Verify the digital lending app’s regulatory status before taking a loan: SmartCoin CEO

The Union finance ministry recently revealed a startling increase in complaints against digital lending apps, which have more than doubled to a total of 1,062 during FY23. Despite the government and Reserve Bank of India's rigorous efforts to clamp down on these apps, they continue to face growing scrutiny. New guidelines have been put in place, necessitating lending licences for approval on the Play Store and prohibiting access to customer photos and contacts. However, the surge in complaints serves as a clear indicator of the pressing need for even more robust measures to combat the escalating cases of cyber fraud.

In the midst of these challenges faced by the digital lending ecosystem, Rohit Garg, CEO and Co-Founder of SmartCoin, an app-based consumer lending platform that registered over 100 per cent growth in disbursal in FY23, shares insights with BT into the obstacles and potential solutions for ensuring safe and secure lending practices. Edited excerpts:  

BT: Despite the regulatory efforts, why have complaints against digital lending apps more than doubled in the last fiscal year?

RG: Despite the regulatory endeavours, complaints against digital lending apps have seen a drastic increase for several reasons. Unscrupulous entities may still find ways to evade regulatory measures, engaging in deceptive lending practices. Moreover, with the growing popularity of digital lending, opportunistic fraudsters have exploited unsuspecting borrowers, leading to a surge in fraudulent lending activities. 

Some of the reasons for the increase in complaints against digital lending apps include a lack of awareness, as despite regulatory efforts, many consumers may still be unaware of the risks associated with using unauthorised lending apps, leading to an increase in complaints.

Some digital lending apps might employ aggressive or predatory lending practices, leading to borrowers facing difficulties in repayment and subsequently lodging complaints. Moreover, complaints may arise due to concerns about the mishandling of personal data by certain lending apps, leading to privacy breaches. The presence of unregulated lenders in the market can also result in fraudulent activities, leading to more complaints.

BT: How have the RBI's Digital Lending Guidelines impacted the relationship between lenders and borrowers in the digital lending space?

RG: The RBI's Digital Lending Guidelines have brought about significant changes in the relationship between lenders and borrowers in the digital lending arena. By allowing only regulated entities to participate, borrowers now have more confidence in the credibility of these platforms. The guidelines promote a direct interaction between lenders and borrowers, fostering transparency and responsibility in lending practices and reducing the risk of exploitative behaviours.

The guidelines have compelled digital lending platforms to be more transparent about their terms, conditions, and interest rates, leading to better-informed borrowers. The guidelines have also introduced more standardised practices, making it easier for borrowers to compare offerings from different lenders.

Also read: I am moving to the US. Should I convert my savings accounts into NRO/NRE accounts? How will my monthly instalments get deducted?

Also read: Majority of investors still consider past performance as key benchmark for investing in mutual funds: Axis Mutual Fund Survey 

Also read: Demand for RuPay credit cards surpasses Visa and Mastercard on UPI integration: Report

BT: What steps have digital lending apps taken to comply with the guidelines and secure customer data and privacy?

RG: In response to the guidelines, digital lending apps have taken specific steps to ensure compliance and protect customer data and privacy. They have made lending licences visible on the Play Store to display their regulatory status transparently. Additionally, robust data protection measures and stringent security protocols have been implemented to safeguard customer information and ensure compliance with the guidelines. 

Apps have implemented robust encryption methods to protect customer data from unauthorised access. Lending apps have introduced explicit consent mechanisms, ensuring that borrowers are aware of how their data will be used. Many lending platforms have set up dedicated compliance teams to ensure adherence to the RBI guidelines. Moreover, digital lending apps conduct regular audits to identify and rectify potential data security loopholes.

BT: What specific measures have the government and RBI implemented to crack down on illegal digital lending apps?

RG: To tackle the menace of illegal digital lending apps, the government and RBI have implemented a series of measures. These include the introduction of Digital Lending Guidelines (DLG), which mandate lending licences to be displayed for approval on the Play Store. Only regulated entities (RE) are permitted to lend to customers, ensuring a direct relationship between lenders and borrowers. Furthermore, stringent data privacy regulations have been enforced, preventing apps from accessing customer photos and contacts.

Specific measures implemented by the government and RBI to crack down on illegal digital lending apps include enhanced monitoring of digital lending platforms to identify and track down illegal operators, which has resulted in greater consolidation and structuring within the industry. Stricter licencing requirements have been put in place, making it mandatory for digital lending platforms to obtain proper licences and adhere to regulations.

Initiatives have been launched to educate the public about the risks associated with illegal lending apps and to promote awareness of legitimate lending options. Mechanisms for reporting and flagging illegal lending apps have been established, allowing users to report fraudulent activities and suspicious applications. Moreover, authorities have strengthened collaborations with law enforcement agencies to take legal action against offenders and shut down unscrupulous lending apps.

BT:  How are consumers being affected by the rise of fraudulent lending practices in the digital lending ecosystem?

RG: The surge in fraudulent lending practices within the digital lending ecosystem has adversely affected consumers. Unregulated lending apps may impose exorbitant interest rates, employ aggressive collection tactics, or misuse personal data, putting borrowers at risk of falling into debt traps. The lack of proper oversight can result in financial distress, harassment, and compromise of personal data, leading to severe consequences for unsuspecting consumers. 

Consumers may fall into debt traps due to exorbitant interest rates and hidden charges from fraudulent lending apps. Borrowers might face harassment and threats from unscrupulous lenders in the event of delayed or missed payments. Fraudulent lending apps might misuse personal information, leading to identity theft and financial loss for consumers. Also, borrowers facing issues with fraudulent lenders may see a negative impact on their credit scores.

BT: What role can technology companies, government agencies, and financial institutions play in creating a safer digital lending environment?

RG: Technology companies, government agencies, and financial institutions have vital roles in creating a safer digital lending environment. They can collaborate to strengthen regulatory enforcement, ensuring that only licenced and reputable entities operate in the digital lending space. By promoting financial literacy and consumer awareness, they empower borrowers to make informed decisions while engaging with digital lending platforms. Furthermore, leveraging technological advancements can enhance data security measures, protecting customers from fraudulent practices. 

BT: How can borrowers identify and differentiate between regulated entities and illegal digital lending apps to protect themselves from potential fraud?

RG: To protect themselves from potential fraud, borrowers should exercise due diligence when dealing with digital lending apps. They can verify the app's regulatory status by checking for visible lending licences on platforms like the Play Store or the official websites of financial regulators. Reputable digital lending apps typically maintain professional websites, transparent terms and conditions, and reliable customer support systems. Borrowers should be wary of apps that promise unrealistically fast loans or request excessive personal data without proper justification. Additionally, referring to reviews and ratings from other users can help gauge the legitimacy and credibility of a lending app. 

BT: How do Chinese lending apps work? Why are they still prevalent despite the ban by the government?

RG: Chinese lending apps typically operate by providing quick and convenient loans through digital platforms. Users can apply for loans online, and the approval process is often swift with minimal documentation. Interest rates can be high, and repayment terms are usually short.

Despite the government ban, some Chinese lending apps might still be prevalent due to the difficulties in enforcement. Enforcing a complete ban on all lending apps can be challenging, especially if they operate from outside the country's jurisdiction. Moreover, users might access banned apps using virtual private networks (VPNs), which allows them to bypass restrictions. Some apps might rebrand themselves or change their names to evade detection and continue operating.