Digital lending apps: A recent survey has found that the Reserve Bank of India’s (RBI) steps against loans being offered by unauthorised digital platforms and mobile applications had a positive impact on users. In 2020, the central bank released a cautionary message directed towards small businesses and individuals regarding the risks associated with obtaining loans through unauthorized digital lending applications.
The cautionary statement was issued in response to an increasing number of reports detailing individuals and businesses falling victim to unscrupulous digital lending platforms and mobile applications that promise quick and hassle-free loan approvals. The central bank advised borrowers to exercise caution and carefully scrutinise the credentials of lenders offering online loans or services through mobile apps.
The latest survey by LocalCircles showed that users using these financial apps to get instant loans have reduced from 14% in 2022 to 9% in 2024. “It appears, the government and RBI intervention/ actions against instant loan apps is having an impact as the percentage of citizens using them to get loans has reduced from 14% in the last survey in 2022 to 9% this year,” the survey stated.
High interest rate
The survey found that users who took a loan using instant loan apps in the last 2 years were charged annual interest of over 25%.
“We found that 45% users said that the rate of interest charged was over 25% per annum. The data shows that 35% got a loan at an annual interest rate of 10-25%, while 15% took it on an annual interest rate of 25-50%; 10% got it at 50-100% interest rate; and 20% at a higher interest rate of 100-200%. Another 20% of the respondents did not disclose the interest they have to pay for the loan they have taken through instant loan apps in the last 2 years. To sum up, 45% of citizens surveyed said when they or someone in their family or household staff took a loan using instant loan apps in the last 2 years, they were charged annual interest of over 25%,” the survey stated.
Extortion and data misuse
The survey also stated that the percentage of citizens facing extortion or data misuse during the loan recovery has risen to 61% in the last two years.
Considering reports of harassment and intimidation by loan recovery agents, the survey found that 61% users said “yes” that they faced extortion threats or
data misuse during the collection process, while 33% denied such acts and 7% of respondents did not give a clear response.
Cap on interest rates on instant loans
The survey stated that 65% of respondents said the central bank should intervene and set a cap on the interest rate charged by institutions and platforms on personal loans.
“Easy access to loans is a major attraction which during a crisis of any kind can sway people into taking loans even at high costs. In the case of app-based loans there is the added disadvantage of not being able to make an informed choice, as many cases reported have revealed. Around 65% of respondents said they would like the RBI to set a cap on the interest rate that can be charged by institutions and platforms on personal loans. The remaining respondents 30% felt those giving the loan should have the right to charge whatever interest is appropriate for the risk undertaken and 5% were indecisive on the subject,” the survey said.
RBI’s action against loan-based apps
The digital lending landscape in India has witnessed significant growth in recent years, with various models such as peer-to-peer lending, pay-later options, invoice financing, bank-led digital platforms, and marketplaces being embraced by both consumer-oriented and enterprise-focused entities.
In 2020, the RBI cautioned small businesses and individuals against taking loans through unauthorised digital lending apps and issued notification following reports with respect to such borrowers “falling prey to growing number of unauthorised digital lending platforms/Mobile Apps on promises of getting loans in quick and hassle-free manner”.
The RBI also urged borrowers to verify the antecedents of the lenders offering loans online or through mobile apps.
Later in 2023, the Ministry of Electronics and Information Technology asked RBI to design for banks a more detailed KYC process that companies will have to furnish, as it would help trace errant loan apps. Moreover, MeitY had warned social media and other platforms to ensure that they do not host any advertisements of app-based instant loan companies. Those intermediaries and platforms that continue to violate the government orders have been warned that they would have to bear the consequences of such actions.
As part of the safety measures, the central bank had earlier this year approved over 70 instant loan apps of non-banking finance companies (NBFCs) along with the range of loans they can disburse. The RBI’s move is in alignment with actions taken by the Ministry of Electronics and Information Technology (MeitY), which had last year urged the RBI to design more detailed Know Your Customer (KYC) norms to ensure traceability.
In the August MPC meeting, the RBI said it plans to create a public repository of digital lending apps deployed by its regulated entities to address the problems arising from unauthorised platforms. The move is part of several measures taken for the orderly development of the digital lending ecosystem in India, RBI Governor Shaktikanta Das said on August 8.