Indian Government To Regulate Illegal Digital Lending Apps With Strict Monitoring

The Indian government is finally taking measures to curb the menace of illegal digital lending platforms and their unfair practices. 

The Finance Ministry has announced that only the digital lending applications whitelisted by the Reserve Bank of India (RBI) can be allowed to conduct their lending business.

Ministry of Electronics and Information Technology (MeiTY) will ensure that only the whitelisted applications are hosted on app stores. 

What Is A Digital Lending Platform? 

A digital lending platform is responsible for lending and recovering loans through web platforms and mobile applications. It is trendy for its quick availability and speedy disbursal.

Using a digital lending platform, Lending Service Providers (LSP) collaborate with Non-Banking Financial Corporations (NBFC) to pay out creditors. It employs credit evaluation and customer authentication technology, much like digital onboarding in mainstream banking systems.

These platforms are highly mobile, less time consuming and the disbursal is often intentionally uncomplicated.

Unfair Practices of Digital Lending Platforms

In contrast, the long waiting period involved in traditional banking, high maintenance fee, collaterals, and guarantor complications often drive people from middle and lower-income groups to reach out to these LSPs.

The digital lending web platforms and mobile applications channel this demand.

However, in many instances, these platforms and LSPs have been accused of taking recourse to unfair practices, and recklessly disbursing credits beyond the borrower’s capacity.

Allegedly, digital lending actors are involved in multiple unethical behaviors, such as mis-selling to customers, charging higher-than-average interests, hidden terms, and conditions, excessive third-party involvement, etc.

They also indulge in predatory loan recovery methods like criminal intimidation, blackmailing, etc.

The Finance Minister’s Response

Union Minister for Finance & Corporate Affairs Smt. Nirmala Sitharaman took note of the increasing volume of illegal micro credits.

She also highlighted the possibility of other financial crimes like tax evasion, money laundering, and data breach.

The rampant abuse of shell companies, payment aggregators, and a section of NBFCs are also taken into consideration.

On September 11, 2022, the corporate fraud investigating agency Serious Fraud Investigation Office (SFIO) raided several locations across the country and arrested alleged masterminds of Chinese Shell companies operating in India. 

Also read: Meta And JioMart Introduced Hassle-Free Shopping On WhatsApp In India

Government’s Measures Against Unethical Digital Lending Platforms

Image credit: INC42

After the recent meeting on the issue of Illegal Loan Apps, the government has taken several measures which are listed below

• RBI’s Whitelist:      
  The Reserve Bank of India will list legal digital lending applications, whereas the MeitY will ensure that non-whitelisted apps do not feature in Android and iOS app stores. 
• • Cancellation of dormant NBFC:
    NBFCs that are lying dormant for a long period of time will face a cancellation.
    
  • Mule Digital Lending Accounts:
    RBI will observe mule accounts to restrict them from being used in money laundering.
    

• Mandatory Registration for Payment Aggregators:
  RBI will come up with a specific time frame under which all payment aggregators need to register themselves. Unregistered aggregators will not be able to function within the bounds of the law.
  

• Monitoring Shell Companies:
  Ministry of Corporate Affairs will be conducting a thorough review of shell companies and their functions to ensure they are de-registered on time.
  

• Increased Cyber Awareness:
  The government will promote cyber awareness among stakeholders including the public, bank employees, and law enforcement agencies to check the growth of digital lending platforms.

• Joint action against Illegal loan apps:
  The government has also called upon concerted inter-ministry efforts to bring swift action against illicit digital lending practices. 

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