Explainer| How Dhani fake loan episode exposes big holes in digital lending

Complainants added that their credit scores have also been impacted, as credit reports have listed loans they had never availed as defaults.

How worrying is this issue?

The indications point to data theft and financial fraud. Essentially, the case here is that fake loans were generated by perpetrators, which is a serious charge. On non-repayment of such loans, the collection agents start harassing the actual owners of the PAN cards, which is when the fraud actually comes to light. Among the affected parties include actor Sunny leone who alleged identity theft to initiate a fake loan.

So what’s Dhani’s response?

A spokesperson for Dhani acknowledged this, stating: “It has come to our notice about a few cases where unscrupulous people have used other people’s PAN and thus credentials from credit bureaus to take a loan through the fintech operation on the app.

“We have taken remedial measures including talking to all complainants and establishing if it is a case of identity theft. We are also rectifying complainants’ records in the credit bureaus immediately in case of identity theft,” the spokesperson told the channel.

A statement from Dhani read: "The digital and tech ecosystems are evolving, and the industry has been facing individuals who try to defraud both, companies and unsuspecting citizens. While there are many cases of fraudsters taking advantage of people who mistakenly share credentials and OTPs of their own volition, cases of identity theft are also on a steady rise. Our risk management and tech teams, therefore, have been on overdrive, constantly building more robust systems to try and keep such activities at a distance. We are taking all necessary steps to fully eliminate such behaviour by fraudulent people.”

But, the question is how in the first place the data leakage happened despite the firm stating that Dhani has integrated with global security platform G-defence, to re-verify each device against a specific customer and PAN through various data-fields “to stop these stray incidents of identity thefts" and has ramped up its service team.

This, in fact, isn’t an isolated instance. The Reserve Bank of India had recently acknowledged that it identifies digital frauds as one of the two major challenges while rolling out the central bank digital currency—the other being cyber frauds. This was highlighted by T Rabisankar, one of the deputy governors, at the RBI on December 8.

Not an isolated problem

Dhani isn’t the only case. Digital frauds have been rising, especially during the pandemic period. According to a report by global information and insights company TransUnion, the share of suspected fraudulent digital transaction attempts originating from India increased 28.32 percent over the 12 months ending March, 2021 compared with the previous 12 months.

In India, across industries, TransUnion found that the highest share of suspected digital fraudulent transactions originated from Mumbai, Delhi and Chennai.

Separately, software firm ACI Worldwide said in a report that globally, card-related fraud accounts for the largest number in terms of reported incidents from consumers, but fraud incidents associated with real-time payments were on the rise from 2019 to 2020 as fraudsters began to target new channels.

“Real-time payments scams that were on the rise include: confidence tricks (12.5 percent rising to 13.7 percent), identity theft (6 percent rising to 11.6 percent) and digital wallet account hacks (4.4 percent rising to 6.2 percent),” ACI Worldwide said.

On the other hand, the incidence of overall bank frauds fell during FY21, the Reserve Bank of India (RBI) annual report showed.

The number of bank frauds reported during 2020-21 decreased by 15 percent in terms of number and 25 percent in terms of value, vis-à-vis 2019-20, the RBI report said. The share of public sector banks in total frauds decreased both in terms of number and value, while that of private sector banks increased during the year, the RBI said.

Fresh challenges to RBI

Digital frauds pose significant challenges to the new age banking channels. Unless companies involved in the business respond swiftly respond to these challenges and revamp their technology platforms to prevent data theft and misuse, such cases will recur, as the Dhani episode evidences. For the regulator, such technology-related frauds poses fresh challenges. In January this year, the RBI formed a Fintech department to focus on the sector. "With a view to give further focus to the area and facilitate innovation in fintech sector in keeping pace with the dynamically changing financial landscape, it was decided to set up a fintech department in the Bank," states the internal circular, which has been accessed by media publications.

The new department has been created with effect from January 04, 2022, by subsuming the FinTech Division of Department of Payment and Settlement Systems, Central Office (DPSS, CO). But, it is a point of debate whether the RBI possesses the infrastructure and manpower to address the growing challenges within the fast evolving digital lending space.