The mushrooming of online money lending platforms took bankers by surprise, as they struggled to established digital footprints in the post demonetisation era. Frauds were quick to follow, and not-so-savvy users became easy victims of online money lending scams.
I saw a cause to celebrate when Reserve Bank of India gave licenses to 11 payment banks and 10 small finance banks in 2015.
I saw a pattern for financial inclusion and growth embedded in the act.
HOW I VISUALISED FINANCIAL INCLUSION WITH THE HELP OF TECHNOLOGY AND OUTREACH
Telecom companies launching payment banks would utilise their technology and outreach to carry banking facilities to last mile beneficiaries, with the help of mobile apps.
India Post would use its postman (glorified as Dakiya in many Hindi flicks of the seventies) and his familiarity with residents of a village to popularise banking. Postmen are slated to carry micro-ATMs and hand-held devices to fulfil the banking needs of villagers.
Fino was the business correspondent for many banks during the Jandhan Yojana in 2014. They would use expertise in remote area banking to not just spread, but activate financial inclusion.
National Securities Depository Limited (NSDL) would offer mutual fund products, and teach investments to multiply wealth. Villagers used to holding wealth in land and gold, need to learn about liquid assets which can also multiply in value faster.
Once the users come in the banking fold, they would learn the importance of saving and investing. Subsequently, they can avail small ticket loans at low interest rates from small finance banks, and escape the moneylenders’ clutches.
It was perhaps a dream too idyllic.
Technology is only a tool, and the final impact depends on intent, awareness and methods employed by users – both lenders and borrowers.
Non-banking finance companies target the segments with a credit score in the range of 600-750, who find it difficult to get loans from banks, and lend them money at high interest rates.
Reserve Bank of India expects NBFCs to apply
- for a license from RBI
2. bring in a minimum capital of Rs. 2 crores.
Peer-to-peer lending companies are treated as NBFCs and have to comply with RBI norms.
ENTRY OF MULTIPLE PLAYERS IN ONLINE LENDING MARKET
Long back, when Kellogs entered the breakfast cereal market, the sale of Mohun’s Cornflakes (an old Indian brand) shot up. Kellog’s spread awareness about the convenience and health quotient of breakfast cereals, which were not popular on Indian breakfast tables till then. Mohun’s cornflakes product being priced lower, benefited from the increased demand and a broad-based market.
We saw the same drama play out in the market for hair colour when L’oreal entered the Indian market.
I see a similar phenomenon fanning out in the online money lending space.
People are getting used to the idea of uploading documents on the internet, online verification and sanctions. A number of unethical players have now entered the market.
They lure consumers with relaxed eligibility criteria, simpler procedures and super – quick sanctions. Interest rates are as high as 35% p.a. in some cases, but borrowers who need small amounts for short periods, or are trapped in credit card debt at 42%-45% p.a. fall prey to sales gimmicks.
The scams came in national focus, by reported incidents of harassment and social shaming of borrowers by the lenders, leading to suicide. Onion Credit Pvt Ltd and Cred Fox Technologies are two such scam companies launched in Hyderabad two years ago, which are under the scanner now. The borrowers had lost their source of income in the Covid-19 economy, and were unable to repay loan instalments.
HOW DOES A BORROWER CHECK CREDIBILITY OF ONLINE MONEY LENDING APPS?
- Check the list of NBFCs licensed on the RBI site.
2. Are they licensed?
3. Check registration of the company on the MCA site
4. Check if they have a physical address.
5. Check in which state is the company registered.
6. Is the website secure with a SSL certificate? The url should start with https:// and not http://
CHECKS ON MODUS OPERANDI OF ONLINE MONEY LENDING PLATFORMS
What should set off alarm bells?
- Do they insist on checking your credit score?
Fake companies will bypass this important criterion of eligibility.
2. Do they offer to do it with minimal documentation?
3. Do they chase you for giving a loan?
4. Do they make it time-bound, and offer attractive terms and conditions if the deal is closed by a certain date?
5. Do they offer a loan to your spouse to help you with larger amounts and less protocol requirements?
6. There is no transparency about processing charges and other fees, and they evade questions on the same.
7. Do they ask for money to cover stamp duty, processing charges etc.?
WHAT IS THE REAL INTENT OF FRAUDULENT ONLINE MONEY LENDING APPS?
The game begins here. The company may show you a sanction letter, cheque of the sanctioned amount, but have no intention of parting with money.
They want your KYC documents (which may be mis-utilised for fraudulent transactions later).
They want money from you in the form of fees/charges.
In case an amount is disbursed as loan, they stand to gain by astronomical rates of interest. Unethical and strong-arm recovery methods are used to recover loan instalments.
HOW TO PROTECT YOURSELF FROM ONLINE MONEY LENDING SCAMS?
- Ask a few incisive questions on the points listed above, and watch their response.
2. Ask if they hold a RBI license, and where is the information available on MCA and RBI sites.
3. Do not display desperation or urgent need for money.
4. Do not part with KYC documents unless you are sure of credibility.
5. Approach banks or NBFCs with credibility. Manage with a lesser amount if possible. Banks offer a lower rate of interest, even if the process takes a longer time.
6. Do not try to settle old loans with a fresh loan at higher rate of interest. You will sink deeper in the debt trap. Consult a debt management expert.
7. Do not get lured by a quick loan to spend on non-essentials such as vacations or diamonds, or risky asset classes such as stocks.
8. Calculate the total cost of the loan – absolute amount paid in interest, charges, fees, penal charges in case of delayed EMIs and the opportunity cost of parking this amount in some other asset class. The exercise helps in staving off temptations to get quick money.
9. Inform the police wherever you notice something suspicious.