It’s no doubt that Digital Lending Apps have taken the financial world by storm. They have changed the very ecosystem of borrowing and stand out by offering unprecedented convenience and accessibility to users.
But to every wonderful phenomenon, there will be a flip side. And digital lending is no exception.
In FY 2023, banking fraud amounted to INR 300 million, of which 96% of the money is attributed to fraudsters receiving loans with the help of forged/ synthetic identities. And this is just one side of the coin. There are also multiple fraudulent loan apps in digital lending scamming common people, obtaining sensitive data with the promise of granting them loans and gaining access to their bank accounts, only to empty it and never be heard from again.
Now, imagine the amount of money being laundered daily by such fraudsters in different financial institutions and with the help of fake lending apps. Users and financial institutions need to be aware of the different types of digital lending scams to navigate this fraudster breeding ground until strong regulations are imposed and holistic cybersecurity solutions are adopted.
This article is aimed at educating and providing a comprehensive guide on online loan fraud in digital lending. Let’s dive in.
Fraudulent loan apps or Fake lending apps are digital platforms that are unauthorized and illegal loan providers impersonating authorized lending companies with loan management systems and loan origination systems. They primarily target low-income individuals and trick users into divulging their personal information or money.
Typically, these loan app scams ask the users to pay an upfront fee by promising them hassle-free immediate loan grants without any credit or collateral checks. Some lending frauds charge exorbitant interest rates not approved by the government with the same promise. This results in users getting trapped in debt cycles and also more alarmingly facing harassment from fraudsters misusing their sensitive personal information.
On the other hand, due to these loan app scammers, financial institutions/ lenders face reputational damage and loss of trust with customers, in turn affecting their businesses. Since creating, distributing and popularizing these apps with the help of social media is very easy, coupled with inadequate regulations by the platforms and the lack of financial literacy among the general public, these fraudster apps have proliferated extensively, especially in the past decade.
There are several guidelines set by RBI in 2022 for digital lending apps to minimize such fraud cases and reduce illegal activities. Some of them are:
In addition to these guidelines, the latest update as of 2024 is that RBI is planning to set up a Digital Trust Agency (DIGITA) to address issues caused by illegal loan apps in India and its cyber frauds. Aimed at helping users differentiate between authorized loan origination systems and fraudulent loan apps, this proposed DIGITA would verify digital lending apps and maintain a public register of authenticated ones.
Additionally, since users are found to trust the legitimacy of apps if they are available in Google or Apple app stores, nearly 2,500 fraudulent loan apps have been removed by Google as of December 2023.
While regulations and measures are being taken from time to time, loan app scammers are also becoming increasingly tech-savvy and gullible people usually fall for their promises. To avoid getting inflicted with such lending frauds, we need to extend our awareness and knowledge on how best to spot these scammers and fraudulent loan applications.
Here are some of the telltale signs of a fake lending app:
Now that Google has taken measures to remove many fake apps from its store, many scammers are sending app files and asking users to download them. Authorized loan management systems do not do this and their digital platforms are available in official app stores.
All loan applications require a Know Your Customer (KYC) process wherein the company collects information and government documents to verify the identity of the borrower. Reputable lenders always conduct this process and any application claiming that proper identity verification or credit score checks are not necessary is likely to be fraudulent.
As discussed earlier, RBI mandates lenders to provide a loan agreement with all key facts and details about the loan to the borrower. Fraudulent apps do not give a clear loan agreement document and it is a major warning sign.
Fake lending apps typically demand upfront fees with the promise of returning them during loan disbursement before sanctioning the loan. Authorized digital lending platforms do not ask for any advance payments to process a loan.
It is wise to check online for the name of a lender and their reviews. If there are no or limited positive or complete negative reviews, they are likely fraudsters.
Authentic lending apps come up first when you do an online search with a proper physical business address along with website, contact no, working hours, long-time active social handles and reliable reviews. Fake lending apps typically do not have this clear physical and digital presence.
Vague or confusing terms and conditions that are not explained properly by the lending app or their support team also indicate potential fraud.
Unverified or suspicious social media profiles or influencers are signals of shadiness and point to fraudulent lending apps.
Additionally, unrealistic promises such as instant loan disbursement without background checks/ credit history checks, requests for unnecessary device data permissions, and intimidation or aggressive behaviour are all signs that you are dealing with a fake lending app.
We cannot talk about fraud in digital lending apps without discussing fraudulent behaviour both by lending apps and borrowers. Following is a list of frauds that come under both these umbrellas.
Borrowers or the common people who fall prey to these fake lending apps are the ones impacted the most by these cyber crimes. Some of the alarming issues they face are:
Identity theft: Personal information stolen and misused for various fraudulent activities.
Financial loss: By paying upfront fees or account information enabling scammers to empty the borrower’s funds, borrowers often go into debt cycles.
Credit damage: As a result of identity theft, this happens when unauthorized loans are taken out of the borrower’s name leading to a credit score fall.
