Unauthorised lending apps give tough time to financial regulators

In the backdrop of Telangana police bursting an instant loan apps scam two days back, financial regulators say they are increasingly finding it difficult to curb the rise in the number of instant lending apps.

Experts say that easy access to technology and convenient ways to avoid regulations are major factors that prevent detection of such illegal moneylenders, mostly based in China.

The unauthorized apps have flourished because of the absence of a correct framework. Unsuspecting customers get drawn into loan traps and end up paying prohibitive interest rates. If they fail to repay, the loan sharks resort to coercive tactics. Three people had committed suicide in Telangana when they failed to repay such loans.

Also read: Telangana police bust instant loan apps scam; Chinese among 4 arrested

Tech policy analyst Prasanto K. Roy told The Mint: “You can pick up apps like these on code sharing sites. Some of these guys are also white-labelling these apps and selling them to other buyers.”

There are two types of players in this app-based loan market: the ones recognized by the Reserve Bank of India (RBI) and the other one which does not have any such recognition. The second category of apps does not have the licence to offer loans like a bank or a non-banking financial company (NBFC). The Reserve Bank of India is struggling to monitor and regulate such unauthorized apps. Chinese companies that are operating in this segment, ‘rent’ an NBFC in India. In case they get caught, it is this NBFC that will face action. The RBI can prevent such NBFCs from supporting such illegal lenders.

Experts, however, agree that regulators like RBI cannot solve the problem on their own. Platform companies like Google can keep an eye on such apps and stop them from getting on gullible customers’ phones in the first place.

After the government banned a number of Chinese apps on security grounds, it won’t be a surprise that many more such apps, possibly in the financial space, face similar action in the days to come.