The Minefield of Instant Loan Apps Illegal lending apps with minimal verification requirements have gained ground among those looking for quick cash but the devil is in the details

Unable to keep up with bills after losing his job as a gym trainer during the Covid-19 lockdown, Jatin (name changed on request) borrowed INR 15,000 from a micro-lending app last year. Terms were simple and suited his circumstances - he didn't have to produce income documents and his credit score will be ignored, provided he paid INR 5,000 within 8 days.

Due to absence of any regular income, the 27-year-old defaulted on the payment.

What followed was an absolute nightmare for Jatin. "My phone just won't stop ringing all day," recalls the Gurugram resident. "Agents flooded my Whatsapp with abuses and threats. They even threatened to malign me publicly if I didn't pay immediately. I thought it was just a threat but they did it!"

The company extracted contact details of his friends and family from his phone, which Jatin gave permission to while filling an application for the loan, and sent them messages over Whatsapp and Facebook flagging him a cheat. Embarrassed and anxious, he gathered funds to pay the initial INR 5,000. But the hounding was far from over.

"By then I'd reached the second installment date and they'd slapped a hefty default fee, so the harassment just got worse," he says, adding that borrowing from parents living in Aligarh (Uttar Pradesh) was not an option as they are dependent on Jatin.

"I was so fed up that I contemplated to go in hiding forever or just commit suicide."

Jatin's is not an isolated case. Several such cases where borrowers unable to bear the harassment and social shaming from agents of app-based lenders ended their lives have come out in the last few months. In one such case, a screenshot of a Whatsapp chat between an agent of a loan app named "Udhaar Loan' and a woman borrower went viral where the former sexually harassed the woman when she failed to make a payment on time. The woman allegedly attempted suicide as a result of the sexual abuse.

The Illegal Chinese Moneylenders

These entities are different from digital lenders that are backed by non-banking financial companies (NBFCs) or partner with banks. They are illegal moneylenders who use technology to create and land an app on the Google playstore but are not registered as a legal entity--quite similar to offline lenders, who have existed since time immemorial, that target low-income groups with limited access to banks for micro-loans.

Research by Cashless Consumer, a citizen-led initiative that spreads awareness around digital transactions, shows that most of these apps are hosted on Chinese servers with familiar Indian names to project that they are locally registered companies.

Though micro-lending apps have existed for long, they gained ground during the Covid-19 induced lockdowns when demand for loans increased due to job losses. With increased takers, complaints against undue loan collection methods and outrageous interest rates on social media also increased. Reports of alleged suicides were the ultimate nail in the coffin that grabbed the regulator's attention, and also Google's.

The internet giant has taken down close to 450 such loan apps from its playstore so far, out of the total 1,300 suspected to operate on it, according to L Srikanth, a fintech researcher and coordinator of Cashless Consumer.

Google has a policy against platforms offering high-interest loans to protect consumers from deceptive and exploitative personal loan terms. However, for Google to take action, the company must be flouting state and local regulations for any region or country, whereas most of the instant loan apps targeting Indian consumers are hosted on Chinese cloud.

Besides, Google Play is only one of the distribution channels. "Mobile Ads (on games, apps), Youtube, TikTok etc are some other platforms where they aggressively market themselves," says Srikanth. Since digital lending through mobile apps operates in a regulatory vacuum in India there's no systematic way to separate the wheat from the chaff and police the miscreants.

Only recently, following reports of alleged suicides linked to harassment by agents of such apps surfacing, RBI has set up a six-member working group to regulate digital lending apps, with a focus on consumer protection, privacy and data security.

What the Customer Should Know

Digital platforms that promise to offer quick loans typically lend for ultra-short periods of 15-30 days at extortionate interest rates that work out a whopping 60 per cent or more at the end of the loan tenure. The average loan ticket size is smaller at INR 20,000.

There are other red flags that customers should watch out for, say experts.

"Dishonest lenders offer credit without carrying identity verification or income-proof, unlike legitimate lenders who carry out proper KYC (know-your-customer) process," says Anuj Kacker, co-Founder, MoneyTap and secretary and chairman - website and communication, Digital Lending association of India (DLAI).

Quick money with minimal documentation is a convenience point that attracts borrowers and also helps overlook the steep rates (see: Costliest of Them All).

"Another tactic used by them is to set an application deadline that creates urgency and prompts the borrower to act immediately without carrying due diligence," adds Kacker.

Borrowers can check the legitimacy of the lender by visiting its website.

"Most of the illegal lending apps don't have a website," explains Anil Pinapala, founder and CEO, Vivifi India. "If the website is listed, the borrower should check on it whether the company is registered with the RBI or works with a bank or is an NBFC registered with the RBI. All legal lending companies clearly show the same along with their Company Identification Number (CIN) and details of the Certificate of Registration (CoR) with RBI."

Further, if the company claims to be working with a RBI registered NBFC, customers must go to the NBFC's website to double-check whether it's an authorized partner of the NBFC before downloading the app, Pinapala adds.

Fishy privacy policy on the website or app is another sign of fraud, points Srikanth. "Under the privacy policy section, details of the grievance officer are either left empty or filled with wrong details," he wrote in a post on Medium.

This story first appeared in the February edition of the Entrepreneur India Magazine