Chinese loan apps and NBFCs misused RBI circular, says ED

The ED had begun its inquiry based on two FIRs filed in Bengaluru by customers who had faced harassment from the recovery agents of the online moneylenders. The fintech companies had agreements with NBFCs for disbursement of loans through digital lending apps

MUMBAI: A probe by the Enforcement Directorate (ED) into the operations of illegal Chinese mobile loan applications has revealed that three Chinese-controlled fintech firms, which worked as technical service providers to three registered Non-Banking Financial Companies (NBFCs), allegedly misused a circular issued by the Reserve Bank of India (RBI) on November 9, 2017.

Chinese loan apps and NBFCs misused RBI circular, says ED

“The RBI had issued the circular allowing NBFCs to outsource their financial activities but by adhering to its guidelines,” said an ED official. The agency’s probe revealed that the NBFCs had violated these guidelines by letting their partners—the Chinese-controlled firms—operate the mobile lending apps themselves. “These NBFCs are accused of letting fintech companies use their names in lieu of a commission without bothering about the conduct of the fintech companies. It’s a violation of the Fair Practices Code of the RBI,” the ED official added.

The ED had begun its inquiry based on two FIRs filed in Bengaluru by customers who had faced harassment from the recovery agents of the online moneylenders. “The fintech companies had agreements with NBFCs for disbursement of loans through digital lending apps,” said the ED official. “During investigation, however, we found out that the moneylending business was actually being illegally run by these fintech companies.” The RBI subsequently pointed out the irregularities in the operations of the lending apps in an email dated April 19 of 2021, and remarked that they were prima facie circumventing the extant guidelines.

The ED’s chargesheet, which was accessed by HT, states, “On September 1, 2016, the RBI had stipulated that the NBFCs shall lay out appropriate internal principles and procedures in determining interest rates and processing and other charges and directed to follow Fair Practices Code in this regard. The effective interest rate of more than 2,000 percent per annum cannot be said to come under fair practices.

“The business model adopted by the firms involves two parties—the NBFC, which has a valid license from the RBI under the Banking Regulation Act and has a right to lend. The other party is a fintech company, a service provider, which has the technical know-how to run the mobile apps, collect and store KYC documents and customer data,” the ED chargesheet continues. “This fintech company disburses loans to various borrowers on behalf of the NBFC by entering into an agreement with the NBFC.”

According to the chargesheet, under this model, 100 per cent of the disbursal is provided by the service providers to the NBFCs in the form of a security deposit. “The NBFC has a guaranteed revenue in accordance with the service agreement on a revenue-sharing basis, in the form of service fees, which range from 0.4 percent to 1.5 percent, on total disbursement through the mobile apps. Thus, NBFCs, without investing a single rupee in the model, get guaranteed return just because of having the lending licence and outsourcing the services to the fintech firms,” the chargesheet says.

The ED in March submitted its first chargesheet in the case in a Bengaluru special court against seven entities and five individuals for their alleged involvement in the loan apps cases. The entities included three fintech companies, Mad Elephant Network Technology, Baryonyx Technology Pvt Ltd and Cloud Atlas Future Technology Pvt Ltd, which are allegedly controlled by Chinese nationals, and three NBFCs registered with the RBI and a payment gateway.

On the ED’s request, a lookout circular was issued against an absconding director of Mad Elephant, Chinese national Yan Peng Qu, and the agency is likely to submit supplementary chargesheets in the case, ED sources said. The ED probe has also revealed that the mobile mobile apps were directly installed, accessed, used and monitored from cloud-based servers in China. The local Indian companies did not have any control over these apps.