Businesses need finance for multiple purposes. It could range from expansion, replacement and purchase of assets, advertising, buying new equipment, opening new branches, or investing in technology. Financial needs can be met from various sources. Broadly, sources of finance can be classified into:
- LONG-TERM SOURCES – Long-term sources of finance are those which are needed for a longer period- generally more than 5 years or more. Shares, debentures, term loans, and venture funding are some examples of term loans.
- MEDIUM TERM SOURCES – Medium-term sources are the sources where the funds are required for more than one year but less than five years.
Commercial banks, Lease Financing, Public deposits, etc. are some of the medium-term sources of finance.
- SHORT TERM SOURCES- Short-term finance, also known as working capital finance refers to financing needs for a small period normally less than a year. Examples include Quick lending apps, Trade credit, bank overdrafts, customer advances, etc.
We will be discussing an emerging source of short-term finance:
Quick Lending Apps
Applications such as LAZYPAY, DHANI, SIMPL, STASHFIN, OLAPOSTPAID, BUDDYLOAN, KREDITBEE are some of the quick lending apps that have emerged recently that allows user to get a loan through their mobile phone without much documentation. People nowadays are in much need of credit, especially after the COVID lockdown. Let’s discuss the benefits and drawbacks of these apps.
Benefits of Quick Lending Apps:
- INSTANT SOURCE OF FINANCE – These credit applications provide loans through a much shorter and easier process as compared to getting a loan from commercial banks or other traditional sources.
- LESS DOCUMENTATION – The whole process of loan approval can be completed in just minutes as it does not requires any proof of income, residence proof, signature, or stamp of government authorities, neither central/state/local nor N.O.Cs. Users are just required to complete an online e-KYC to get instant approval.
- NO RED TAPE – ‘RED TAPISM is a phrase used to glorify the hurdles coming in way of getting work done by government corporations such as conformity to rules, following unnecessary rules and formalities, bureaucracy, etc’ Getting loans from traditional sources may require several formalities such as authority approvals, NOCs, mortgage, collateral security, and local body permissions, whereas there are no such requirements in case of this new source of finance.
- SECURITY – These fintech companies do not demand from their users any credit score, mortgage, or collateral security. Therefore, this is a good option for those users who do not fulfill the above requirements or whose applications have been rejected by banks.
- FLEXIBILITY – They give their users enough flexibility to use the money anywhere, whether it is for shopping, investing, managing household expenses, or personal use. Users need not give any explanations to anyone regarding its usage.
Drawbacks of Quick Lending Apps
- CENTRAL BANK REGULATIONS – In India, these companies have exploited their customers harshly. These companies lend money without following RBI guidelines, which is the central bank of India. They can manipulate the rules on their terms in the way they want as no governing body is looking towards them.
- DATA LEAK – Many times, data breaches have been reported through these companies as they do not maintain proper security in their servers because after all their motive is to earn interest incomes and not customer security. Unfortunately, some low-key companies have allegedly sold their customer’s data to hacking firms and for other illegal activities. DATA is the new BLOOD and can’t be put at stake like this.
- HIDDEN CHARGES – They are in wake of adding late payment charges, which may extend up to 100% of total dues besides charging interest, even deliberately. Apart from interest and late payment fees, many money lending firms charge countless hidden charges, which add fuel to the fire on overall dues.
- MISUSE OF USER INFORMATION – The customers who are in quick need of finance, submit all documents demanded by these companies in desperation which may contain sensitive information. These companies gain full authority over their identities and can also misuse them.
- BAD FINANCIAL PLANNING – The availability of credit affects our spending habits a lot. It may lead to overspending as we think that we have an abundance of liquidity although it may be not ours. It may also damage/hamper our monthly budget.
RBI’s Recent Inspections
RBI is keeping an eye on their activities. Recent raids and inspections have proved that the central bank is cracking down hard on lending apps. Central agencies such as CBI and ED have found out that the companies have been cheating on customers. Allegedly, they were suspected of illegal business with various means. Offenders that are under the scanner of money laundering are being booked under the PREVENTION OF MONEY LAUNDERING ACT (PMLA). Cyber Crime Police in Bengaluru found out that the firms were involved in the extortion and harassment of the users who had availed of small amounts of loans through the mobile apps. These NBFCs misused personal data and resorted to predatory lending practices to extort high-interest rates from those who took loans. Most of these companies have their registered office in CHINA and when a customer is not able to pay back loans, the companies resort to blackmailing and over 500 people have committed suicide consequently. They have siphoned over 500 crores from India through illegal activities.
Their activities should be monitored regularly and dangerous and unreliable apps should be banned with immediate effect. The Indian government should pass new laws to stop further harassment and blackmail.
In the past few years, the number of quick lending companies has increased at an alarming rate, especially after the lockdown as the masses were in the need of instant finance. Many people lost their jobs and businesses suffered huge losses. As commercial banks and other sources require a lot of formalities to be fulfilled, instant loan apps came as a messiah because no credit score and collateral were required.
There are many advantages and disadvantages associated with them. Credit is the backbone of an economy but it should be wisely used. It’s gonna prove a boon or bane depending on the person wholly. We should use the credit facilities only if we have the potential to pay them off within the due date. The availability of credit makes us feel confident that we have money, but it should not be misused and should be used only before making adjustments to repay, and not recklessly. Many people avail of these services just for offers, which is not wrong. Being unregistered, they cannot report to credit bureaus and hence they are only left with unethical ways of recovery such as blackmailing and spamming, etc.
The moral of the story is “BEWARE OF INSTANT LOAN APPS”
There is a wise saying that,
“CREDIT FACILITIES ARE A BLESSING FOR THOSE WHO ARE NOT IN THE NEED OF CREDIT”