A major fin-tech scam is on the cusp of emerging in India's instant loan startups space. The case below could be a precursor to it….
I was talking to a few students who had filed a complaint with the Delhi Police against a coaching institute, which was working in tandem with an instant loans startup backed by some venture capital investors.
The students are not complaining on the methodology of their teaching but on the way the coaching institute is extracting money from the students and their parents.
The main culprit behind the whole ‘fraud’ that students claim is the Aadhaar’s Instant Authentication System. The system is being used to extract money from a student or parent’s bank account even before ‘they have agreed to be enrolled in the course or negotiated on the fee’.
Here is how it works. The student walks into the coaching institute. The institute asks them to bring their Aadhaar card for registration and a finger print authentication on an app. The coaching institute also asks for a signature on a sheet where its written ECS Mandate.
The students are apparently told that they would be given a loan only if they agree to being enrolled after attending a few ‘demo classes’.
But lo an behold! Within 24 hours, the students are sent a loan agreement letter on their email id by an NBFC.
The agreement says that they have taken a loan and upon their request, the amount has been paid to the institute. After a class or two, when the students find they are not interested in the course, the NBFC says that the money for the entire year has already been transferred to the institute’s bank account.
And the institute is unwilling to refund the money.
From the next month onwards, the EMI starts getting debited from a student or their parent’s bank account even though the student is not enrolled in the institute or attending its classes.
To stop the EMIs, the the students filed an FIR. That’s how they approached the Delhi Police, and Moneycontrol.
Since the matter in under investigation, Moneycontrol is withholding the name of the NBFC.
Extrapolating the same scenario, the fraud has a likelihood of emerging in various sectors, including retail (when you buy a TV, fridge or washing machine).
The fraud can also unfold the other way round, a CEO of a lending company, which has raised over USD 50 million, told me.
“There could be students who may be acting in connivance with a coaching institute. While the students may pocket Rs 10k-Rs 20k, by getting instant loans granted against their Aadhaar, the coaching institute can flee by pocketing a lot of money within a few weeks. The government has to be really cautious on this and so are we,” he told me on condition of anonymity.
In approving these loans, the NBFCs hardly ask for any credit history proof or the ITR returns to showcase the financial history of the borrower.
The other flip side to instant loan fraud is likely to emerge in the merchant and sellers market. Loans could be approved against the names of staff members of a shop or trading firm and the proprietor could defraud NBFCs by the millions.
However lending startups told Moneycontrol on anonymity that getting back to the same ‘cumbersome’ process of paperwork before a loan gets approved would kill this emerging market.
“Yes a few bad apples will spoil the party. But we should not throw the baby out of the bath water,” said CEO of a Bangalore based lending firm.
Another impact investment firm that has invested in such lending startups told me on the sidelines of Fintegrate Conference 2018, this week that Aadhaar being one of the largest personal databases in the world is not a startup anymore. “It’s an emerging space which has a lot of potential for those who were never financially included or had a credit history,” she said.
The fault also lies on the part of UIDAI. “Every week, we see a patch being issued from the Aadhaar technology team. Clearly, Aadhaar should not be open to all and sundry,” CEO of a payments firm said.
For the students who are paying the loan even without studying in the institute, clearly the NBFCs should take proper authorisation before transferring the amount to their intermediary sales agents.(This is an opinion piece. Views expressed are personal)