Demand drives supply in any market, and the financial services sector is no exception. As the industry expands and there is a growing influx of players, there is also an unwelcome corollary that has been cropping up with increasing frequency. This is the alarming trend of people being defrauded by deceitful entities posing as legitimate financial companies. This is especially true when it comes to loan fraud in India, as has become evident from the increasing reportage surrounding people losing money, property, and in extreme cases, even their lives to such fraudulent loan scams and their aftermath.
These instances, although extremely common, could be preventable with the right amount of scrutiny and awareness. Let’s explore what a loan scam constitutes and how you can avoid falling victim to such unscrupulous practices.
Kinds of Scam You Must Know About
Data Phishing
With the rapidly growing number of internet and smartphone users in India, the number of scams and fraudulent activities targeting them has also grown steadily. Financial frauds particularly target vulnerable individuals like the elderly or financially illiterate, but none of us are immune to their destructive impact. Typically, data phishing is carried out by fraudsters in the guise of financial services providers ranging from well-known banks to companies peddling attractive new offers.
In the case of loan-app scams related to phishing, the most common way that people are targeted is by false representation. An individual posing as your bank or financial service provider’s representative can visit your work or business place or contact you through SMS, email, or call and request sensitive information like your card number, PIN, and OTP. If you end up divulging these details, it will grant them access to your accounts, and they will start pilfering your money through transfers or transactions.
In certain cases, fraudsters also build web pages to resemble the website of financial institutions, and unless you look closely, you can be duped into entering your information onto such a fake page, granting them access to your accounts.
Here’s what you should watch out for in order to avoid falling victim to phishing scams:
- Don’t divulge any sensitive information like your bank account number, card numbers, PIN, and OTP. Your bank or legitimate financial companies will never ask for such information over a call, email or mail.
- If someone calls you claiming to be your bank’s representative, verify their identity before continuing the conversation. Then, check the bank’s official website to call the main bank’s number. If the call was real, they will be able to verify that.
- Don’t entertain anyone pressuring you to act immediately in order to get a good loan deal. Don’t agree to pay any upfront fee in order to get a loan faster.
- Steer clear of lenders who are willing to disburse a loan with no due diligence or KYC or background check needed.
- When logging on to a financial institution’s website, make sure that it’s genuine. Pay close attention to the URL, and ensure that it’s secure (HTTPS, not just HTTP).
Predatory Loan Apps
Digital lending in India has witnessed an explosion over the past five years or so. According to a report issued by Reserve Bank of India (RBI) in 2021, there had been a twelvefold increase between 2017 to 2020, and the Covid-19 pandemic has only served to accelerate it further.
The main reason that lending apps have seen such popularity in the country is that a huge majority of Indians don’t have access to formal sources of financing. Traditional lenders like banks are averse to lending without collateral or lack of credit history.
It is natural for this section of borrowers, therefore, to turn to alternatives like loan apps that promise lucrative financing options with little to no documentation required. While there are a plethora of legal lending apps that follow best practices and maintain transparency, their popularity has resulted in a huge spurt in the emergence of loan app scams that are illegal and predatory.
In fact, according to the RBI working group report, between January and February 2021, close to half of the 1,100 digital lending apps available in India were illegal. This alarming figure is backed by the increase in the number of people being duped by such scams, with the app-based lenders being duplicitous about the interest rate, tenure, etc., and then harassing their borrowers for loan recovery. In many extreme cases, harassment and shaming by the lender or third-party recovery companies engaged by them have even resulted in deaths.
The most common lure of this scam is through fake loan apps advertising attractive offers promising even zero percent interest rates for a limited time. You might even get a call telling you to act fast in order to get an instant loan with no due diligence or background check needed. This should immediately throw up a red flag since any credible lender will typically check your income sources, existing loan commitments, credit history and verify your repayment ability before issuing a loan.
In some cases, you might be asked for a small upfront fee to get a lucrative loan, which is typically a sure sign of fraud.
