Social media companies are, unsurprisingly, once again on the receiving end. GOI has warned about hosting fraudulent Digital Loan App (DLA) advertisements. But while social media is irresponsible in publishing these ads, it’s not all that bad. The real bad guys are online loan sharks. They jumped on a fast-growing platform to offer small-scale retail credit.
10 years of digital boom | Digital lending in India grew 39.5% annually from 2012 to 2023 to reach $350 billion, according to a parliamentary committee report this year. Part of this growth is being driven by DLA. We can only speculate on the business generated by DLA, as a significant portion is illegal.
RBI investigated DLA over two months in January and February 2021. They found 1,100 loan apps available in 81 app stores. Of these, about 600 were illegal.
Two-factor threat | Consumer surveys and police investigations point to two main features of the world of illegal loan apps. Illegal lending apps attract customers for the same reason as informal lending: convenience. Even people who need money urgently can easily obtain a loan. Interest rates are much higher than banks. What happens after that is unique to the digital world.
The app will be downloaded to your phone. Dodgy loan apps illegally copy borrowers’ phone data. The data is used to harass debtors when they delay repayments. A police investigation revealed how this suspicious activity was carried out. One frequently used harassment technique was to send morphed photos of the borrower to all numbers on the phone list. This even led to suicides.
Regulatory gray area | The RBI’s powers end with financial intermediaries such as banks and NBFCs. They are not always blameless, with 1,062 complaints filed against them in 2022-2023. But illegal lending apps are a different story. As a result of the investigation, in some cases the ownership of the apps was traced back to Chinese companies operating in Hong Kong. Crime here also includes money laundering. Therefore, dealing with them involves multiple agencies.
Prosecution and Competition | From April 2021 to July 2022, over 2,500 apps were removed from the Play Store. This is a continuous process and must be supported by public awareness campaigns, prompt police investigations and swift prosecutions of crimes. A long-term solution requires regulated financial intermediaries to make it easier for individual borrowers to approach financial intermediaries. When regulated companies create a gap in the market, criminals move in.
This article was published as an editorial opinion in the print edition of The Times of India.
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