Not Dennis but Digital Lending is the real Menace

Author: Rini Mishra

Narwdeshwar Law College

Introduction 

India's emergence in the digital ecosystem has been spectacular. India's is well on the path of digital revolution. The transition to a digital economy lies in moving beyond fragmented digital solutions to digital infrastructures that will spur digitalisation across economies and societies.

While Artificial intelligence, Quantum Computing, Cloud Computing and Blockchain are making a mark. One of the new emerging digital infrastructure is that of digital lending applications which can be added to the buzzwords.

What is digital lending?

Digital lending is the process of lending credit to individuals through web platforms or mobile apps, utilizing technology for authentication and credit evaluation. Over the years the digital lending market has evolved and expanded continuously and significantly. More than 190 million Indian adults don't have any bank accounts. Digital lending enables potential borrowers to apply for loan products from any internet capable device from any worldwide locations.

Why the need of digital lending? The future and scope of digital lending

Digital lending with it's services like video-KYC (Know your Customer),  Adhaar based KYC and website applications with pioneering functionalities make the loan application procedures more efficient and less cumbersome over traditional or conventional lending procedures. The ever-increasing use of Artificial Intelligence, Machine Learning and data analytics for collection and evaluation of creditworthiness  of an applicant makes it even better as it is quicker and efficient.

The growth of the digital lending industry had been catalysed by Covid-19 as the demand for contact-less services and transactions increased tremendously ,thereby pushing more and more lenders towards adopting technologies that are seamless and provide maximum convenience to customers. This in turn will further the cause of much required financial inclusion as lenders can reach out and extend credit to a great number of individuals. 

A handy walk over the trends in digital lending ecosystem.

Unauthorised lending applications

To be able to lend, a lending company has to be registered either as a bank or an NBFC (Non-Banking Financial Company) with RBI (Reserve Bank of India). Any company or entity  not registered under the prevailing law and engaging in  providing credit services to individuals is unauthorised and fraudulent.

A one-click search on Play Store will reveal the names of many applications that promise credit within the same day you submit a KYC form. Almost 200 apps have been removed from Google Play Store especially the ones targeting the low income individuals or groups , lending small amounts between ₹ 2000 to ₹10,000. Despite that, these applications are on the rise. These are allegedly Chinese promoted mobile applications tieing up with the local NBFCs in order to expand business and book huge profits by means of exploitation.

The modus operandi and the menace

The modus operandi (the particular way or method of doing something) of these lending applications is such that they target vulnerable borrowers in need of wherewithal. However this comes at a cost of huge interest rates, and compromised privacy to the extent that the moment an individual accepts the terms and conditions,they have complete access to the customer's personal information including entire contact lists, photos , videos etc. The moment, you give in the details such as Aadhar, PAN, adress etc you will see your account credited with the cash. Sometimes these loans are sanctioned even without the required documents. 

As the proverb goes " if something is too good to be true,then probably it isn't". Customers within days of getting loan are then harassed and abused by the agents of such companies through extortion, or by sending indecent, obscene messages ,forged pictures etc even threatening to send these to their relatives and other people in their contact list.

Nearly 7800 cases have been filed against companies, NBFCs ,corporations etc related to digital lending frauds and the harassment by the recovery agents in the last one year. In 2021 atleast six people committed suicide due to the  harassment by recovery agents ,these agents even go down to the level of framing their victims in fake scenarios and leveling fake accusations against them,thereby defaming them in the society among their near and dear ones in order to usurp money.

The role of existing law 

• A Banking company has been defined in clause (c) of section 5 of the Banking Regulation Act, 1949.
• Section 6 of the BRA defines the standards and scope of business, of a lending company i.e; NBFC or a bank.
• Consumer Protection Act, 2019: Section 2(47) defines 'Unfair Trade Practices' including practice of disclosing personal information of the consumer to any person, not in accordance with the law.
• Section 17 of the same Act provides that a complaint regarding unfair trade practice, violation of consumer rights or misleading and false advertisements can be filed in electronic mode also to the District Collector, the Regional Office Commissioner or the Central Authority.
• The Companies Act,2013 : Chapter II of the Act defines and explains the incorporation of a company.

Although the existing laws can be utilised in dealing with such cases , but the manner in which the digital lending infrastructure is expanding, there needs to be a centralised, regulatory framework which targets the current situation and acts as a helping hand to the already affected entities thereby bringing under radar any unchecked, illegal activity happening in the garb of lending or providing direct credit to accounts sans third party.

The latest RBI guidelines

These Norms follow the recommendations of the Working Groups Committee on digital lending which was constituted by RBI.

• All digital loans must be disbursed and repaid through bank accounts of Regulated Entities (REs) only without pass-through of Lending Service Providers (LSP)or other third parties.
• All charges payable to the loan service provider for will have to be paid by banks and non-banks and not by the borrower.
• A standardized key fact statement (KSF) including the All-inclusive cost of digital loans in the form of Annual Percentage Rate (APR) must be provided to the borrower before the execution of the loan contract.
• Automatic increases in credit line without explicit consent of borrower has been prohibited.
• All digital lending products extended by REs involving short term credit, deferred payments must also be reported to credit bureaus.

Conclusion

On many different occasions RBI has warned and highlighted against the risks being posed to the financial system including fintech and digital ecosystem. With the ever expanding digital infrastructure and related technologies, it has become paramount for the users and consumers of these products and services to practice prudence especially if the activity revolves around personal information or privacy.Awareness of Rights is also equally important in case one is scammed or defrauded.

References

• Excerpts of Economics Times , The Indian Express.
• The Companies Act ,2013
• Consumer Protection Act,2019
• Banking Regulation Act,1949