Rise of illegal digital lending applications led to a wave of frauds

Digital lending sector in India has grown by leaps and bounds and attracted a number of scammers that push illegal digital lending applications (DLAs) to the market.

Most borrowers take small value personal loans from fintechs. Around 35 percent of loans are worth less than ₹25,000. Loans which are worth between ₹25,000 to 50,000 are nearly 14 percent and the remaining 51 percent of loans are worth more than ₹50,000.

Digital lending apps

Those who are not aware of digital lending apps play an important role in maintaining an interface with customers to facilitate credit. These apps are owned by a regulated entity (RE) or a loan service provider such as a fintech which facilitates loans through partnerships with regulated entities as per digital lending guidelines. Such genuine DLAs distribute apps mostly through Google Play Store or Apple store.

Spate of unauthorised apps

There has been a rise in unauthorised digital lending applications. The influx of illegal lending apps poses a significant challenge to the industry. It includes privacy violations, cybersecurity risks, threats to customers and unfair collection practices.

This jeopardises the reputation of responsible digital lenders that work under the regulatory framework and deeply erodes the user's trust in digital lending.

Modus operandi of illegal apps

Some of these apps are available on the app store. Although Google Play Store regularly upgrades its defences against fraudulent activities, however fraudsters can always generate counterfeit evidence and bypass checks through the impersonation of regulated entities' websites or registration certificates.

Outside of app stores, illegal digital lending apps increasingly use alternative channels to circumvent app store verification and distribute APK files. These channels include web links, social media, WhatsApp, Telegram, messaging and email. Some of these channels may lack a robust verification process, thus shifting the responsibility of verification on to the users.

Impact of illegal DLAs

I. Fake association: Fraudsters fake their association with a regulated entity and penetrate the app store's due diligence via fake letters and certificates.

II. Stealthy outreach: Illegal DLAs circumvent the Play Store in the face of heightened scrutiny. They connect with users through websites, social media, WhatsApp, email, Telegram and SMS.

III. Strategic scaling: Illegal DLAs employ aggressive advertising to scale rapidly. Additionally, they used technology unscrupulously to garner positive ratings.

IV. Risk spectrum: Users are harmed in a number of ways. These include the collection of data which includes KYC, imposition of high processing fees without loan disbursement, among others.

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