Loan sharks are typically unlicensed, unregulated, and illegal businesses or individuals. Many of them are members of organized crime syndicates. They charge interest rates that are higher than the legally permitted rates, sometimes reaching 1.5% per day.
Important Takeaways
- Loan sharks are typically unregistered lenders (individuals or businesses) who charge exorbitant interest rates on borrowed funds.
- Such usurers do not require the borrower to provide a guarantor, asset mortgage, or extensive documentation. They do not check the client’s credit score or conduct any background checks.
- They have no code of conduct and threaten borrowers with the sum being recovered even before the due date.
- They frequently use hidden clauses in their loan agreements, which are not legally enforceable.
How Do Loan Sharks Operate?
Some borrowers have difficulty obtaining a loan from a licensed lender. Underprivileged borrowers who lack a good credit score or a steady bank balance frequently seek loans from informal networks. Many unregistered and illegal lenders operate under the cover of informal lending. Loan sharks are typically unregistered lenders who prey on the vulnerable in their community. They offer immediate credit to even high-risk borrowers who lack proper documentation and are unable to deliver a collateral asset.
When entering the deal, loan sharks appear polite and convincing. However, they charge exorbitant interest rates, which desperate borrowers frequently accept. If the borrower fails to repay the debt, the moneylenders force them to do so by instituting legal action.
Apps promising quick cash have proliferated during the pandemic. Many take advantage of borrowers’ lack of financial literacy, charging interest rates as high as 500% annualized and, in some cases, using heavy-handed collection tactics that have been linked to a string of suicides in India.
A growing number of technology companies and regulators have taken action. Google has banned hundreds of apps from its Android store around the world because they have “deceptive and exploitative terms” that could hurt borrowers. China, Indonesia, and Kenya all did the same thing and shut down dozens of new businesses that promised easy money to people who didn’t have bank accounts.
India, which has the most of these apps in the world, has also taken action. In November, the Reserve Bank of India hinted at new rules for digital lenders. A panel convened by the bank discovered that more than half of the approximately 1,100 digital loan providers were operating illegally.
According to the police, some of the companies charge interest rates ranging from 25-40%, with processing fees ranging from 15% to 20%. Some even charge 1% interest (365% annually) per day on the principal amount for late payments. Last week, the Cyber Crime Division of the Karnataka CID blocked access to over 100 illegal loan apps.
The Strategy
These platforms take advantage of the unmet need for credit and target vulnerable borrowers by offering supposedly no-strings-attached credit. They do, however, come with exorbitant interest rates and terms and conditions to which borrowers have no recourse. And with a single tap, you essentially grant them access to everything on your phone, including your entire contact list, photos, and videos. And as soon as you enter your Aadhaar, PAN, address, and the amount you require click apply, your account will be credited with cash. The apps, under the guise of advancing a loan, access all information from the customers’ phones, which would later be used by the company to commit another financial crime.
“We urge citizens not to fall victim to such apps and to report to us if they have (already) fallen into this vicious trap,” said the Cyber Crime Division police.
The police explained their strategy on Twitter, saying that fraudsters lure customers via SMS to download apps promising instant loans. Once installed, the apps gain access to the borrower’s phone’s contacts, photos, and other data. When this happens, users are harassed by sending defamatory messages to all of their contacts.
Following media reports, the RBI fine-tuned the regulations in June and warned these companies not to engage in illegal practices. Many of these platforms were backed by Chinese players, who collaborated with them.
The mode of operation appears to be registering fake entities, using white-labeled software to generate apps, uploading and using wallets / UPI for running the operations along with extra-ordinarily high interest (with GST which is a loot, as these are companies that do not exist in the GST database), social shaming, threatening using data obtained from the phone using the app permissions in case of non-payment / delayed repayment.
An RBI panel said that if a consumer uses such an app or website, it could collect the user’s personally identifiable information (PII), financial data, and other sensitive information, which could then be used to break into the user’s accounts, do phishing attacks, or steal their identity.
Is It Legal To Use Such Lending Apps?
The majority of these apps are completely illegal. To be able to lend, a lending company must be either a bank or a non-banking financial company (NBFC) registered with the RBI or have a license as a money lender under the State Money Lenders Acts.
These Apps frequently operate entirely outside the law because they are not registered under any of the aforementioned categories. This makes them illegal. The Information Technology (Procedure and Safeguards for Blocking for Public Access to Information) Rules, 2009, which were adopted under Section 69A of the Information Technology Act, 2000, previously restricted several of these apps, but they are still in use today.
