Bad guys may re-enter digital lending in India despite govt ban: Experts

They say the rogue apps can come back using some other name or some forged documents

Though the government has blocked a bulk of non-compliant online lending apps, this may not be the endgame for bad actors in the digital lending ecosystem. Experts believe the system lacked stringent entry-level checks and due diligence norms for the sector.

The Ministry of Electronics and Information Technology (MeitY) issued blocking orders against 138 betting and 94 loan apps on February 5, stating “links with China”, and alleged “involvement in money laundering” were posing a “threat to financial security”. The ministry later revoked the blocking orders for some of the affected apps after reviewing basic documents related to registration with the Reserve Bank of India, data localisation, KYC process, grievance redress etc.

Dr Pavan Duggal, Advocate, Supreme Court of India and expert on cyber law said the online lending sector was in a “complete grey zone” when a large number of lending apps flourished a few years ago. The IT ministry and the Reserve Bank of India released separate sets of guidelines for digital intermediaries only in 2021 and 2022 respectively.

“The RBI is only controlling a limited number of Regulated Entities (REs). Until recently, anybody could create an online lending app and invite potential people and make them victims by putting exorbitant interest rates, selling their data etc. Though these lending apps were intermediaries, they were not regulated in the country because the government had not yet stipulated minimum parameters for due diligence for intermediaries like online lending apps,” Duggal said.

The mobile lending apps offering easy and instant personal loans of a few hundred rupees to about Rs 10,000 are also known as ‘Chinese loan apps’ due to their business model of small financing. Authorities began taking down such unregulated entities after several cases of predatory lending, harassment, and blackmailing were reported during the pandemic years.

“Under section 79 of IT Act and IT Rules, 2021, online intermediaries are required to exercise due diligence. These are some general parameters for due diligence for intermediaries. But specific parameters for the online lending app have not been stipulated as yet.”

The Reserve Bank of India released the Guidelines on Digital Lending in September 2022. The rules apply to the central bank’s Regulated Entities including all commercial banks and Non-Banking Financial Companies (NBFCs). The REs must ensure that their digital lending partners remain compliant with the norms. Mobile application distribution platforms like Google’s Play Store and Apple’s App Store are required to host only such apps, which are either registered with RBI or are a partner of any of the Regulated Entities (REs).

According to a response tabled in the Indian Parliament, proceeds of crime in illegal apps are estimated at Rs 2,116 crore. So far, the Directorate of Enforcement (ED) has attached Rs 859 crore under the Prevention of Money Laundering Act (PMLA), 2002, while investigating illegal loan apps. A total of Rs 289.28 crore has also been seized under the Foreign Exchange Management Act, 1999, as per the response submitted by the Minister of State for Finance Bhagwat Karad.

Amol Kulkarni Director (Research) at CUTS International, a public advocacy group said: “The RBI only directly regulates the entities which are registered with it and which take loans on their books. However, the platforms like app stores have no way to ascertain the validity of registration documents and certifications submitted by the lending apps as a part of the compliance requirement. So it becomes a kind of self-certification.”

Kulkarni said this created a risk of allowing the entry of players with forged documents and more checks and balances were needed at the time of entry rather than a follow-on crackdown.

“The apps can come back with some other name and (by using) some forged documents. A more stringent regulatory and supervisory mechanism needs to be put in place, which would require coordination between MeitY, and RBI. Better communication between the private sector and different arms of the government can help only genuine players to register and enter the market,” he added.

The RBI has finalised a ‘whitelist’ of digital lending apps, and only these would be allowed to be listed on app stores. According to the Finance Ministry, the government has already shared the list of apps with the respective intermediaries (app stores). The app stores and internet service providers believe this may bring clarity and help them in hosting only the legal entities.

Aditya Kumar, co-founder and the chief executive officer (CEO) of Niro, a consumer lending platform said, “A potential solution to ensuring these regulations are adhered to, at inception, would be to have the RBI regulate lending platforms through a separate license. This would involve the now-regulated digital lending entities submitting adequate documentation at the time of incorporation or launch, thereby satisfying the regulations implemented by MeitY. It can enable lending apps to adhere to data localisation laws, and mandated KYC processes as well as maintain transparency around beneficial ownership.”

Cleaning the lending scene

• The RBI last year identified 600 “illegal lending apps” operating in India
• Government estimates total money operated by illegal apps at Rs 2,116 crore
• The ED has already seized assets worth Rs 1,148 from such platforms
• Blocked apps may reappear with some other name in absence of entry level checks
• App stores await  a ‘whitelist’ of legal apps to filter out bad actors