Moneycontrol

Budget 2023Budget 2023

PARTNERS

  • Tata AIA Life Insurance
  • Hafele
  • Motilal Oswal
  • SMC Global Securities Limited
Live: Budget Session Live: President's House address
Budget 2023
Budget 2023

Tapping an app for a loan? Beware of these fraud traps

If you are applying for a loan from a digital lender, know the multiple risks involved. Before installing the digital lending app read user reviews, know the charges and terms.

January 24, 2023 / 09:53 AM IST
Digital frauds through lending apps are on the rise since December 2020. The modus operandi of these lending apps is to extend credit to needy customers instantly. But, there are multiple risks associated with such digital lending applications. To systematically identify and assess the risks in the fintech industry, Fintech Association for Consumer Empowerment (FACE) and Center for Finacial Inclusion (CFI) recently launched Fintech Lending Risk Barometer. This risk barometer study aims to create a systematic baseline of emerging risks in the digital lending industry.
1/10
Digital frauds through lending apps are on the rise since December 2020. The modus operandi of these lending apps is to extend credit to needy customers instantly. But, there are multiple risks associated with such digital lending applications. To systematically identify and assess the risks in the fintech industry, Fintech Association for Consumer Empowerment (FACE) and Center for Finacial Inclusion (CFI) recently launched Fintech Lending Risk Barometer. This risk barometer study aims to create a systematic baseline of emerging risks in the digital lending industry.
This fintech lending risk barometer study followed a mixed methods approach to identify the risks. First, they conducted an online survey among forty fintech lenders from September to October 2022 to gather lenders’ and non-lenders’ initial perceptions of risks. In-depth qualitative interviews with select respondents had followed. For each risk, the survey asked participants to rank risks on a scale of 1 to 7, 1 being the lowest severity risk and 7 being the highest. Here are top five risks in digital lending.
2/10
This fintech lending risk barometer study followed a mixed methods approach to identify the risks. First, they conducted an online survey among forty fintech lenders from September to October 2022 to gather lenders’ and non-lenders’ initial perceptions of risks. In-depth qualitative interviews with select respondents had followed. For each risk, the survey asked participants to rank risks on a scale of 1 to 7, 1 being the lowest severity risk and 7 being the highest. Here are top five risks in digital lending.
 Risk #1: Lack of   credibility |  Ninety percent of the respondents in the survey mentioned top risk is unscrupulous fintech lenders with a score of 6.3 out of 7. Such fintech lenders are unauthorized, charge excessive processing fees, do not reveal terms and conditions, and follow aggressive collection practices. These lenders harm borrowers and undermine trust in digital lending. The RBI working group on digital lending found almost 1,100 lending apps available to Indian android users, of which nearly 600 were illegal.
3/10
Risk #1: Lack of credibility | Ninety percent of the respondents in the survey mentioned top risk is unscrupulous fintech lenders with a score of 6.3 out of 7. Such fintech lenders are unauthorized, charge excessive processing fees, do not reveal terms and conditions, and follow aggressive collection practices. These lenders harm borrowers and undermine trust in digital lending. The RBI working group on digital lending found almost 1,100 lending apps available to Indian android users, of which nearly 600 were illegal.
 Risk #2: Cyber fraud |  Eighty-three percent of the respondents in the survey ranked cyber fraud and cybercrime as a second most severe risk with a score of 5.5 out of 7. There is a risk in the form of identity theft. In cyber fraud there are instances of forged pages on social media with company logo and claim they are collecting data on behalf of a fintech lender, promising borrowers that if they apply for loans through their pages, the borrower will get better rates, or discount on loan repayments. It is hard to monitor such fake lending pages.
4/10
Risk #2: Cyber fraud | Eighty-three percent of the respondents in the survey ranked cyber fraud and cybercrime as a second most severe risk with a score of 5.5 out of 7. There is a risk in the form of identity theft. In cyber fraud there are instances of forged pages on social media with company logo and claim they are collecting data on behalf of a fintech lender, promising borrowers that if they apply for loans through their pages, the borrower will get better rates, or discount on loan repayments. It is hard to monitor such fake lending pages.
 Risk #3: Data privacy |  Seventy-three percent of the respondents in the survey ranked data privacy as a severe risk with a score of 5.1 out of 7. The absence of a clear data protection law and lack of standards contribute to create a risk of non-compliance for the digital fintech industry. Often, potential borrower submits personal information demanded or rights to access messages, contacts, files, etc. on the mobile device while installing the lending app.
5/10
Risk #3: Data privacy | Seventy-three percent of the respondents in the survey ranked data privacy as a severe risk with a score of 5.1 out of 7. The absence of a clear data protection law and lack of standards contribute to create a risk of non-compliance for the digital fintech industry. Often, potential borrower submits personal information demanded or rights to access messages, contacts, files, etc. on the mobile device while installing the lending app.
 Risk #4: Non-compliance |  Sixty-five percent of the respondents in the survey ranked non-compliance as a severe risk with a score of 5 out of 7. In the absence of a clear channel of communication with the regulators, there is a danger that the guidelines are being implemented in different ways by the fintech lender, which lead to fines and penalties, and erode borrowers trust. Fintech lenders need to ensure transparent and consultative framing of regulations and there should be systematic consultations, meeting minutes should be made available for public access to build the trust.
6/10
Risk #4: Non-compliance | Sixty-five percent of the respondents in the survey ranked non-compliance as a severe risk with a score of 5 out of 7. In the absence of a clear channel of communication with the regulators, there is a danger that the guidelines are being implemented in different ways by the fintech lender, which lead to fines and penalties, and erode borrowers trust. Fintech lenders need to ensure transparent and consultative framing of regulations and there should be systematic consultations, meeting minutes should be made available for public access to build the trust.

