The Indian Enforcement Directorate (ED) recently cracked down on several NBFCs (non-banking financial companies), which were found to be working with Chinese money-laundering organizations to conduct their activities through cryptocurrency transactions or micro-loan applications.
What are Microloan Applications?
Microloans usually refer to lending small amounts of money to deserving small businesses at low-interest rates. However, in the aftermath of the COVID-19 pandemic, the term micro loan took on a new definition. With the downturn of the economy over the pandemic, many people lost their lives and, in the case of lower-class families- their only source of income.
The central bank attempted to soften the blow by issuing a moratorium on existing loans; however, this impacted repayment which negatively impacted the banking industry. It also did not solve the problem of people losing their stream of income, without which they were unsure about their future financial stability.
Seeing masses of people struggling to make ends meet, Chinese scammers flooded the app store with a number of ‘microloan apps’, which help provide small personal loans at a decentralized level. These shady companies often hired agents inside of India by offering them attractive incentives and would make them do their dirty work for them. Anyone could easily avail of loans through these applications, as it would simply require users to enter their identification and bank details, after which they would be granted loans with a certain time frame to repay them.
However, what users were unaware of were the hidden high rates of interest that came along with extremely small deadlines, which further pushed the borrower into debt, forcing them to take more loans in order to cover up the previous ones. Even if they did manage to repay the money, the people behind the applications would call them and threaten them to pay more under the name of hidden costs and conditions.
In this way, microloan apps were able to trap many people in vicious cycles of debt, even driving some to commit suicide to avoid the neverending harassment. In many cases, these companies were able to extract people’s personal details, pictures, and other files from their associated devices and blackmail them.
Despite partaking in such despicable activities, these microloan companies often escaped detection as they simply closed their businesses and moved on with their profits, escaping from legal repercussions due to their immaculate legal paperwork and terms and conditions.
The whole microloan scandal shocked many and decreased the credibility of digital and application-based loaning- even causing damage to the reputation of legitimate firms.
How did the Indian Authorities handle the issue?
The microloan scandal caused harm to many innocent people who were simply looking for relief from the financial pressure of the pandemic and even caused some to lose their lives. In retaliation, the RBI intervened to form a committee to create better rules and regulations for the space and weed out fraudulent applications to scam people or fund illicit money-laundering operations.
The Telangana police have put together a cyber law enforcement unit with the aim of finding the perpetrators, freezing their bank accounts, and making them face legal repercussions. Google has also co-operated with the authorities and is active in taking down instant micro-loan apps with complaints against them as well as those of Chinese origins.
The RBI aims to emphasize future guidelines of consumer protection, which will help them differentiate between legitimate and fake lenders in the future. It also discourages people in need from borrowing from micro-loan apps, urging them to approach banks instead.
Repercussions on app-based loaning companies
The Enforcement Directorate recently cracked down on a total of 12 NBFCs that were found to be dealing in app-based micro-loans. The ED’s Hyderabad cell was able to trace back assets of over Rs. 105 crores to these companies and other Fintrade companies working in association with them, following allegations that the funds were gotten through illegal activities.
The 12 named companies included
- Inditrade Fincorp Limited
- Aglow Fintrade Private Limited
- Kalpavitta Finance Private Limited
- Star Finverv India Limited
- UMB Securities Limited
- Sarvottam Fincap Limited
- Care India Finvest Limited
- Credit Gate Private Limited
- Zavron Finance Private Limited
- Pinnacle Capital Solutions Private Limited
- Pawan Finvest Private Limited
- BCL Enterprises Limited.
By engaging in providing instant micro-loans, these companies collectively earned a profit of Rs 819 crore. The method through which these companies earned the profit was found to be in violation of the RBI’s latest guidelines, which it put in place after the rise of app-based micro loan schemes by Chinese scammers. Hence, their micro-loan activities, even though there is a possibility that they may have been legitimate, were seen as criminal in nature.
How did the ED Deal with these companies?
The ED reportedly sent notices to all the companies, after which it seized their funds. The companies were forced to cease their operations and divert their funds. This is the second time that Inditrade has landed itself in trouble, with the company alleged to have been involved in the deaths of two borrowers in 2017. The case was taken to the CID in order to investigate the two cases, both of which involved high investments by the victims in Inditrade, after which they suffered massive losses leading to stress, depression, and ultimately their deaths.
Conclusion
The concept of Microloans was initially developed to provide help to promising small businesses at lower rates of interest. However, in the aftermath of the COVID-19 pandemic that saw many people take a hit to their means of income and finances, scammers came up with new use of the concept. These criminals developed mobile applications that would provide instant loans to vulnerable targets without lengthy verification processes.
However, the victims, attracted by the ease of taking out loans, would often neglect to read the fine print and fall into debt traps, fueled by the high rates of interest and impossible-to-meet deadlines. Many of these companies were operated by Chinese scammers, who hired people in India to harass and blackmail borrowers into repaying their loans, demanding more and more money from them until many of them succumbed to mental anguish.
Following a series of such incidents, the RBI set down new regulations for such businesses and weeded out such illegitimate applications from the app store. However, the ED recently caught 12 NBFCs in violation of these regulations and potential ties to money laundering and other illicit financial activities.