Emotional distress/ Legal issues: With low-income individuals facing financial ruin and with others facing reputation loss owing to harassment or misuse of personal information, people can become emotionally distressed and might even have suicidal thoughts. Some individuals decide to take the help of the legal system, resulting in a struggle and expenditure of time and money proving they were victims of lending fraud.
Although the impact of such fraud is prominent on individual borrowers, authorized digital lending apps with loan management systems on the other hand, also face fatal consequences.
Reputational damage: When fraudulent loan apps misrepresent themselves as established lenders, they erode the trust of the customers and potential clients, leading to irreparable reputation damage.
Financial loss: Financial losses occur through fraudulent loan applications that slip through verification processes. Additionally, owing to reputation damage, lenders lose out on prospects and business leading to a substantial financial burden.
Regulatory Scrutiny: With the loss of trust or compromise on user data, comes regulatory scrutiny. It can potentially lead lenders to pay hefty fines and further erosion of trust. These issues and scrutiny can have long-lasting effects on a lender’s market position and growth prospects.
In digital solutions, the balance between user convenience and data security has always been intricate. Government measures and the current regulatory landscape have significant gaps in identifying and preventing such fraudulent loan apps in digital lending. Unfortunately, these app scammers are also evolving day by day, and they operate in a grey area exploiting gullible borrowers.
The lack of seriousness by social media platforms in framing regulations for these promotions is further worsening the situation. These online loan frauds are complex in nature and they demand collective efforts from all stakeholders: from regulators, and financial institutions to technology companies, and end users.
There is an urgent need to create a secure and ethical ecosystem with digital lending apps focusing on stringent technology and cybersecurity measures. CloudBankin’s state-of-the-art encryption features, VAPT testing and cyber security plug-ins are aimed to do just that.
Ultimately, combating fraudulent lending apps necessitates a multi-pronged approach involving legal, technological, and educational initiatives. Only through such concerted efforts can we ensure that digital lending fulfils its promise of financial inclusion without compromising user safety and trust.
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After smartphone penetration, people are not watching their SMS at all. They use SMS only for OTP related transactions. That’s it.
But What can a Lender see in your SMS after you consent to them?
Lender can see income, expenses, and any other Fixed Obligation like (EMIs/Credit Card).
1) Income – Parameters like Average Salary Credited, Stable Monthly inflows like Rent
2) Expenses – Average monthly debit card transactions, UPI Transactions, Monthly ATM Withdrawal Amount etc
3) Fixed Obligations – Loan payments have been made for the past few months, Credit card transactions.
It also tells the Lender the adverse incidents like
1) Missed Loan payments
2) Cheque bounces
3) Missed Bill Payments like EB, LPG gas bills.
4) POS transaction declines due to insufficient funds.
A massive chunk of data is available in our SMS (more than 700 data points), which helps Lender to make a credit decision.
An interesting insight on vehicle loans for lenders.
A trend we are seeing today – the first-hand vehicle ownership is decreasing with time. Why? People are upgrading their vehicles in every few years because of technological advances. And, this can be seen more with the millennial generation.
So, what should a lender do in terms of financing?
– Estimating the residual value of the vehicle at the start of the financing period.
– Charging a borrower only for the residual value (which is the difference between the value after a few years and the current value)
Example: A bike currently is INR 1 lakh. You want to buy the vehicle for 2 years. A lender will estimate the residual value of that bike today and what it would be after 2 years. If the estimated residual value = INR 45,000, the lender will charge you only that (say, INR 55,000 with interest for this instance) during your tenure.
At the end of 2-year period, you have 3 choices:
1. Return the bike and upgrade to a new one without going through the struggle of selling it.
2. Pay the lump sum remaining amount to own the vehicle outright.
3. Extend the financing and own it by keep paying the EMIs for the remaining amount of the vehicle for the next 12 or 18 months.
Benefits for the borrowers?
– Flexibility to use a vehicle and upgrade to a new one.
– Affordability to not pay for the complete value of the vehicle with the intention to use for a lesser amount of time.
– Convenience in owning the vehicle.
Say goodbye to the old lending option and embrace the new way of financing for vehicle by lenders!
How many of us know this?
1) Tiktok does Lending ( is it an entertainment company or social media company or a fintech company?
2) Youtube China does Lending
3) Top 100 internet companies in China(no matter what business they are in) do Lending
The team which was heading Lending in Tiktok was the Advertisement team. If we do Ads, we do X no of revenue. But if we do lending, we’ll get X+30% more revenue. This is on the same Ad spot.
Ad team has transformed into a lending team, and in today’s world, it’s possible because the subject matter expertise can be put in as an API and given to you.
Embedded Lending as a service is becoming popular in India too, and I am happy to be part of this ecosystem.
The answer is No. Only the top 10 crore people have access to many credit products in India. Almost all Banks focus on this market.
Once you go beyond that, the credit access rate has dropped significantly due to multiple factors.
1) Customers who are having low income(30-40K per month)
2) Not earning from an employer who belongs to Category A or B
3) Not from Tier 1 or 2 cities
NBFCs and Fintechs focus on the above segment, pushing another 10 crores of people.
But in India, 70 crores more people are formally or informally employed, which still needs to be tapped.