and Facebook, supposedly equipped with filters, continue to showcase fraudulent loan apps, even those red-flagged by the government.

The Continuous Battle: Legitimate Entities Caught in the Crossfire

Social media companies’ lack of diligence in monitoring advertisements of fake loan apps has raised concerns. An anonymous government official criticized the perceived corporate greed, highlighting the substantial profits associated with such ads. However, a senior social media executive countered, stating that government crackdowns occasionally impact legitimate apps. In February of the current year, over 90 apps deemed fake led to a ban that affected legitimate lending companies, causing regulatory uncertainty and credibility challenges.

Bharat Singh’s plight persists, receiving calls and harassment messages. UnicashX’s claim of backing by Kemex Engineering Ltd, an RBI-registered NBFC, remains disputed. Vinay Shankar, the director of Kemex, denies any involvement with UnicashX.

Industry Concerns and Future Projections

Legitimate NBFCs express apprehension, recognizing the potential harm caused by a few bad actors tarnishing the industry’s reputation. Raman Aggarwal, director of the NBFC industry body Finance Industry Development Council, emphasizes the need to address the issue promptly.

Led by banks, NBFCs, and fintech companies like Paytm, Cred, Indifi, and KreditBee, the digital lending landscape is poised to reach $80 billion in 2023, marking a significant leap from $5 billion a decade ago. Most digital lending apps either have bank or NBFC ownership or establish partnerships with NBFCs.

In the complex web of digital lending, the battle against fraudulent loan apps requires collective efforts from regulators, tech companies, and legitimate financial entities to safeguard unsuspecting borrowers and maintain the integrity of the digital lending ecosystem.

Bharat Singh’s Nightmare: A Tale of Deception and Harassment

In the quiet village of Ghosi, located in Uttar Pradesh’s eastern region, Bharat Singh found himself entangled in a web of deception when he decided to borrow Rs 15,000 for his sister’s wedding. The seemingly innocent loan app, UnicashX, discovered on Instagram, presented itself as a viable option. Unfortunately, Singh had little guidance on its authenticity.

Surprisingly, neither Instagram nor the Reserve Bank of India (RBI) raised any red flags. Singh, trusting the app’s claim of being backed by a non-banking financial company (NBFC), believed he was in safe hands, given the regulation of NBFCs by the RBI.

However, reality struck hard. UnicashX not only imposed exorbitant interest rates but also subjected Singh to relentless mental harassment. Demanding Rs 50,000, more than three times the borrowed amount, the app’s tactics escalated. Singh received a chilling message on WhatsApp, threatening him with abusive language and suggesting self-harm. The following days were marked by incessant harassment from unknown individuals.

Sadly, Singh’s story is not an isolated incident.

The Unchecked Rise of Digital Lending and the Dark Underbelly

Over the past 11 years, the digital lending market has experienced exponential growth, projected to reach $350 billion by 2023 with a staggering annual growth rate of nearly 40%, according to Experian, a credit information company. While genuine fintech companies, supported by NBFCs and banks, contribute significantly to this surge, a shadowy realm of unscrupulous players has emerged, estimating the illegal lending market at a potentially alarming $700-800 million.

Regulatory Gaps: A Breeding Ground for Fraud

In a landscape lacking government and regulatory norms, stakeholders have voiced concerns. Borrowers, fintech intermediaries, government officials, big tech companies, and former RBI officials attest to a common narrative. The absence of a comprehensive list of registered or blacklisted loan apps from the RBI leaves online platforms with minimal due diligence, allowing fraudsters to openly promote predatory loan apps.

Trapped in the Web: How Fraudulent Apps Exploit Vulnerable Individuals

Victims, predominantly mid- to low-income individuals rejected by traditional banks, share harrowing stories. The government’s inability to establish guidelines to counter this menace has led to a reported dozen cases of suicides linked to illegal loan apps since 2020.

Seeking Solutions: The Regulatory Conundrum

The latest effort to address the issue occurred on October 13, with the Ministry of Finance, RBI, and the Ministry of Electronics and Information Technology (MeitY) convening. During the meeting, MeitY proposed detailed Know Your Customer (KYC) norms for lending apps, akin to the process for opening a bank account, referred to as Know Your Digital Finance App (KYDFA).

Despite the RBI releasing guidelines for digital lending in September 2022, these applied only to regulated entities like banks and NBFCs. Wrongdoings by unregistered lending apps fall through the regulatory cracks, leaving victims without recourse.

Ads That Deceive: Exploiting Popular Platforms

Fraudsters leverage the popularity of online platforms such as Meta, Google and Apple app stores, and WhatsApp to advertise and distribute dubious loan apps. Despite Google and Apple blocking thousands of these apps, they persistently find ways to reappear. Deceptive tactics include presenting as loan calculators, aggregators, or even unrelated applications like food recipe recorders to evade review processes.

Corporate Responsibility: Are Social Media Giants Doing Enough?

Critics argue that social media companies, Meta in particular, are not adequately monitoring advertisements for fake loan apps. Allegations of corporate greed and insufficient efforts to filter out such ads raise concerns. The government’s continuous dialogue with big tech companies highlights the contentious nature of this issue.

Collateral Damage: Legitimate Apps Suffer Too

When the government cracks down on fraudulent activities, legitimate apps sometimes bear the brunt. The banning of over 90 apps in February, including legitimate lending companies like KreditBee, LazyPay, and Kissht, underscores the regulatory uncertainty impacting even well-intentioned businesses.

Conclusion: Nipping the Issue in the Bud

The dark underbelly of digital lending demands urgent attention. The concerns voiced by legitimate NBFCs and the potential snowball effect on the industry emphasize the need for decisive action. Led by banks, NBFCs, and fintech companies, the digital lending landscape is projected to reach $80 billion in 2023. However, without robust regulatory measures, the industry risks tarnishing its reputation and compromising the financial well-being of vulnerable individuals.

In the face of a rapidly evolving digital landscape, a collaborative effort between regulators, government bodies, and tech giants is essential to create a secure environment for borrowers and safeguard the integrity of the digital lending industry.

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