 Risk #5: Unfair practices |  Sixty percent off the respondents in the survey ranked unfair practices as a severe risk with a score of 4.9 out of 7. The risk of aggressive marketing and collection practices has harmed borrowers. The complaints of unfair practices are widely spread and not restricted to an urban segment or specific geography. On the regulatory front, the RBI has issued stringent guidelines on recovery practices and indicated that strong regulatory action would be taken for lenders who do not comply.
7/10
Risk #5: Unfair practices | Sixty percent off the respondents in the survey ranked unfair practices as a severe risk with a score of 4.9 out of 7. The risk of aggressive marketing and collection practices has harmed borrowers. The complaints of unfair practices are widely spread and not restricted to an urban segment or specific geography. On the regulatory front, the RBI has issued stringent guidelines on recovery practices and indicated that strong regulatory action would be taken for lenders who do not comply.

 Other risks |  There are several other risks which falls under moderate, with scores ranging between 3 and 5. Some of these risks are regulation, data, reputation, business model and more.
8/10
Other risks | There are several other risks which falls under moderate, with scores ranging between 3 and 5. Some of these risks are regulation, data, reputation, business model and more.
 Easy tips to protect from   frauds : You must exercise caution while borrowing from a digital fintech lender and lower the probabilities of becoming a victim to a financial risk. While borrowing know your lender well, choose an RBI-registered lender, do not click on unsolicited links in mails or messages and stay away from pushy digital lenders with quick loan offers.
9/10
Easy tips to protect from frauds: You must exercise caution while borrowing from a digital fintech lender and lower the probabilities of becoming a victim to a financial risk. While borrowing know your lender well, choose an RBI-registered lender, do not click on unsolicited links in mails or messages and stay away from pushy digital lenders with quick loan offers.
If you have decided taking a loan from a digital lender, then you must read the user reviews of the lending app before installing, identify the processing fees and other charges. Also, know other terms and conditions while registering or before giving consent to access your emails, photos, messages, contacts, etc. to the lending app while installing.
10/10
If you have decided taking a loan from a digital lender, then you must read the user reviews of the lending app before installing, identify the processing fees and other charges. Also, know other terms and conditions while registering or before giving consent to access your emails, photos, messages, contacts, etc. to the lending app while installing.