rbi: Loan sharking galore: Why RBI banned five NBFCs from lending online

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NEW DELHI: The Reserve Bank on Wednesday canceled the certificate of registration (CoR) of five NBFCs for violating standards related to outsourcing and the code of fair practices in their digital lending operations. . In addition, they violated regulations on charging excessive interest and resorted to harassing customers for collection.
Who are all loan bans?
UMB Securities, which used the services of the digital platform provided by Fastapp Technologies, and Anashri Finvest, lending through multiple apps, are the two Bengaluru-based companies that can no longer lend. Anashri Finvest used apps/platforms provided by Datimes, Bullintech Finance, TGHY Trustrock Mrupee, Kush Cash, Karna Loan, Mr Cash, Fly Cash and others for lending.
Chadha Finance, which operated from New Delhi and lent via WifiCash, also had its certificate revoked. The other two companies that have been barred from operating as NBFC are Kolkata-based Alexcy Tracon, which lent through Badabro, and Guwahati-headquartered Jhuria Financial Services, which lent through multiple platforms. These Jhuria platforms include Aeritech, Finclub Technologies, MoNeed, MoMo, CashFish, Kredipe, RupeeLand, and Rupee Master.
Not the first time this year: in February, RBI revoked the registration of PC Financial Services Pvt Ltd, which operated the Cashbean lending app.
What did RBI say?
“The aforementioned NBFC’s CoR has been canceled due to breach of RBI guidelines on outsourcing and code of fair practice in their digital lending operations undertaken through third party applications, which was considered detrimental to the “public interest. These companies also failed to comply with existing regulations on charging excessive interest and had resorted to undue harassment of customers for loan collection purposes,” he said. in a press release.
Why now?
The central bank’s action comes as multiple cases of harassment, including one victim being driven to suicide, have shed light on the illegal practices adopted by digital lenders. Some of the illegal recovery tactics involved gaining access to the borrower’s device and blackmailing it with altered and inappropriate photographs. A survey revealed that many lenders providing advances using digital apps were not registered with the RBI.
After a furor over the excesses committed by digital lending apps in 2020, the RBI had set up a task force to present a report on the regulation of these apps. The group’s recommendations, published in November 2021, range from subjecting digital lending applications (DLAs) to a verification process by a nodal agency to dedicated legislation to prevent illegal digital lending activities. But RBI has yet to finalize these guidelines.
“Lending is a highly regulated industry. Lenders must play by the rules of the game. The RBI is quite clear on the means of recovery and what lenders can or cannot do to collect their due. Non-compliance will result in regulatory action. It’s ultimately a matter of corporate governance,” said Adhil Shetty, CEO of Bankbazaar.
“The NBFC industry fueled by digital lending is characterized by significant non-compliance. The actions of the RBI are commendable – although I suspect this is just the tip of the iceberg as the regulator tries to protect the integrity of the financial system and the interests of consumers. NBFCs would be well advised to ensure they follow the law – or face the wrath of a vigilant regulator,” said Mathew Chacko, Partner, Spice Route Legal.
What do these lending apps do?
The loan apps, which lend small amounts between Rs 2,000 and Rs 10,000, target low-income and financially unsophisticated Indians and exploit unmet need for credit by offering so-called unconditional credit. However, they come with huge interest rates and exorbitant terms, which borrowers have no recourse to. And with just one click, you’re essentially giving them access to everything on your phone, whether it’s your entire contact list, photos, and videos. And the moment you fill in the details like your Aadhaar, PAN, address, the amount you need and click apply, you will see your account credited with cash. The apps, under the guise of advancing a loan, access all the information from customers’ phones which could then be used by the company to carry out another financial crime.
What about suicide cases?
According to the latest report from the National Crime Records Bureau, suicide by bankruptcy or debt accounts for 3.4% of the total reported cases in India in 2020.
In 2021, at least six people have committed suicide in Hyderabad alone due to harassment by officers. As many as 50 cases of harassment have been reported by police stations in Hyderabad, Cyberabad and Rachakonda. Earlier this month, a man in Mumbai took his own life after his tweaked images were shared on Whatsapp by alleged loan app recovery agents. In another such incident, 24-year-old Anurag Singh fell prey to one of these loan apps, which accessed his contact list after installing it on May 1 to find out which loan he was entitled. Without his consent, the app transferred Rs 3,805 to his bank account on the same day. On May 6, Singh started receiving threatening text messages and calls demanding that he repay the loan with ‘interest’ of Rs 7,000 for just six days.
Operating mode
According to bank officials, fintechs lend to people who do not have sufficient funds. By using bank statement analysis software, they can get an idea of ​​the person’s ability to repay. Loan application companies are also violating RBI rules on maximum interest rates. Some app companies charge 0.1% per day, which equals 36% per year, while others actually charge 10% per month. RBI has capped interest on microloans using a formula based on the average bank lending rate. At no time did the maximum authorized interest rate exceed 26%.
Often, lending apps partner with multiple Non-Banking Financial Companies (NBFCs) and use this as legal cover for their operations. As part of the matchmaking, NBFC donates money to these lending apps and they, in turn, will find people in need and lend them money.
At least 600 illegal loan apps operating in India
A report by the Reserve Bank of India’s (RBI) Digital Lending Task Force, released in November, identified 600 illegal lending apps operating in India last year. There were around 1,100 loan apps available for Indian Android users across more than 80 app stores from January 1, 2021 to February 28, 2021. Sachet, a portal established by the RBI against unregistered entities, received 2,562 complaints against digital loan applications between the beginning of January 2020 and the end of March 2021.
How to avoid such scams?
The only recourse is to borrow from legitimate and approved lenders, platforms and intermediaries. A borrower should verify the credentials of the lender and ensure that it is an entity registered with the RBI. Customers can also refer to ratings and reviews when choosing a lender.
“Approach the bank or NBFC directly or use reputable, genuine and secure platforms to apply for credit. Make sure of the credentials of the company that the site or app you are using represents. Check if they have physical offices and if their website is secure Don’t borrow if an app or service doesn’t ask for your credit history and urges you to close the deal immediately You don’t need to pay any money for approval of the loan to an entity.The processing fee is usually charged to you as part of your loan or payable directly to the bank on NBFC that offers you the loan.If you are asked to pay part of the loan to advance for treatment or if you have to pay cash or transfer money to a personal account, it’s a red flag,” said Adhil Shetty, CEO of Bankbazaar.
Google recently decided that it would only allow RBI-registered lenders to provide lending apps on its app stores. In accordance with Google’s guidelines, the listing on the App Store must mention the names of all registered lenders who lend on the respective platform. Failure to follow these rules could be a potential red flag, and borrowers should be wary of these platforms. Additionally, Google Play Store does not allow apps that offer loans with terms of less than 60 days. Loan applications must complete a “Personal Loan Application Declaration” form and provide supporting documents such as Reserve Bank of India (RBI) license or proof that the application is only a platform serving as an intermediary for the unregistered. – banking financial companies (NBFC) or banks.
On the borrower’s side, they must understand what they are taking out and exercise caution. “What has been borrowed must be repaid. The consequence of non-repayment is a deterioration in credit history which makes future borrowing difficult. such cases to the regulator,” added Adhil Shetty, CEO of Bankbazaar.
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