The Dark Side of Digital Lending: Fake Apps and a Lack of Regulation

Strategic Insights -

In the rapidly growing digital lending market, a significant proportion of transactions are facilitated by unscrupulous players who take advantage of unsuspecting users, often with disastrous consequences. The Reserve Bank of India (RBI) has been criticized for its inadequate measures to regulate the sector, with stakeholders pointing out that the absence of a white list of registered loan apps or a negative list of banned apps has enabled fake operators to thrive. Bharat Singh, a resident of Ghosi in Uttar Pradesh, borrowed Rs 15,000 through a loan app called UnicashX, only to be harassed by the app's owners for repayment of an amount over three times the original loan. Singh is not alone; over a dozen cases since 2020 have been reported where victims of such apps have allegedly died by suicide.

Key Takeaways:

  • The digital lending market is estimated to have touched $350 billion by 2023, growing at a compounded annual growth rate of almost 40 per cent, according to Experian, a credit information company.
  • The RBI has released guidelines for digital lending, but they only apply to regulated entities like banks and NBFCs, leaving a gap for fraudulent apps that exist outside this framework.
  • The RBI's proposal to create a white list of legal lending apps and an independent multi-stakeholder body to verify digital lending apps have not been implemented, and the central bank finds maintaining such a list "cumbersome".
  • Social media companies like Meta, Google, and Apple app stores are accused of not taking adequate measures to prevent fake loan apps from advertising and distributing their services.
  • Legitimate lending companies like KreditBee, LazyPay, and Kissht have faced the brunt of regulatory uncertainty, with some experiencing bans and facing difficulty in building credibility with customers.
  • A senior social media executive stated that legitimate apps can occasionally get affected when the government cracks down on fake lending apps.
  • Police investigations have revealed that some of the RBI-registered NBFCs have been misrepresented by illegal lending apps, causing concern among legitimate NBFCs.
  • The total digital lending in 2023 is expected to be $80 billion, according to Experian, with most digital lending apps either owned by banks or NBFCs or having partnerships with NBFCs.

Statistics:

  • The estimated size of the illegal lending market is $700-800 million.
  • Over a dozen cases since 2020 have been reported where victims of fake loan apps have allegedly died by suicide.
  • The RBI has failed to update its list of banned apps.
  • Social media companies receive thousands of complaints about fake loan apps but take little action.
  • Google has blocked thousands of fake lending apps from its app store, but new ones continue to emerge.

Sources:

  • Experian: A credit information company that estimated the digital lending market to be $350 billion by 2023.
  • RBI: Released guidelines for digital lending, but only for regulated entities like banks and NBFCs.
  • Ministry of Finance: Participated in a meeting with the RBI and MeitY to discuss the menace of fake loan apps.
  • MeitY: Suggested the RBI can design detailed know-your-customer (KYC) norms for lending apps.
  • Meta, Google, and Apple: Accused of not taking adequate measures to prevent fake loan apps from advertising and distributing their services.
  • Finance Industry Development Council: A trade body that represents the NBFC industry and expressed concern about the misrepresentation of legitimate NBFCs by fake lending apps.