India’s digital lending landscape: Is the RBI doing enough to curb online fraud?

In a crackdown on digital lending apps, the Reserve Bank of India, in its recent monetary policy committee meeting,announced the creation of a Digital India Trust Agency (DIGITA). It will function as a central repository of legitimate digital lending apps and is the latest movein the battle againstunauthorised digital lending fraud.

This comes as the Indian lending market experiences exponential growth, aided by increasing internet and smartphone penetration. This has subsequently led to a glaring number of online fraud cases in the country, currently at 29,082 in the financial year 2023-24 (334 per centyear-on-year increase). Fraud cases in the banking sector alone have risen 166 per centyear-on-year.

To discuss the menace of online lending fraud in India’s digital economy and the needed regulations, we spoke to Siddharth Soni, a fintech expert based out of Mumbai.

“India is fortunate to have one of the most proactive regulators globally. RBI has driven many proactive interventions in light of this emerging threat,” he saidwhile pointing to the digital lending guidelines published in 2022 and several other reforms, including enforcing rules on Google to allow only legal lending apps on their Play Store,guidelines for fintech self regulatory organisation (SRO), andIntegrated Ombudsman Scheme launched in 2021. The Ombudsmanscheme simplified the grievances redressal process by consolidating various distinct ombudsman schemes into one umbrella for all its entities (NBFCs, Banks, CICs, PPI issuers) - with one portal, one email and one address for the customers to lodge their complaints.

This begs the question: Why are unauthorised lending apps prevalent despite these regulations?

“I believe the real challenge lies in growing customer awareness,” Siddharth said. “A report by industry body FACE (Fintech Association for Consumer Empowerment) suggests that almost 36 per cent of survey respondents who initially displayed “high-confidence in their ability to verify Digital Lending App legality” actually had limited awareness on how to go about verifying - rather using factors such as app review and rating,” he added.

Creating customer trust in digital lendingis more difficult than intraditional lending. This is more psychological asdigital lendingistechnically through apps on our phones. With the rise in online fraud cases, this trust, which is already on a slippery slope, is expected to decline further. “Unauthorised digital lending apps not only cause economic loss to borrowers, but on a broader level create a negative impression for the overall legitimate digital lending industry,” Siddharth said.

Factors driving India's digital lending market

Siddharthexpressed optimism in the industry’s growth outlook. “The overall fintech lending growth story remains strong. India is at the peak of its demographic dividend with an average age of 28 years. These young, digitally savvy Indians are the target market for fintechs. As they grow older, their income levels and requirement for financial services will grow in tandem - and fintechs will be well placed to serve them digitally,” he said.

“India’s fintech adoption rate as per the global fintech adoption index is 87 per cent higher than the global average of 64 per cent. Fintech adoption beyond tier 1-2 is rising rapidly on the back of growing wireless internet penetration, better access to cheap smartphones, and rising income levels. These are few among several tailwinds which will drive growth for the fintech lending industry overall," he said on the factors driving India’s fintech growth.

India is positioned to dominate the digital lending market but needs to address the challenges of financial literacy and digital fraud more diligently. This becomes more crucial as tech becomes sophisticated with the rise of Artificial intelligence.

Can AI armour digital lending market against fraud? "The silver lining is, we may potentially see growth in sophisticated AI-led fraud detection and prevention tools to evolve in parallel. As we observed platforms such as GPTZero get launched to combat AI plagiarism, similar tools to prevent AI led frauds in KYC may be seen in the future," Siddharth said.

(Expert views are personal)