Ghost loans haunt Indian fintechs – challenges and next steps

Bollywood actor Sunny Leone recently discovered that she was in default through her credit report. Strangely, she discovered it when applying for a loan. Among the documents required to apply for a home loan, Sunny received her credit report which shockingly revealed that she was in arrears from a previous loan she had received. This came as a brutal shock since Sunny had never even applied for said loan before. This stain on his credit report was followed by a drop in his credit rating of up to 20%. The only thing that connected Sunny to the loan was that his name and PAN details were accurate.

Sunny isn’t the only victim of a phantom loan scam. Ghost loans are increasingly appearing in credit bureau reports from unsuspecting people and have come back to haunt Indian fintech companies. Fraudsters and unscrupulous elements steal other people’s identities and take out loans with no intention of repaying the loan. Usually, one has to go through a typical KYC process to apply for loans. A KYC process involves proof of identity (POI), proof of address (POA), and photographic proof. Banks and loan companies need your PAN card as proof of identity. Fraudsters take the victim’s PAN card and, using sophisticated software, they replace the photo with a fake one.

This problem of phantom or fictitious loans can really ruin a person’s credit score and overall credit report and ruin their reputation as a credible borrower in the public domain. This problem arose when a large number of people borrowing from Indian fintech companies started to discover that their credit scores had dropped and the reports contained incorrect personal information on a loan that they had never even heard of. .

Identity theft and fraud are certainly not new to the lending industry. What is new is that the scale and severity of the problem has been intensified by a myriad of factors, primarily with the digitization of lending and the lending business itself. Although the digitization of loan application procedures makes it seamless and easy for genuine consumers, the online world is full of frauds, hackers and cybercriminals. Online processes work well most of the time, but when the number of errors increases dramatically, that’s when cracks start to appear. What makes the digital lending process particularly complex are India-specific complications on the ground. This can be confusing with something as simple as the borrower’s name. In India, many people commonly use different spellings or different names in their different IDs like PAN and Aadhar. Many Indian women, for example, change their maiden name and family name after marriage, resulting in different names on different documents. The digital procedure of just using the borrower’s PAN card is not enough to verify every little detail and match the online identity to the real person in the real world, especially when so many complexities arise in credentials.

The number of complaints about phantom loans and fintech companies to the RBI in recent years has seen an alarming increase. The RBI, after receiving numerous complaints, took note of the scale of the problem as it was not limited to one or two fintech companies but had systematically affected the entire industry. Almost all fintech lenders in India have been affected by phantom loans facing huge losses over the years.

One of the possible solutions to this very complex problem may come from focusing on the documents and information that lenders have submitted to credit reporting companies in order to generate credit scores. Fintech companies can work closely with CICs and follow the same practice used by credit card companies and banks while reporting fraud and suspicious transactions. Each time a new loan is flagged on a borrower’s credit profile, CIC could send an alert message to the borrower. A helpline number and repair email ID can be included in said alert message so that in the event of a phantom loan, borrowers can immediately report a concern and take corrective action. The four CICs operating in India along with all fintech companies registered with RBI can form a centralized system to regulate the digital lending process, smooth out wrinkles and reduce incidents of fraud. This will help protect individuals by providing them with instant vital information as people cannot be expected to keep pace with ever-changing fintech businesses in India.



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The opinions expressed above are those of the author.



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