APP Users: If unable to download, please re-install our APP.
Only logged in User can create notes
Only logged in User can create notes
General Studies 3 >> Economy
audio may take few seconds to load
INSTANT LOAN APPS
INSTANT LOAN APPS
Source: The Hindu
1.Context
Several Indians have ended their lives owing to harassment by recovery agents of unregulated digital lending apps mostly linked to entities based in China.
Probe agencies are now cracking the whip on such apps that lure customers into debt traps by offering quick loans.
2.Key points
Their high-interest rates, short repayment windows, coercive recovery methods and misuse of personal information have prompted the Reserve Bank of India (RBI).
Central probe agencies to crack down on the entities that run these loan apps and the payment gateways and crypto exchanges used by them to transfer overseas the money extracted from borrowers.
3.Concerns Raised in Parliament
On August 2 2022, Sujeet Kumar, a Rajya Sabha member raised concerns in Parliament over "dubious digital loan apps with links to China and backed by Chinese entities lending unscrupulous loans in violation of RBI guidelines".
He said Odisha alone had seen 1.5 lakh downloads of these apps and asked if the country's regulatory framework was adequate to tackle the threat posed by them.
In response, Union Finance Minister Nirmala Sitharaman said the Central government had taken cognisance of such cases where digital loan apps "originating from one particular country" were being misused to harass citizens and extort money.
She added that the Union Ministries of Finance, Corporate Affairs, Electronics and Information Technology and Home were working together to take action against such apps.
Ms Sitharaman said, "I can broadly indicate that in the past couple of months, particularly in Telangana, a lot of people have faced harassment and in those cases, actions have been initiated. That is not to say the action is not being taken elsewhere. We are also consciously taking action against Indian citizens who have helped in getting these companies established and the shell companies through which they are operating".
4.ED Investigation
The Enforcement Directorate (ED) has launched a money laundering investigation into unauthorised online microloan apps based on multiple FIRs registered in Hyderabad and Bengaluru over the past two years.
According to the agency, most instant loan apps have links to entities based in China.
Chinese nationals or companies directly own several financial technologies (fintech) firms in Gurugram, Delhi, Mumbai and Bengaluru or control them by using proxies as directors.
To initiate the lending business, they infused funds into these firms directly or indirectly from overseas locations such as Hong kong.
4.1.ED raids
The ED conducted raids at the premises of online payment gateways such as Razorpay, Paytm and Cashfree in Bengaluru as part of its probe into the money laundering case.
ED seized funds worth ₹17 crores kept in "merchant IDs and bank accounts of these Chinese-controlled entities".
The companies said they were cooperating with the ED.
5.Deals inked with defunct NBFCs
As per the law, a lending company needs to be either a bank or a non-banking financial company (NBFC) that is registered with the RBI.
When the RBI refused to provide these Chinese entities with an NBFC licence to start their digital lending business, they identified 38 defunct NBFCs with meagre capital ranging from ₹3.50 crore to ₹1 crore.
Deals were inked between the fintech firms and the NBFCs, providing security deposits worth over ₹100 crores and bringing in more funding through the Foreign Direct Investment route.
The NBFCs then registered separate merchant IDs with various payment gateways for the fintech firms to start their lending business using loan apps.
6.RBI Notice
The RBI, too, took notice of the growing number of individuals and small businesses falling prey to unregulated digital lending platforms and mobile apps offering quick loans in a hassle-free manner.
On December 23, 2020, the central bank issued a note asking members of the public to verify the antecedents of companies offering such loans.
"Consumers should never share copies of KYC (Know Your Customer) documents with unidentified persons, or unverified/ unauthorised apps and should report such apps/ bank account information associated with the apps to concerned law enforcement agencies or use the Sachet portal," the note said.
7.RBI Working Group
On January 13, 2021, the RBI constituted a Working Group on "digital lending including lending through online platforms and mobile apps.
As per the findings of the Working Group, from January 1, 2021, to February 28, 2021. around 600 of the 1, 100 lending apps available for Android users in India across 81 application stores were illegal.
During the same period, Google removed 115 apps from its Play Store for policy violations at the request of the Intelligence Bureau.
Despite the RBI's guidelines to regulate digital lending platforms, the apps continued to offer loans, ranging from ₹2, 000 to ₹ 20, 000 to thousands of customers with minimum KYC requirements and based only on online verification.
8.Complete Access
According to the police, to provide a loan, the apps ask customers to upload their Aadhaar card, PAN card and a live photograph.
Customers are also asked to share a One Time Password (OTP) that is generated.
The borrowers give various permissions while activating the app, giving it complete access to their contact list, location, chats, photo gallery and camera.
This information is then uploaded to servers hosted in China and other parts of the world.
The police say loan recovery agents operate from call centres situated in different parts of the country that have access to the data stored in these servers.
Each call centre employs six to seven telecallers, who are paid around ₹25, 000 per month and given incentives based on the targets they achieve.
9.Missing the fine print
A police officer says smartphone users often miss the fine print while permitting such apps.
The catch is that at the time of sanctioning the loan, 15-25 per cent of the amount is deducted as a processing fee and the remaining sum carries an interest rate ranging from 182 per cent to 365 per cent per annum.
A steep rate of penalty is added to the total repayable amount in case of default, "The rate of recovery of loans is as high as 90 per cent. The net profit is 25 per cent or more," says an ED official.
