Due to the economic stress created by the Covid-19 pandemic, technology-enabled digital transformation has played a pivotal role in enabling individuals to carry out financial services anytime, anywhere. However, evolving technologies (digital lending in this case), though meant to facilitate convenience and efficiency, also come with their share of pitfalls. Hence, one needs to be cognisant of using lending apps for financial needs.
According to a recent report by Reserve Bank of India’s Working Group, there are over 1,100 digital lending apps available on Indian app stores. Surprisingly, more than 600 apps were found to be unlawful. These lending apps are primarily a digital layer between traditional banking entities and customers, conducting facilitation of financial services.
The Indian digital lending space continues to witness big growth, accelerated by the Covid breakout. Between January and August 2021, digital lending tech companies received funding worth $806 million, making up the second largest share—18 per cent—in the fintech funding pie, according to Inc24 data.
The most worrisome situation for regulators and the industry is that online lending in partnership with banks and non-banking financial companies (NBFCs) alone currently does not fall under the purview of any regulation. Moreover, on the tech front, these fintech companies need to have data storage servers within India and must disclose the rationale for their algorithmic features behind lending decisions.
With this advice in mind, users should adhere to a few easy principles when applying for a loan through a digital lending app. People who have a rudimentary awareness of digital loans and their modalities, would be able to avoid fraudulent activities.
Here are some key points to consider before choosing your lending partner.
First and foremost, borrowers should keep in mind that lenders must be registered with the Reserve Bank of India, the country’s banking regulator. Lenders who are not registered with the RBI are not permitted to lend money and could end up defrauding the individual. To check if the lender is authorised or not, check on the RBI website to see if the lender is registered or not. RBI has the list of all registered banks and NBFCs in India.
Borrowers should be aware that all lenders are required to complete the ‘Know Your Customer (KYC)’ of their customers. Lenders who do not comply with KYC standards should be regarded as suspicious apps right away.
Hundreds of lending apps guarantee loans in seconds or minutes available on popular app stores. However, one should only borrow through credible sources and make sure the lending company is legitimate and has a substantial customer base with positive ratings and reviews.
Aside from interest rates, there are a few other factors to think about. Apps that charge high pre-payment, processing or pre-closure fees should be avoided. Furthermore, customers should also take note of the additional charges in the form of value-added services and should be familiar with the
benefits and charges of the services attached to their loans. For example, if a borrower applied for a Rs 5 lakh loan (personal loan), the final loan disbursed would be Rs 4,85,000. The difference (Rs 15,000) is the extra fee and processing fee charged by the banker and which are incurred by the borrower.
Demand for upfront payments, assurances of “assured approvals” and a lack of proof are all red flags that indicate malicious schemes. Suspicious lenders make time-limited loan offers to potential victims, indicating that not availing the offer will surely be a loss.
Read the terms and conditions and make sure you understand them. Before selecting the ‘Proceed’ option, make sure you read and understand the fine print. This is important for everything, but especially when you are a borrower.
Finally, keep in mind that while digital technology allows for quick loan distribution, it can also be used to deceive individuals. The best method to avoid falling prey to malicious apps is to double-check every loan offer, lending portal, and the lender’s credentials, as well as keep an eye out for the red flags highlighted previously.
Even in the age of digital lending, there are no shortcuts to safety.
The author is vice president–customer experience, Home Credit India