Crypto payments and namesake directors -- the story behind fake lending apps

The year 2020 saw small-ticket short-term consumer lending apps gain traction in India. But for every reliable app, hundreds of fraudulent apps have popped up, pushing unsuspecting users into debt traps. 

Funding for these apps largely happens over cryptocurrency payments and direct deposits to “namesake” directors’ accounts, according to the Fintech Association for Consumer Empowerment (FACE) -- a not-for-profit industry association formed by Fintech leaders. 

The statement from FACE comes amid the ongoing crackdown of unethical lending apps by RBI (Reserve Bank of India) and Google Play Store.

Nasdaq-listed Opera’s subsidiary P.C. Financial Services also notified Google Play Store on December 30 about a fake lending app that looks to be a duplicate of its lending platform CashBean. The fraudulent app is written as “Cash Bean.”

“The fraudsters running the fake application (Cash Bean) have cloned the logo and trademark however; there is no mention of the company or NBFC partner. The address mentioned by the operators of the fake application is also incomplete,” the Gurugram-based company, which originally operates CashBean said in a statement.

Interestingly, several of these lending apps have been set up in India and have Indian directors, who are mere “namesakes” and are used during the transfer of funds. 

“One of the larger issues is how funds are infused into these Indian app companies. It doesn’t come as equity. To be an equity investment, they have to follow several FEMA guidelines. I believe they have used other channels such as trading in bitcoins or sending the money directly to the director’s accounts, to avoid FEMA guidelines,” Madhusudan Ekambaram, co-founder and CEO, KreditBee and co-founder, FACE, told TechCircle. 

“These apps are largely imported. They aren’t looking at a long-term business but want to make quick bucks. These are two-three companies hiring Indian directors and setting up at least 20-30 apps and multiple entities. While the products are similar, so many apps are created to avoid brand attraction. They get scale but don’t want to create a brand,” Ekambaram, told TechCircle. 

Digital lending apps have also found a way to dodge regulatory routes such as NBFC licensing requirements and Foreign Exchange Management Act (FEMA) guidelines

“Getting an NBFC license in India is a long process of 4-8 months and can go upto a year. To cut short the chase, they tie-up or rent out licenses from NBFCs,” Ekambaram said.

There are 9,600 NBFCs in India, of which systematically important ones are hardly 292, who have an AUM (Assets under management) of over Rs 500 crore. 

“It is likely for the rest to rent licenses and earn some revenue,” he added. 

About 450 such lending apps have been delisted from Google Play Store since December 28. These apps allegedly either didn’t have NBFC licenses or were using coercive force to collect money. Google India has recently announced that it will only allow regulatorily-compliant apps letting at least 60 days for borrowers to repay. 

FACE said it is closely working with the RBI Working Group and has submitted its recommendations and case studies on the matter.