On Fraudulent Digital Lending – RBI, loan scammers and financial literacy

Source: The post on Fraudulent Digital Lending has been created based on the article “RBI, loan scammers and financial literacy” published in “Indian Express” on 22nd November 2023.

UPSC Syllabus Topic: GS Paper 3 Indian Economy – Indian Economy and issues relating to mobilization of resources.
GS Paper 3 Internal Security – Basics of cyber security.

News: The article discusses the issues associated with fraudulent digital lending apps. It highlights the reasons for people falling for the scams, and the variou steps taken in this regard.

In recent years, there has been an expansion of the digital economy in India. This has created conditions for a surge in digital lending, driven by fintech companies.

For more on Digital Lending, read here.

Why do people fall for fraudulent digital lending?

1. Inducement of access to easier and faster low-cost loans.
2. Promise lending to people with low credit scores.
3. Provide loans to people with limited access to financial services.
4. Low levels of financial literacy (amongst the low- and middle-income classes, including students and shopkeepers in smaller towns).

What steps have been taken in this regard?

1. RBI working group had suggested the creation of an independent body to verify digital lending apps.
2. Ministry of Electronics and Information Technology (MeitY) was allotted the responsibility of ensuring that only legitimate apps are hosted on the app stores.
3. Tech platforms (which host lending apps) such as Google and Apple have blocked several such apps.

What needs to be done?

1. Regulatory Measures: Implementing strict regulations specifically targeting digital lending platforms to ensure compliance with existing financial and consumer protection laws should be done. KYC norms for lending apps as suggested by MeitY can be put in place.
2. Monitoring and Oversight: Establish a regulatory body or task force dedicated to monitoring digital lending practices, investigating complaints, and taking necessary actions against illegal operators.
3. Consumer Awareness and Protection: Public awareness campaigns to educate consumers about the risks associated with illegal digital loan apps with an emphasis on financial literacy should be launched.
4. Use of Technology: Developing technology solutions to verify the authenticity of digital lending platforms and prevent unauthorized access to personal data can be done.
5. Collaboration with Financial Institutions: Partnerships between legitimate digital lenders and established financial institutions or banks to ensure responsible lending practices should be encouraged.

Question for practice:

Financial inclusion and financial literacy are important pre-requisites for unleashing the potential of India’s digital economy. Discuss in the context of fraudulent digital lending apps.