With the surge in digital lending, fraudulent loan apps have emerged as significant risks to borrowers. Unauthorized and unregulated, these digital lending platforms exploit unsuspecting users with exorbitant interest rates and harassing practices. Despite the rise of legitimate financial technology companies, a lack of regulatory norms allows these scam apps to thrive.
Understanding Fraudulent Loan Apps
Fraudulent loan apps are unauthorized digital lending platforms that offer loans from as little as Rs.1,000 up to Rs.1 lakh. They target low-income and financially naive individuals with promises of instant, hassle-free loans without any credit checks, documentation, or collateral requirement. They unscrupulously leverage user trust, pose as authentic financial tools, and capitalize on the vast user base of popular social media platforms.
How Fraudulent Apps Operate
These fraudulent loan apps typically disguise themselves as legitimate financial tools like loan calculators or aggregators. They advertise freely on social media platforms like Instagram, Facebook, and WhatsApp and exploit users who fail to investigate their deceptive claims. When a borrower fails to repay the loan on time, they resort to abusive tactics, including sending threatening messages, emails, or even resorting to physical violence and harassment.
The Digital Lending Landscape and Emergence of Frauds
Over the last decade, the digital lending market has seen robust growth. Led by banks, Non-Banking Finance Companies (NBFCs), and fintech firms, it is estimated to hit USD 350 billion by 2023. However, this boom has also paved the way for fraudsters, with the illegal lending market potentially growing to USD 700-800 million.
Concerns Surrounding Fraud Loan Apps
Notable concerns around fraudulent loan apps include lack of regulatory norms and guidelines that enable minimal due diligence from online platforms. Furthermore, the Reserve Bank of India’s (RBI) existing guidelines for digital lending only apply to regulated entities like banks and NBFCs, leaving fraudulent loan apps largely unchecked. There is also criticism towards social media companies for their lackadaisical approach towards monitoring fake loan app advertisements.
Impact on Legitimate Apps and NBFCs
While regulatory measures have been taken to crack down on fraudulent apps, they sometimes inadvertently affect legal lending apps. A 2021 ban on certain apps impacted genuine lending companies, indicating the challenges in regulatory actions. Additionally, legitimate NBFCs voice concern over the misrepresentation of their sector by illegal lending apps.
Awareness and Protection for Consumers
There is a marked need for consumer awareness. Borrowers often fall prey to deceptive and coercive practices, primarily because they do not verify the credentials and terms of loan apps. This highlights a significant gap in consumer protection.
The Way Forward: Strengthening Regulatory Frameworks
A comprehensive legal guideline addressing digital lending platforms, particularly mobile apps, needs to be established. RBI guidelines should be extended to cover all digital lending entities. Strict due diligence procedures, enhanced oversight on social media platforms, and penalties for non-compliance should be enforced to curtail fraudulent loan apps.
Educating Consumers and Global Collaboration
Awareness campaigns that educate consumers about the risks associated with fraudulent loan apps and advocate responsible borrowing habits are necessary. International partnerships will also be advantageous in tracking and penalizing cross-border fraudulent loan app operations and strengthening regulatory measures.
Past UPSC Civil Services Examination Question
Prelims Q. In reference to Non-banking Financial Companies (NBFCs) in India, consider the statements given below:
1. They cannot engage in the acquisition of securities issued by the government.
2. They cannot accept demand deposits like Savings Account.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
Answer: (b)