Digital Loan Apps: Growing Threat Of Financial Fraud & Exploitation
In India, fraudulent loan applications are exploiting borrowers, leading to financial losses and tragic consequences
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The surge in digital loan apps has revolutionised access to credit, offering borrowers the promise of quick loans with minimal paperwork. However, this convenience comes with a growing risk as fraudulent loan apps continue to target vulnerable individuals, leading to financial exploitation, psychological trauma and even tragic outcomes.
According to industry experts, consumers must exercise extreme caution before downloading any loan app. They added that users should avoid granting unnecessary permissions for sensitive data like contacts or photos, which can be used for extortion.
Varun Grover, Brand Safety BU Head, mFilterIt, emphasised the importance of verifying the source of the app before installing it. He stated, "Consumers should avoid downloading apps from third-party stores and stick to official platforms like Google Play or the Apple App Store. In the case of loan apps, ensure they are linked to established financial institutions or registered non-banking financial companies (NBFCs) with a strong online presence."
The Scale Of The Problem
The rise in fraudulent loan apps has led to widespread financial and emotional damage across India. Data revealed that at least 60 individuals have taken their own lives after facing relentless harassment and threats from recovery agents associated with these apps. The psychological distress caused by such intimidation has torn families apart, exposing the dark side of these digital platforms.
In a particularly tragic case from Bhopal, 35-year-old Bhupendra Vishwakarma, an insurance firm employee, took his life along with his family after being harassed by loan app agents. Vishwakarma had borrowed money from multiple loan apps, which led to a cycle of debt. The recovery agents threatened to share manipulated explicit photos of him, driving him to despair. His suicide note expressed his hopelessness: “I can not see a future for myself and my family. I am no longer worthy of showing my face to anyone.”
Similarly, Shivani Rawat, a 23-year-old receptionist in Delhi, faced severe harassment after using a fraudulent app. Despite not receiving the loan she applied for, she was bombarded with threats, including manipulated photos being sent to her colleagues. "After losing my job, I became so depressed that I even had thoughts of ending my life," Rawat said, recounting her ordeal with the fraudulent app.
Modus Operandi Of Fraudulent Apps
Fraudulent loan apps typically operate by harvesting personal data such as contacts, photos, and ID cards. Borrowers are lured with promises of instant loan approvals and low documentation, but once downloaded, these apps gain access to sensitive information, which is later used to extort and humiliate users.
Grover warned that many fake apps resemble well-known financial institutions and lack legitimate web presence or customer support. Some even run malicious code in the background, accessing personal information without the user's knowledge.
Kunal Varma, Co-founder and CEO, Freo advised consumers to thoroughly verify the legitimacy of loan apps. “Always verify the developer’s credentials, review user feedback, and check for transparent terms. A genuine app will give users a choice to share sensitive permissions and won’t force access. Avoid apps that approve loans without KYC or ask for payments upfront," Varma added.
Notably, financial fraud linked to digital lending apps reached Rs 300 million in the fiscal year 2023, with 96 per cent of cases involving the use of forged or synthetic identities. This alarming statistic highlights the urgent need for stricter regulations and consumer protection.
According to the Pune Cyber Cell, complaints related to loan app scams have also surged. While the cell reported 928 complaints in 2021, the number of complaints in 2022 was 319, demonstrating the ongoing risk posed by these fraudulent platforms.
Regulatory Crackdown
In response to the rising threat of digital loan fraud, the Reserve Bank of India (RBI) has implemented strict guidelines. Only regulated entities like banks, NBFCs, or their authorised Lending Service Providers (LSPs) are permitted to operate digital lending apps. The RBI's KYC (Know Your Customer) process plays a crucial role in reducing identity theft and ensuring that only genuine borrowers are granted loans.
Vishal Jain, CEO, Manipal Business Solutions noted the importance of KYC in fraud prevention He stated, “KYC helps identify and verify customers, reducing the chances of identity theft. By requesting valid ID and personal information, KYC enables banks to confirm they are working with genuine borrowers instead of fraudsters trying to obtain loans illegally.”
Furthermore, the Enforcement Directorate (ED) has been investigating fraudulent loan app cases in states like Telangana and Tamil Nadu as part of a wider money-laundering probe. These enforcement actions are part of broader efforts to curb the rise of financial fraud linked to digital loan platforms.
As the digital lending market continues to grow, so do the risks. Consumers must remain vigilant by using only regulated apps, conducting thorough checks before sharing personal data and avoiding apps that offer loans without KYC or demand payments upfront. With increasing awareness and regulatory measures in place, India can take steps to safeguard users from falling victim to these fraudulent practices.