The NBFCs receive only 0.20 per cent - 0.50 per cent of the interest collected.
The police officer says the source code for most Chinese loan apps is the same.
It means they change just the names and layout, but the money goes through the same network.
Apple automatically checks all malicious apps and if the source code is the same or not. Hence, the accused used the Google Play Store.
Data theft is a concern as these networks can later use for other cyber crimes.
With the help of the customer's OTP, the apps can access a victim's bank account and understand their paying capacity too.
The tele-callers and loan recovery agents blackmailed people in the contact list and threatened victims by using morphed images of their family members.
Earlier investment app scams, now loan apps are being used to extort money with the growing number of Internet users and the scope of cybercrime has widened.
10.Chinese involvement
On August 20, Delhi Police busted a firm that ran a predatory instant loan app after receiving over 100 complaints on the National Crime Records Bureau Portal. It took two months to arrest 23 people working across the country.
Six Chinese nationals were involved in the crime and an FIR was registered against them.
The police said around ₹500 crores were routed to associates in China through cryptocurrency and hawala routes.
The Internet Protocol addresses and money routes are located in China.
The apps were being hosted from Amazon Web Services and Ali Baba Servers, which are in operation in India but do not comply with the norms here.
11.Recovery agents
Operatives are shifting call centres to Pakistan, Nepal and Bangladesh.
Different syndicates run such businesses, the officer says, as several people are needed to make threat calls, convert extorted money to cryptocurrency, create fictitious bank accounts and buy SIM cards.
It is a network that doesn't just operate for Chinese loan apps but all cyber frauds.
People from China, Singapore, Hong Kong and Dubai are involved in such activities too, but Chinese nationals have a larger stake in this.
Each recovery agent is given a target of Collecting ₹40, 000 per day.
They are given a script, including threats, which they cannot deviate from.
If the customer exhibits vulnerability, a link is sent to a payment gateway, which is operated by a different team.
12.Cracking down on offenders
On February 24 this year, the RBI cancelled the Certificate of Registration issued to P. C. Financial Services (PCFS), which earned ₹1, 320.13 crores in a year via the Cashbean app.
According to the EDs seizure documents, the CEO of PCFS said the company was part of Opera Limited, headquartered in Norway, but all its major investors were Chinese nationals.
Opera Group realised that third-world countries offer good markets for its instant loans without collateral business.
There was no competition in the Indian market at that time said the CEO's statement recorded under Section 37 of the Foreign Exchange Management Act, 1999.
He said no one in PCFS objected as all the directors were on a "salary basis".
The ultimate beneficiary was a Chinese national, Zhou Yahui.
Set up in 1995 by Indian directors, the Company secured an NBFC licence in 2002.
Following an RBI approval in 2018, its ownership shifted to the Chinese-controlled entities, the ED alleges.
Of the total revenue from the app, ₹468 crores were sent overseas as payment for various services and ₹ 723 crores were claimed as domestic expenditure.
Fake invoices were raised through 111 shell companies that claimed to be engaged in business like logistics (64), gems and jewellery (17) and audio-visual services (30).
All foreign service providers were chosen by the Chinese owners and the price of the services was also fixed by them. Exorbitant payments were blindly allowed by the dummy Indian directors of PCFS without any due diligence and on the instructions of the country head, Zhang Hong, who directly reported to Zhou Yahui.
12.1..Money trail
The ED also gathered evidence showing that cryptocurrency exchanges were used by the masterminds to transfer funds.
The amount was allegedly deposited by different entities, including the accused NBFCs and fintech firms, into the wallets of the agencies that were held with the exchange.
After initiating the probe, most of the apps were closed and the funds diverted.
12.2.Shell entity
It was set up by Chinese nationals in connivance with chartered accountants and company secretaries.
Bank accounts were opened in the name of dummy directors.
The internet banking credentials and digital signatures of dummy directors and other particulars were shipped abroad and used by Chinese nationals to launder the proceeds of crime.
13.Money transferred into Crypto
The exchange has not been able to share all the details of suspect transactions with the ED as it allegedly had lax KYC norms, no due diligence mechanism, no check on the source of funds of depositors and no mechanism for raising suspicious transaction reports.
The agency owns cryptocurrency exchanges as part of the probe against the NBFCs and their fintech partners.
These companies and their virtual assets are untraceable at the moment. the maximum amount of funds was diverted to exchange and the crypto assets purchased have been diverted to unknown foreign wallets.
Crypto exchange also could not give any account for the missing assets.
By encouraging obscurity and having Anti-Money laundering norms, and assisted accused fintech firms in laundering the proceeds of crime using the crypto route.
14.The Way Forward
The RBI issued its first set of guidelines to crack down on illegal activities in the digital lending industry.
As per the new norms, all loan disbursals and repayments will be required to be executed only between the bank accounts of the borrower and the regulated entities such as a bank or an NBFC without any pass-through or pool account of the lending service providers or any third party.
The central bank asked the industry to implement the norms by November.
The norms are designed to end regulatory arbitrage and protect customers and put the onus on the regulated entities on behalf of whom the apps do the lending.
The passage of a law banning lending by unauthorised entities and the creation of a self-regulatory organisation for digital lenders will bring transparency to the industry.
.png)
