Explained: why digital lenders have come under the scanner

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Last week, the Reserve Bank canceled the Certificate of Registration (CoR) issued to PC Financial Services Pvt Ltd, New Delhi, which was primarily engaged in mobile app-based lending through an app called “Cashbean” . While PC Financial was a registered entity with the central bank, the RBI’s Digital Lending Task Force recently estimated that there are around 600 illegal lending apps that typically charge high interest rates, adopt unacceptable and authoritarian recovery methods and operate in an opaque manner.

Why was PC Financial’s license revoked?

The RBI said the company’s CoR was canceled due to oversight concerns such as flagrant breaches of RBI guidelines on outsourcing and knowing your customers’ standards. The company was also found to “charge usurious interest rates and other fees to its borrowers in an opaque manner, in addition to engaging in unauthorized use of the RBI and Central Bureau of Finance logos. investigation for collection from borrowers in flagrant violation of the Fair”. Code of Practice”.

Illegal digital lenders

According to the findings of an RBI task force, published in November 2021, up to 600 of the 1,100 lending apps currently available to Indian Android users across 80 app stores are illegal apps. And as the number of lending apps increases, this trend would increase because a user downloading a lending app cannot determine whether the app is legit or not. It is also likely that several copycat apps and websites are proliferating on the internet. “If a consumer uses such an app or website, they could collect the user’s personally identifiable information (PII), financial data, and other sensitive details, which can then be used to compromise the user’s accounts. “user, carry out phishing attacks and identity theft. In addition to affecting the user, it also harms the reputation of the business that the fake app is impersonating,” the RBI panel said.

A few weeks ago, crooks allegedly misused the PAN details of unsuspecting citizens to avail loans through Indiabulls’ Dhani app. These scam artists never repaid the loans while the people whose PAN documents were misused were shocked to see their credit scores plummet due to loan default. Complaints against DLAs – Sachet, a portal created by the Reserve Bank to record complaints from the public, has received a significantly increasing number of complaints against digital lending apps – approximately 2,562 complaints from January 2020 to March 2021. The majority of the complaints concerned loan applications promoted by entities not regulated by the RBI.

Specific cases have been reported for Dhani Loans and Services, formerly known as Indiabulls Consumer Finance Ltd. We have a customer service team of over 6,500 executives to provide prompt resolutions after due diligence. Our risk management and technology teams have been in overdrive, constantly building more robust systems to try to keep such activities at bay. We have integrated G-defence which is a global security platform to double-check each device against a specific client and PAN across various data fields. If anyone has a question or needs to connect with us, can reach us on 0124 6555 555 or write to us at [email protected],” a Dhani Loans and Services spokesperson said.

What is the RBI used for?

The RBI is expected to soon come up with a comprehensive regulatory framework for digital lending. The task force set up by the RBI has proposed tough standards for digital lenders, including separate legislation to prevent illegal digital lending activities. Regulators may consider introducing interest rate caps in a phased manner, broadly in line with effective credit card interest rates.

The panel said digital lending applications should undergo a verification process by a nodal agency to be put in place in consultation with stakeholders. He also proposed the establishment of a self-regulatory body (SRO) covering players in the digital lending ecosystem. He proposed that the disbursement of loans should be made directly to the borrowers’ bank accounts. The committee said that the algorithmic features used in the digital loan to document should provide the necessary transparency. The RBI has already warned the public against illegal digital lending platforms.

How big is the digital lending business?

The RBI task force says that lending via digital versus physical mode is still at a nascent stage. Private sector banks and NBFCs, with 55% and 30% share respectively, are the dominant entities in the digital lending ecosystem. In the case of banks, Rs 1.12 lakh crore was disbursed via digital mode against Rs 53.08 lakh crore via physical mode while for NBFCs, a higher proportion of loans at Rs 23,000 crore were made via digital mode against Rs 1.93 lakh crore via physical mode in March 2020. The overall volume of digital mode disbursements for sampled entities more than doubled between 2017 and 2020, from Rs 11,671 crore to Rs 1,41 821 crores.

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Imprudent loan:

Several digital lenders engage in reckless lending practices driven by pure profit motives, riding excessive interest rates to make up for delinquencies. As the central bank has said, there is also a tendency to rapidly increase activity in lending to subprime borrowers beyond their ability to repay and the increased risk is priced in terms of the higher spread charged to all borrowers, resulting in exorbitant interest rates.

The RBI panel says their valuation models are based on high loss rates which, in turn, are offset by high interest rates and other charges on all borrowers. Also, there is a tendency to hide excessive interest rates by disclosing only weekly or monthly rates depending on the repayment schedule. They are notorious for adopting unacceptable and overbearing recovery methods and misusing agreements to access data on borrowers’ mobile phones.