Today, China is not just trying to encroach upon India’s territory, but has also got deeply integrated into the latter’s economy using modern technologies. It was the Fintech India Expo in 2019 when Chinese software developers successfully lured Indian investors to gain entry into Indian markets.
Indian authorities have launched a full-fledged counter attack on such apps which are offering loans to vulnerable and tech-illiterate people at exorbitant interest rates with hidden processing fees and charges. These illegal apps also use predatory loan recovery practices involving blackmail and criminal intimidation. In addition, there is the possibility of money laundering and tax evasion. Coercive recovery methods and misuse of personal information have prompted the Reserve Bank of India (RBI) and probe agencies to crack down on the loan app entities and the payment gateways.
Unlawful lending and defunct NBFCs
A lending company needs to be either a bank or a Non-Banking Financial Company (NBFC), i.e. registered with the RBI. As per the June 2020 order issued by the RBI, complete details of such companies must be available on the websites of the banks and NBFC companies involved in such business. A written consent letter is required from the customers along with details as to the amount of interest that is to be paid by them.
On August 10, 2022, the RBI issued a fresh set of guidelines on how all loan disbursals and repayments should be executed only between the bank accounts of the borrower and the bank accounts of the lending service providers or any third party. However, Chinese entities have been doing business with defunct NBFCs with meagre capital.
In February this year, the RBI cancelled the Certificate of Registration issued to PC Financial Services (PCFS), which earned Rs 1,320.13 crore in a year via the Cash Bean app. After the Ministry of Corporate Affairs (MCA)’s search operations, the Serious Frauds Investigation Office (SFIO) carried out various operations. They arrested one person, the alleged mastermind of a widespread racket that involved the setting up of shell companies with Chinese links and dummy directors.
Illegal Call Centres, Sensitive Personal Details & Breach of IT Act
When these apps are downloaded, they mandatorily require access to contacts, videos, photo galleries and other personal information. Once access is given to these apps, it becomes mandatory for the customers to upload their Aadhaar Card, PAN Card and a live photograph. Customers are also asked to share a One Time Password (OTP) that is generated. Such information is then uploaded to servers hosted in China and other parts of the world. These loan app operators have illegal call centres that are given unauthorised access to such personal data. They call victims (or customers) to extort money by threatening to reveal their liabilities to their friends, family and colleagues. They are also trained in morphing pictures.
With the help of the customer’s OTP, these apps get unauthorised access to the victim’s bank account. These apps are being hosted from the AWS server and Ali Baba Servers, which do not comply with Indian rules as they are American companies. For such crimes, various criminal cases under Sections 384 (extortion), 420 (cheating), 120B (conspiracy) and 465 (forgery) of the Indian Penal Code and Sections 66, 66B, 67 and 67A of the Information Technology Act have been registered in various police stations across India.
FDI, money laundering, crypto and Chinese connection
As per the report released by a working group of RBI, from 2017 to 2020 instant loan business jumped from Rs 11,617 crore to Rs 1,41,821 crore, which is 12 times higher than the initial amount. An investigation conducted by the Maharashtra Police Cyber Cell also reveals that Chinese loan apps have amassed Rs 160 crore in the past two years and a lookout notice has been issued against the Chinese kingpin.
The Delhi Police in its latest operations has identified such apps wherein money to the tune of over Rs 3,000 crore has been siphoned off, and routed to China through cryptocurrency. The Enforcement Directorate too gathered evidence showing that cryptocurrency exchanges were used by the loan apps to transfer unlawful proceeds.
The ED searched the premises of online payment gateways such as Razorpay and Paytm to probe the money laundering aspect of these loan apps. The ED claimed that these entities used forged documents of Indians and made them dummy directors in these firms, thus escaping the regulatory mechanism. Many of them have converted extorted money into cryptocurrency, created fictitious bank accounts and bought multiple SIM Cards. After the ED crackdown, Income Tax, police and other authorities, syndicates have been shifting their call centres to Pakistan, Nepal and Bangladesh.
RBI warning and new guidelines
In 2021, an RBI working group identified a whopping 600 illegal lending apps operating in India. On the other hand, Google India alone has claimed to have removed over 2,000 personal loan apps in 2022 from its Play Store. The RBI’s August guidelines require that loan servicing amount and repayments are to be executed by the borrower directly into the RE’s bank account without any pass-through account or pool account of a third party. However, it will be applicable only to existing customers availing of fresh loans.
As per the RBI clarification, in order to ensure a smooth transition, REs shall be given time till November 30, 2022. According to the RBI Deputy Governor, the theme of the regulatory guidelines rests squarely with the regulated entities and they will have to ensure that the loan service facilitator and the digital lending apps with whom they have outsourcing tie-ups function within the regulatory ecosystem not just in letter but also in spirit. As per the chairman of the Payments Council of India, the RBI decision will save millions of innocent people from falling prey to such unregistered, unregulated and illegal loan sharks as well as ensure that international fraudsters don’t get access to Indian payments systems.
How to crack this menace?
As per Sujeet Kumar, Rajya Sabha member from the Biju Janata Dal, Odisha alone had seen 1.5 lakh downloads of these apps. He said that dubious digital loan apps with links to China and backed by Chinese entities lending unscrupulous loans are in violation of RBI guidelines. He questioned in Parliament whether the country’s regulatory framework was adequate enough to tackle the threat posed by them.
Finance Minister Nirmala Sitharaman informed the Rajya Sabha last month that the government was taking action against dubious digital loan apps. Without naming China, the minister said most dubious apps were originating from one particular country. The Ministry of Electronics and Information Technology (MEITY) has been asked to coordinate with the RBI and service providers such as Google Play and Apple App Store to ensure that only loan apps on the RBI whitelist are available for download.
As per RBI officials, technological innovations such as artificial intelligence, blockchain, quantum computing, big data, analytics, and 5G, have brought a whole lot of benefits. However, they also pose significant challenges for the future of finance. As per Senior Director and head of Trust & Safety for Google Asia-Pacific, “The issues with the loan apps could be easily solved in countries like Indonesia as there was a list of government-certified apps.” However, as per research done by Cashless Consumer, out of 1,050 apps available in the Google Play Store, only 90 have disclosed their address. Out of 750 apps only 300 had given website links, but the same was found to be fake.
The Indian government can take a leaf out of the Indonesian model to put a brake on these loan apps. Now the onus is on the government to make the enforcement agencies future-ready before it is too late.
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