How Many Of These Apps Are There?
According to a Reserve Bank of India report published in November 2021, digital lending in India increased more than twelvefold between 2017 and 2020. Only 33% of the 220 million Indians eligible for loans from legal financial institutions have access to a bank account, and the majority are ineligible for loans due to a lack of collateral and a lack of understanding of the loan process.
While several legal mobile lending apps have emerged to meet their needs, such as Dhani, PayMe India, and IndiaLends, India has also seen a surge in scam apps. According to Reserve Bank of India data, 600 illegal lending apps have been discovered, with the government already blocking 27 of them. As of November 2021, the Google Play store had removed over 205 such apps.
Legal Actions Taken By Home Ministry Against Predatory Loan Apps
The Union Home Ministry has asked law enforcement to take immediate and severe action against predatory loan apps that have been found to use harassment, blackmail, and harsh recovery techniques, which have resulted in a number of suicides in recent years. The problem has had a significant impact on economic growth, public safety, and national security, according to the ministry.
The home ministry stated in a communication to all states and union territories that a significant number of complaints have been reported across India related to illegal digital lending apps that provide short-term loans or micro-credits at exorbitant interest rates with processing or hidden charges, particularly to vulnerable and low-income group people.
Lenders use borrowers’ private information, such as contacts, whereabouts, images, and videos, for extortion and harassment.” The harsh recovery methods used by these illegal loan apps have claimed many lives across India. According to the statement, this issue has had a significant impact on national security, the economy, and civilian safety.
According to the home ministry, these illegal lending apps make extensive use of bulk SMS, digital advertising, chat messengers, and mobile app stores and may not be Regulated Entities (RE) by the Reserve Bank of India. Borrowers must grant required access to contacts, location, and phone storage in order to obtain loans.
“An investigation by the home ministry revealed that this was a well-organized cybercrime carried out with the help of disposable email addresses, fake phone numbers, mule accounts, shell corporations, payment aggregators, API services (account validation, document verification), cloud hosting, cryptocurrency, and so on.
According to the home page, the National Cyber Crime Forensic Laboratory (NCFL), one of the verticals of the Indian Cyber Crime Law enforcement agencies can get technical assistance from the Coordination Centre (14C), CIS Division, with the investigation of lending apps, malware analysis, and cryptocurrency transaction tracing.
The loan applications, according to investigators, are part of an ongoing investigation into money laundering that focuses on a “Chinese-controlled” investment token app.
Illegal loan financing apps have become a growing concern, especially due to their exorbitant interest rates and unethical practices. Here’s an overview of the key issues associated with these apps:
Key Issues with Illegal Loan Financing Apps
- Exorbitant Interest Rates:
- These apps often charge extremely high-interest rates, far exceeding the legal limits set by financial authorities.
- Borrowers can end up paying multiple times the amount they originally borrowed.
- Hidden Fees and Charges:
- Many apps include hidden fees and charges that are not clearly disclosed to the borrower.
- These additional costs can significantly increase the total repayment amount.
- Lack of Transparency:
- The terms and conditions are often not clearly communicated, leading to confusion and misunderstandings about repayment obligations.
- Borrowers might not be aware of the total cost of the loan until they are already committed.
- Harassment and Coercion:
- When borrowers fail to make payments, these apps often resort to aggressive collection tactics, including harassment and threats.
- Some apps even access personal contacts to pressure borrowers into repayment.
- Data Privacy Concerns:
- These apps often require access to personal data, including contacts, location, and messages.
- There have been instances where this data is misused or sold without the borrower’s consent.
- Unlicensed Operations:
- Many of these apps operate without proper licensing or regulation, making them difficult to hold accountable.
- Borrowers have limited recourse if they face issues with these lenders.
- Targeting Vulnerable Populations:
- These apps often target individuals in urgent need of cash, such as low-income families, students, and people with poor credit histories.
- They exploit the financial desperation of these groups, trapping them in a cycle of debt.
Protecting yourself from illegal loan financing apps with exorbitant interest rates and unethical practices involves being vigilant and informed. Here are some steps you can take to safeguard yourself:
Steps to Protect Yourself
- Research and Verify:
- Only use loan apps that are registered and regulated by official financial authorities.
- Check reviews and ratings on app stores and online forums to get an idea of the app’s reputation.
- Read the Fine Print:
- Carefully read the terms and conditions, especially the interest rates, repayment schedules, and any additional fees.
- Research and Verify:
