The issue of phantom loans or bogus loans that can destroy a person’s credit report burst into the public domain when large numbers of people began to discover that their credit scores had dropped or their credit contained incorrect information about loans they had never used.

After a public furor, the Reserve Bank of India (RBI) promised swift action, but it was likely stopped short by the discovery that the problem is not limited to one company – Dhani Loans & Services (Dhani ) – but is a larger systemic problem. Almost all fintech lenders follow the same flawed process that Dhani used to complete know-your-customer (KYC) formalities with onboard customers so they can sanction and disburse loans in minutes. They get away with it because people are just starting to take notice of the problem of fake/ghost loans. Also, like all online systems, things work well most of the time; but it is only when the number of errors becomes large enough and the grievance process remains disrupted that it provokes public outrage and compels the regulator to take corrective action.

The faulty process

RBI KYC rules require a photograph and proof of address and identity. Authorized documents are: PAN, voter card, Aadhaar number, NREGA (National Rural Employment Guarantee Act) card, driver’s license, etc., which can be presented in person or online. Real-time video verification or electronic KYC is an expensive process; Aadhaar/PAN is verified by pinging government databases; but some lenders allegedly use less reliable options.

Consumer organizations including the Moneylife Foundation have urged RBI to mandate the use of e-KYC verified through the Central Registry of Reconstruction of Securitization Assets and Security Interests of India (CERSAI), to reduce fraud. Such e-KYC is already mandated by capital market, pension and insurance regulators; however, RBI declined to act on this without explaining its reluctance.

According to Gagan Banga, an independent director of Dhani, explaining the corrective actions initiated on their phantom loan issue, said most fintech companies follow a similar two-step process. The first is an Aadhaar-based verification with an OTP (one-time password) sent to the linked mobile number. The second method allowed borrowers to upload another proof of identity, which was misused by falsifying and altering documents. Dhani stopped the second process and started a cleanup.

If that sounds flimsy, it should be noted that most other lenders follow the same onboarding process. These include Slice Card (offered by a subsidiary of Quadrillion Finance Pvt Ltd), Moneytap (owned by MWYN Tech Pvt Ltd), CASHe (of Bhanix Finance and Investment Ltd) and Kreditbee Services Pvt Ltd. Bajaj Finserv, a major lender, only requires a PAN for the Bajaj EMI card (equivalent monthly installment).

The phantom loans, and the ensuing panic, could have been avoided by better identity checks; but two other issues compound the problem.

1. According to L Srikanth, founder of Cashless Consumer, a tech security advocacy organization, many app-based lenders cut costs by sourcing data from “profilers” who create and sell “risk scores” that act as a proxy for credit scores. The data is pulled from government websites and utility companies that remain completely lax on data protection. This data is then matched against other databases to obtain mobile phone numbers and UPI payment addresses, and even social media, to create risk profiles, he says. Such profiles are widely used by lenders, especially for collection operations.

2. India has a serious problem with poor quality data and mismatch of information between official IDs such as PAN, Aadhaar, passports, driving licenses and voter cards. Addresses are spelled differently, as are the spellings of names and places and there are countless data entry errors by government officials. This prevents perfect verification across multiple identities. Even if such checks were mandatory, ordinary people would be harassed, as fixes are notoriously slow and often lead to new errors. Photo identification is even less reliable, given the quality of the photos on the PAN and Aadhaar documents. Data cleaning and matching for key identity documents should be a national project that can perhaps be flagged Swachh Data Abhiyan.

Checking credit reports

Given the complexity of the issues, one possible solution is to focus on the information submitted by lenders to the credit information companies (CICs) that generate our credit scores. At the moment, the system is heavily stacked against individuals. Credit reports are deliberately complicated so that CICs can generate and sell “credit scores”.

Although one can file a complaint about erroneous entries in credit reports, the process is slow and tedious. CICs cannot modify any credit data without the express written consent of the lender. A disputed entry can take up to 30 days to resolve even if the lender cooperates; otherwise, it’s a harrowing process. For example, a person who disputed a phantom loan was asked by the application-based lender to produce a “no charge” certificate before rectifying the credit report! Sometimes lenders are deliberately vindictive and collectors use threats to destroy credit records with impunity in order to obtain payments. All of this stems from poor complaint resolution systems and the fact that the regulator has rarely acted on behalf of victims of fraud.

The solution

A simple solution would be for the industry to work with CICs and follow the practice adopted by credit card companies to report fraud and disputed transactions. CIC could send a mobile phone alert when a new loan is flagged on its credit profile. The message should include a number and email to allow people to raise an immediate dispute and take corrective action if the dispute is false. A centralized system that would cover all four CICs operating in India can easily be set up with RBI-registered fintech companies paying for the convenience of quick onboarding, while reducing the incidence of fraud.

Although it does not solve the problem of weak integration and questionable data entry, it protects individuals by providing immediate information and giving them greater control over their credit reports. Such control is crucial because fintech companies are constantly expanding their businesses in ways that people cannot be expected to understand or follow.

For example, a new source of panic and concern among people is the appearance of “loans” on their credit reports from lenders such as Arth Digital, Clix Capital, Simpl Pay, Capfloat, Karur Vysya Bank and others. It turns out that most of these companies have partnered with big fintech marketplaces or food delivery companies, such as Amazon, Zomato, Jio Mart, and others, that offer fee-based payments. on the EMI or “buy now, pay later”. ‘ which are backed by loans from these companies. Most people who take advantage of these offers are unaware that they show up as loans/borrowings on their credit reports and impact their credit scores. People complain that while markets, geared towards sales promotion, facilitate access to these facilities, the terms of the loans are never clear and it is almost impossible to withdraw and make full payment. If RBI mandated and quickly implemented a customer alerting system, it would help create better awareness, increase transparency, ensure drastic improvement in grievance handling and allow for better oversight by the regulator.