With the use of technology, the risk of fraud is also increased. When it comes to banking and finance, the digitalization for every service is increasing, and getting an online loan is no exception. However, that is associated with multiple risks. Before installing or using a digital loan app, you should check the authenticity of that app, read the reviews of users, check its terms or conditions, and know the charges.
Since 2020, the use of digital loan apps has increased, so digital fraud is also raised. Though these loan apps are intended to extend quick credit to needy people, the risk associated with these digital loan apps cannot be denied. Recently Fintech Association for Consumer Empowerment (FACE) and the Center for Financial Inclusion (CFI) launched a lending risk barometer to assess and identify the risk in the fintech industry. The risk barometer aims to analyze emerging risks in the digital lending industry.
They have conducted surveys amongst 40 fintech lenders and non-lenders from September to October 2022 to find out their initial perception of risks. For each risk, the survey asked participants to rank risks on a scale of 1 to 7, 1 being the lowest severity risk and 7 being the highest.
Here we are listing risks in digital lending.
Unscrupulous Fintech Lenders
90% of the respondents in the survey mentioned top risk is unscrupulous fintech lenders with a score of 6.3 out of 7. Such fintech lenders are unauthorized, charge excessive processing fees, do not reveal terms and conditions, and follow aggressive collection practices.
Earlier the RBI working Group of digital lending found almost 1100 lending apps available to Indian Android users, of which nearly 600 were illegal. The RBI has also noticed a significant rise in the number of complaints against digital lending apps since December 2020. So the RBI released a note cautioning the public against unauthorized lending apps.
Because of unscrupulous fintech lenders, the digital lending sector has to face reputational risk.
Cyber Fraud or Cyber Crime
83% of the respondents in the survey ranked cyber fraud and cybercrime as the second most severe risk with a score of 5.5 out of 7. Cyber fraud or cybercrime is a massive challenge in digital time.
As digital lending expands to a larger consumer base and first-time borrowers, consumer protection risks from cyber fraud are likely to increase. Lenders have highlighted the rise in cybercrime, experienced in the form of identity theft.
73% of the lender and non-lender respondents in the survey ranked data privacy as a severe risk with a score of 5.1 out of 7.
“The absence of a data protection law makes it hard to tell if collecting something will become unlawful in the future.” – said one of the respondents in the survey.
Often it has been noticed that potential borrowers often lead them to submit information demanded by the potential lenders to access messages, contacts, files, etc. Studies reveal that over 90% of consumers do not read the terms and conditions and due to that the chance of risk is increased in terms of data privacy.
“RBI mandates that the data collected by digital lending apps should be need-based, have clear audit trails, and should be collected after prior exposures from the borrowers.”
The government recently released a draft Digital Personal Data Protection Bill 2022 for public consultation. Moreover, the lenders should ask the borrowers to accept or deny the consent for use of specific data.
65% of the respondents in the survey ranked non-compliance as a severe risk with a score of 5 out of 7. Regulation and compliance are important, in the absence of clear communication with regulators, there is a danger that the guidelines are implemented by the fintech lender.
In the survey overall, compliance received a moderate to severe rating. To ensure transparent and consultative framing of regulations, there should be systematic consultations and meeting minutes should be made available for public access.
60% of the respondents in the survey ranked unfair practices as a severe risk with a score of 4.9 out of 7. The risk of aggressive marketing and collection practices that harm consumers.
“The respondent to the survey largely agreed that even a single publicity-reported episode of unfair practices can precipitate rapidly and create reputational risks. There is a need for systematic research to understand how many consumers experience unfair practices when applying for and using digital loans.
Due to customer complaints on social media and media reporting on unfair collection practices and misuse of data permission by apps, RBI has formed a working group on digital lending. Hence, the RBI has issued stringent guidelines on recovery practices and indicated that strong regulatory actions would be taken for lenders who do not comply.
65% of the respondents in the survey ranked regulation as a severe risk with a score of 4.8 out of 7. Inadequate or excessive regulation changing frequently for fintech lenders is creating an uncertain business environment.
Several other risks fall under moderate risks like reputation, data, business model, transparency, and more.
The Bottom Line
When you want to loan online, make sure that you borrow from RBI-registered lenders only. Do not click on the link which you do not recognize in emails and messages. Before taking an online loan, you should check customer reviews of the lending app, and identify the processing fees and other charges. Besides, you should know other terms and conditions while registering or before giving consent to access your email, photos, message, contact, etc.