Does your credit report indicate a fictitious or phantom loan? Know the repair


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HIGHLIGHTS

  • After a recent monetary policy review, the RBI said it had received numerous complaints about fake loans.
  • Almost all fintech lenders follow a flawed process to complete KYC to on-board customers so they can sanction and disburse loans within minutes.
  • They get away with it because people are just starting to take notice of the problem of fake/ghost loans.

New Delhi: In recent times, the number of complaints to the RBI against digital lenders regarding fake loans or phantom loans has increased. After a recent monetary policy review, the RBI said it had received numerous complaints about fake loans. The issue of phantom loans or fake loans can ruin a person’s credit record. Ghost loan victims’ credit scores plummet due to credit reports containing incorrect information on loans they never used.

The amount of bogus loans could range from a few hundred to over a million rupees. According to the repayment file, the consequences for the victim are: a sharp drop in the credit rating resulting in higher interest on their loan, lower credit limits and, worse, a refusal of credit, if there is default on the bogus loan.

After numerous complaints, the Reserve Bank promised to take action, but it was also probably surprised to see that the problem was not limited to one company but was a broader systemic problem. Almost all fintech lenders follow a flawed process to complete know-your-customer (KYC) formalities with on-board customers so they can sanction and disburse loans in minutes.

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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.

Remedies:

Given the complexity of the issues, one possible solution is to focus on information submitted by lenders to credit information companies (CICs) that generate 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”.

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.

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