Financial Technology

Illegal loan apps are a menace, but they are also a message on a market gap in bank lending

The finance minister last week added heft to RBI’s attack on illegal loan apps. Last month, RBI had issued guidelines that made banks and NBFCs squarely responsible for the conduct of digital intermediaries hired by them to drum up lending business. GoI has now asked RBI to prepare a ‘whitelist’ of legal apps, which will be the only ones app stores can host. The scale of the problem can be gauged from data collected by RBI in 2021. Over two months, January and February, RBI found 1,100 unique Indian loan apps available in over 81 app stores, of which 600 apps were illegal.

But this proliferation, much of it a menace, is filling a market gap – lack of financial inclusion in the lending side. For deposits and transfer payments, digital business models have enabled a rapid scale up of banking services. There are 464 million beneficiary accounts under Jan Dhan and the World Bank estimated in 2021 that 78% of Indian adults had a bank account. Banks, however, don’t have the domain expertise to disburse micro loans on a large scale. This gap is being filled by the financial technology firms, which make customer convenience their USP. Lending apps work by the 2-1-0 formula – two minutes to decide, one minute to transfer and no human contact and zero collateral. But of course, unregulated by RBI, these lenders often resort to tactics favoured by loan sharks. Moreover, there’s the danger of these apps being used for money laundering and data theft.

For the moment, steps taken by GoI and RBI will have an impact. However, the only durable solution is to offer the convenience of loan apps in a regulated space. RBI needs to balance trade-offs between customer convenience and protection. It might be instructive to look at lessons of the effort undertaken in 2015 to introduce differentiated banking licences, which led to the creation of small finance banks and payments banks. Another set of licences for entities that can disburse micro loans quickly is an idea worth pursuing.



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This piece appeared as an editorial opinion in the print edition of The Times of India.



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