Fintechs In Trouble Again: MeitY’s Crackdown On Digital Lending Apps Causes Chaos, Panic Among Stakeholders

The Ministry of Electronics and Information Technology’s (MeitY’s) move to ban over 90 digital lending apps from app stores has thrown the Indian fintech industry into confusion and created a lot of uncertainty.

While initial reports said that the government was looking to ban instant loan apps with Chinese links, it now seems that the move is a part of a wider crackdown on apps involved in alleged frauds and unethical practices as a number of apps of Indian fintech firms are also part of MeitY’s list.

As reported by Inc42, PayU-owned LazyPay, IndiaBulls Home Loans, Buddy Loans, and Faircent are among the lending apps impacted by the ministry’s action.

Fintech applications like PayMe India, TrueBalance, and Avail Finance, which feature on the list, do not belong to these companies but are clones created on alternative app stores which have been ordered to be taken down, according to industry sources.

A total of 232 apps, including 138 betting apps and 94 loan apps, are set to be banned as a result of the government order.

The fintech industry was caught off guard by the government’s move and is awaiting clarity. In a statement, the Digital Lenders Association of India told Inc42 that it has not received any formal communication from MeitY so far and it would approach the relevant authorities “to understand the matter in detail and implement requisite action points if required”.

Executives of top digital loan provider companies Inc42 talked to also said that the current situation is uncertain and they are awaiting clear communication from MeitY.

“We are only hearing the media reports and rumours. However, we would want a clear communication from the government at this point as to what are the various reasons for banning the apps. Few apps which were banned have RBI-licensed NBFCs working with them. Hence, this has come as a huge shock,” a top fintech founder, who didn’t want to be named, said.

Meanwhile, the finance ministry informed the Parliament on Tuesday that the Reserve Bank of India (RBI) has provided the list of digital lending apps being used by regulated entities to MeitY, which in turn has shared it with app stores and directed them to host only the lending apps on the list.

Despite the clarification, the ban on apps like IndiaBulls Home Loans and LazyPay, which have regulated entities as their lending partners, has raised questions over the grounds for the ban.

More Big Names To Appear On The Ban List?

Taking advantage of the fall in income of households due to the stay-at-home mandates amidst the Covid-19 pandemic and the grey areas in regulations, a number of digital lending apps mushroomed in the country. However, these apps were accused of using strong-arm tactics for collection, charging exorbitant interest rates, and harassing borrowers, among others, which also resulted in many users taking extreme measures such as taking their lives.

Following complaints against these apps across the country, Finance Minister Nirmala Sitharaman asked the central bank to prepare a whitelist of digital loan apps. In September 2022, the RBI also came up with digital lending guidelines to protect the interest of borrowers and also limit the interference of third-party lending service providers in loan recoveries.

Since 2020 Google has also removed several loan apps from its playstore which were blacklisted by the government. In response to the actions, Google had said that it is updating its policies due to the new and emerging threats and bad actors

However, incidents of fraud and unethical practices by the operators of instant loan apps have not been curbed completely. In December 2022, the Noida Police arrested 12 people in connection with instant loan app frauds linked to a Chinese national, who, according to the police, was the mastermind behind the gang.

The police officials also furnished a list of various apps including Freecash, Mastermelon, Cashon, LoanEase, CrediPay, RupeeStar, EasyCredit, MartRupee and TruBalance which were alleged to be involved in unethical activities.

Kaushik Saha, a fintech analyst, believes that digital loan apps operating entities based outside India will face more scrutiny due to data sharing and money laundering concerns, which have been challenging the country’s fintech industry.

“In the recent past, many fraudulent agencies have incorporated shell companies outside India, acquired NBFCs to tap the digital lending market of India, and are engaged in unethical practices. The ED and police have unearthed a number of such entities which showed fictitious loan books to investors, were indulging in unethical loan recovery methods, and committed crimes through a nexus of Indian and foreign nationals,” Saha said.

The concerns over data misuse have also brought fintech companies registered outside India or which have shareholders from China under the scanner of the authorities, he added.

Considering the situation, many industry experts expect apps of some of the big names from India’s fintech sector to appear on MeitY’s ban list.