Here’s what you do to avoid falling for predatory lending apps:
- Don’t download any loan app from the app store which is unverified.
- Avoid loan apps with low user reviews or negative ratings.
- Avoid loan apps that don’t have clear-cut terms and conditions and fees listed, and simply promise fast loans.
- Don’t opt for a lender that requires no documentation or background checks to provide you with a loan.
- Avoid loan apps that are not affiliated with an RBI-registered bank or NBFC, since these are unregulated and illegal.
- Check the lender’s website for a physical address, and if they don’t have one, steer clear of them.
- If a lender offers 0% or similarly nominal interest rates, it may be a scam and you should research further before applying.
What To Protect Yourself From Potential Scams
Doing your due diligence when choosing the lender and watching out for obvious red flags can ensure that you have a smooth and harassment-free loan experience. The more you research and secure your bases, the lower the chances of you choosing an unreliable lender.
However, it’s important to keep in mind that even legitimate lending companies are not always above employing predatory or deceptive practices. For instance, recently, the RBI canceled the certificate of registration of five non-banking finance companies (NBFCs) for implementing irregular lending practices, including charging excessive interest rates and harassing customers for loan recovery.
The crackdown is a testament to the fact that while regulatory measures are in place for registered lenders like banks and NBFCs, predatory practices can still slip through the cracks and result in difficult circumstances for borrowers.
It’s critical to know your rights and obligations as a borrower or potential customer of a lending institution. For instance, after you take a loan, the lender can’t demand immediate repayment and is required to wait for a 60-120 day period before classifying you as a defaulter; but that doesn’t stop many unscrupulous lenders from demanding immediate repayment.
Here are a few things you should keep in mind to protect yourself from fraudulent loans and lenders exploiting legal loopholes:
- Make sure the lender is registered with a regulatory body such as the RBI and follows regulatory protocol.
- Ensure that the lender has a publicly available dedicated grievance redressal system or customer helpline in place, so that you can reach out to resolve any issues.
- Find out the exact interest rate cap for the category of loan and lender, and make sure what you are being charged is within the limit.
- Check if the lender has positive ratings and reviews on the internet.
- Check to see if there has been any negative media coverage about the lender in the past.
- Make sure that the lender does not have a reputation for using extreme measures for recovery in case of default.
- Choose a lender who is transparent about their fees, practices, and policies.
- Make sure there is full disclosure about interest rates, full EMI and repayment amount, as well as prepayment penalties.
- Make sure the lender offers a degree of protection to borrowers and flexibility in terms of repayment and default.
Despite your best efforts, you might find yourself in a difficult situation if you end up as the target of a loan scam, whether it’s a fraudulent loan, app scam, phishing, predatory practices, or unscrupulous lenders.
Here’s what you can do if you suspect that you have already fallen victim to a loan scam:
- Keep a careful record of all transactions, including EMI payment receipts. Pursue legal action if the lender turns out to be fraudulent.
- File a police report for fraud with all the necessary details. In the case of a fake loan app or online scam, you can also file a cybercrime report.
- Monitor your accounts closely for any suspicious or unauthorized activities which may have been triggered by a fraudster.
- Stop any unauthorized transactions by contacting your bank. As per RBI guidelines, if an illegal transaction is reported immediately, the bank will cover the lost amount if no fault is found with the account holder.
- Block your current account and card and move your money to a new account if you suspect that sensitive details have been compromised.
Bottom Line
When it comes to borrowing, the main thing to keep in mind when scouting for a loan or changing upon an offer is that if it seems too good to be true, it probably is. Unrealistically low interest rates, zero due diligence on the lender’s part, additional offers to sweeten the deal, etc. are all red flags that you should carefully consider before choosing a loan option.
In addition to this, selecting a lender after doing your research and making sure that they abide by regulatory mandates and best practices is a fool-proof way to keep your loan journey transparent and hassle-free.
