Illegal loan apps: MeitY urges RBI to design more detailed KYC to ensure traceability

Minister of State for Electronics and Information Technology Rajeev Chandrasekhar

In a bid to tackle the growing menace of illegal instant loan apps, the Ministry of Electronics and Information Technology (MeitY) has urged the Reserve Bank of India (RBI) to design for banks a more detailed KYC process that companies will have to furnish. It will help trace errant loan apps, the ministry believes.

On October 13, the MeitY conveyed this to Department of Financial Services (DFS) and RBI in a meeting held in this regard.

"We have recommended the RBI, within their regulatory framework, to design a detailed KYC for companies, which we refer to as Know Your Digital Finance App (KYDFA), in the same manner that customers have to undergo detailed KYC for opening a bank account," Minister for State for Electronics and Information Technology Rajeev Chandrasekhar told Moneycontrol. He chaired the meeting with the RBI and DFS.

"This will ensure that only legitimate and scrutinised financial apps can access and use the Indian banking system and further, if there is any violation of law, the KYDFA process will help in establishing traceability and origin of the app for action under law," he said.

The need for such measures

This comes at a time when several people have fallen into the trap of predatory loan apps, often driving the victims to suicide. The pull point of these apps is that they offer money instantly as loan, as opposed to more traditional methods such as through banks.

However, what these loan apps offer in terms of speed and accessibility to money, they also compromise when it comes to security and privacy of individuals. It has been well documented that these apps, when installed get access to huge amounts of smartphone data, including one's entire contact list.

There have been cases when recovery agents of such loan apps, when the borrower fails to return the money within the stipulated time, has harassed the victim by reaching out to their relatives.

In some cases, recovery agents of such apps even threaten to circulate digitally altered, poronographic images of the victims among his or her relatives.

Such incidents have often driven victims to suicide. Apart from that, police have found that several such illegal lending apps have connections to Chinese nationals, raising concerns of national security .

Also read: Banking Central | From debt trap to death trap, thanks to small loan apps

How this menace is being tackled

Both the government and app stores, where such lending apps are hosted, have taken cognisance of issues associated with such apps, and over the few years, have taken steps to address them.

The government has been sending several advisories to Google and Apple app stores to take action against such apps as they contravene several sections of the Indian Penal Code and the Information Technology Act.

Google and Apple's app stores have been identifying and removing such apps regularly. Earlier this year, Google said that it has removed more than 3,500 personal loan apps in 2022 for violating its Play Policy requirements.

The finance ministry had last year proposed that the RBI will prepare a whitelist of such applications and that the government will only allow those applications to be hosted on app stores.

However,  these measures have fallen short as complaints against such lending loan apps have increased over time. The number of complaints against such apps have more than doubled to 1,062 in FY 23, the finance ministry informed the Lok Sabha recently.

The MeitY's latest recommendation to the RBI marks a new method through which the government aims to tackle the ever-growing menace of instant loan apps.