Why in this News?
Launching a multi-agency crackdown on illegal loan apps, the government has asked the RBI to prepare a white list of legal digital lending apps to be permitted in app stores.
What is Digital Lending?
Digital lending is the process if availing credit online. It involves lending through web platforms or mobile apps, utilising technology in customer acquisition, credit assessment, loan approval, disbursement, recovery and associated customer service.
Its increased popularity amongst new-age lenders can be attributed to expanding smartphone penetration, credit range flexibility and speedy online transactions.
It includes like Buy Now Pay Letter (BNPL), which is financing option (or simply a short-term loan product). BNPL allows one to buy a product or avail a service without having to worry about paying for it immediately.
Illegal Lending Apps in India
A recent report by the RBI says that India has the maximum number of digital loan apps in the world. The report has marked 600 loan apps illegal.
Challenges posed by the illegal lending apps
- Low-income and financial unsavvy (untrained) Indians are the targets.
These apps mostly lend small sums between Rs 2000 and Rs 10000 targeting low-income and financial unsavvy Indians.
These loans come with huge interest rates and extortionate terms and conditions, to which borrowers have no recourse.
This increases the vulnerabilities of these borrowers by exploiting the unmet need for credit.
- Harassment by recovery agent
Such apps are dangerous as the harassment by recovery agents have driven many to suicide in the recent past in 2021, at least six people committed suicide in Hyderabad alone due to harassment by agents.
- Breach of privacy
With just one tap, borrowers allow these lenders to access everything on their phone. The lender also get access to information such as PAN and Aadhar details.
The apps, on the pretext of advancing a loan, obtain all information from the customers’ phones which could later be used by the company to perpetrate some other financial crime.
- Acts as tool for money laundering
More than a hundred apps related to loans, betting and dating- successfully collected thousands of crores in revenue and repatriated them to china.
This was revealed in an investigation conducted by the Enforcement Directorate (ED).
RBI has been designated as the nodal department for dealing with complaints against unauthorised digital lending platforms as well as mobile apps.