There are many apps that are ready to provide you quick loans. The experience is seamless. Everything gets done on the app/website. How does everything work? Do these apps lend on their own or they are acting as agents?
If any website or a mobile application is offering you a loan, one of the following two things must happen.
- The website’s owners have the NBFC license. OR
- The website acts as a distribution partner for an NBFC or a bank.
The way things work, there are inherent issues in the second model. Under the second model, you may not even know who has lent you the money. The problem with such a model is that you do not have access to (rather you may not know about) the proper grievance redressal avenues. Moreover, as per the Reserve Bank, it has received many complaints on digital lending platforms about the high interest rates, interest rate calculations, harsh recovery practices and even unauthorised usage of personal information.
In any case, grievance redressal leaves a lot to be desired. And lending through the third-party apps/websites provides a perfect setup for acting with impunity. The regulators are slow and do not always help. The regulators are more likely to address these grievances through policy changes rather than address individual complaints. The lender (banks and NBFCs) and the channel partners know that most borrowers won’t have time and/or money to take the legal route. The first line of defence is to simply shirk the responsibility. When the borrower approaches the website/app owners, they are asked to contact the bank. When the borrower approaches the bank/NBFC, they are asked to contact the digital platform.
Author’s Note: I have never taken a loan through any app/websites. Hence, these are my biases speaking. However, we know how people are harassed by the financial services intermediaries. I have personally come across many examples of insurance companies and banks fleecing hapless and less aware investors. Nothing happens. Nobody is held accountable. The banks, insurance companies and the regulators play ping-pong. There is no end to end customer misery. After all, he/she signed the dotted line. I am sure these digital lending platforms are no different. Not right for me to paint everyone with the same brush. Caveat Emptor.
Coming back, as per this Times of India article, there have been cases where improper recovery mechanisms have been used. The app-based lenders usually ask for access to messages and contacts. The borrowers have been blackmailed by recovered agents threatening to approach people in their contact list and divulging private information. I don’t know how much of this is true but it does not appear unlikely. I can understand an app can need access to messages for evaluating your credit application or loan eligibility. The credit and debit SMSes can provide them a lot of information. However, many apps in general (and not just lending apps) ask for too many permissions. I don’t see the need for access to the contacts list.
In a circular dated June 24, 2020, the Reserve Bank of India has tried to address some of these issues. With these changes, if the website/app is acting merely as an agent of the lender, you will be given more information upfront. Here is the list of changes that RBI has brought.
- The Banks/NBFCs shall disclose the names of all the digital lending platforms (mobile apps or website) acting as their agents on their websites.
- Even the digital lending platforms shall disclose the name of the NBFC/banks (the final lender) upfront to the customer.
- Now, this is important. After the sanction but before the execution of the loan agreement (and of course before the disbursal of funds), the sanction letter must be issued to the borrower on the letter head of the eventual lender. This looks like an additional step but brings in much needed transparency. You will likely get an e-mail with the sanction letter.
- A copy of the loan agreement shall be furnished to the borrowers at the time of disbursement of loans.
- The outsourcing of lending activity to any agent does not diminish the obligations of banks/NBFCs.
The digital delivery of loans is a welcome step. It can help quicker and wider access to credit. However, in a rush to get a quick and convenient loan, don’t forget that the loan is being offered under a contract. You must understand the terms and conditions, various charges and interest rate calculation before signing up for the loan. After all, you have agreed to the terms and conditions digitally. And yes, do not borrow what you cannot repay.