If the rapidity with which Indians have embraced digital financial transactions is a positive offshoot of Covid-19, it has also had an unsavoury fallout in the mushrooming of unauthorised digital lending apps. Lately, reports have emerged of borrowers from these apps being driven to suicide, owing to their usurious interest rates and extreme recovery practices. Armed with a battery of permissions to access borrowers’ call records, contact books and even photo archives while disbursing their ‘easy’ loans, these lenders are said to call up borrowers’ contacts for naming and shaming them, and even harassing women contacts. While legitimate digital lending platforms meet a felt need of borrowers with no banking access with quick payday loans, the dubious ones seem to lure them into a debt trap with processing charges as high as 20 per cent and interest rates up to 50 per cent. These are blatant violations of RBI’s regulations and its fair practices code, which requires a paper trail and a grievance redress mechanism for every loan. Unauthorised digital lending also creates significant regulatory arbitrage against licensed banks and NBFCs which comply with the rulebook on ownership, net worth and lending practices. The RBI may, therefore, need to do more than warn the public about not falling prey to such illegal entities. It should actively shut them down, involving the law and order machinery, if necessary.
RBI regulations do not allow any entity to undertake lending activity without registering with it as a bank or an NBFC or with a State government as a money lender. But many digital lending apps appear to have side-stepped these rules, either by disguising their loans as purchase transactions or entering into agreements with registered NBFCs or banks to function as ‘selling agents’. The RBI tried to plug this loophole in June 2020, by decreeing that every digital lender must disclose the name of the bank/NBFC originating the loan, but these guidelines seem to be observed more in the breach. While aggrieved borrowers from brick-and-mortar moneylenders may not find it easy to escalate their complaints to the RBI, it stands to reason that borrowers from lending apps are digitally literate, and thus capable of airing their grievances to the RBI through email or its awareness platform — Sachet.
While the regulator is right to warn borrowers to verify the credentials of banks or NBFCs that back lending apps, it must also make the former’s task easier. A check on the RBI website reveals 12 different categories of NBFCs, with over 9,200 firms listed under ‘Investment and Credit’ entities alone. Expecting consumers to wade through such data to identify illegal entities is unrealistic. A separate registration for digital lending apps, as for P2P platforms, would make the task easier. The Centre and the RBI must also exert pressure on platforms such as Google and Apple to actively monitor user reviews on lending apps and to take them down if they’re found to be violating the law.