ED finds 800 crore crime proceeds in fintech, NBFC probe
These lending apps flourished amid the Covid-19 pandemic as many in the workforce lost their jobs as the country went into lockdown. These firms have been under the scanner for more than a year.
People aware of the ED probe said loans of over Rs 4,000 crore were disbursed by these fintech firms, which then tried to recover the amounts lent through phone calls. The companies mostly used defunct NBFCs, which reportedly lent out their RBI-issued license for a share of profits ranging from 0.5% to 1%. In most of these cases, the investigation has found that the platforms were supported by Chinese money.
Chinese nationals had taken operational or board control over the service provider companies and provided funds to run these apps.
Of the loans disbursed, over Rs 700 crore was collected upfront by these fintechs under the guise of processing fees and over Rs 85 crore by way of interest and penalty charges, people familiar with the matter said on condition of anonymity.
“The capital of the fintechs was parked in the bank accounts of the accused NBFCs in the form of inter-company deposits or performance guarantees… These NBFCs did not receive any approvals from the Reserve Bank of India (RBI) before accepting the deposits from the fintech players, and thus breaking the norms,” explained a person familiar with the development.
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“They followed a co-lending model where the total disbursement amount was provided by the fintech companies. These NBFCs charged around 0.5% of the disbursement through mobile apps or a minimum commitment on a monthly basis, whichever was higher. These NBFCs made money without investing a single rupee,” he added.
The role of payment gateways
Lending and subsequent recovery transactions to these lending apps were routed through online payment gateways. In February 2021, the ED had summoned officials from Razorpay Software Pvt Ltd, Cashfree and
.
Subsequently, the statement of Harshil Mathur, CEO, Razorpay, Vikas Garg, CFO, Paytm and Akash Sinha, CEO, Cashfree, were recorded, sources said.
“The accused NBFCs at the behest of the fintechs opened merchant IDs with the payment gateways, thereby allowing the companies to do lending business for the same amount as the security deposits. The entire lending and recovery payment transactions of these fintech companies were routed through payment gateways. As for Razorpay, over 300 virtual accounts have been found along with the same number of linked bank accounts. The entire business was done by these apps and not controlled and managed by NBFCs,” the source added.
The fintech companies under the scanner lent from their own security deposits and traded on the licenses of the NBFCs, the ED has established as part of its probe, people familiar with the matter said.
When contacted by ET, a Paytm spokesperson said, “We conduct thorough checks on the merchants before and after their onboarding on our payment gateway platform, including know-your-customer (KYC) and verification of business documents, along with extensive risk assessment of the seller’s website and app. No seller is on board without proper documents on the account where you want to receive funds, and such accounts are opened by scheduled commercial banks. Even in the post-onboarding stage, we strictly monitor all transactions to flag risky behavior or suspicious patterns.”
According to a fintech executive involved in the operation of these payment gateways, the problem was that the virtual accounts on behalf of the loan apps—whose premise seemed dubious—were opened by their NBFC partners. “The biggest challenge the payment gateways faced was that they could not deny an RBI-registered entity, an NBFC in this case, from opening an account. These NBFCs were operating in cahoots with these so-called Chinese loan apps and had multiple virtual accounts opened for the partners theirs.”
“We would like to state that we are not part of any ongoing investigation into lending by the ED. As a leading industry player, it is our endeavor to continuously support the government, regulators as well as all state investigative agencies in promoting best practices to operate safe and secure digital payments,” said a spokesperson for Cashfree.
A Razorpay spokesperson said the company has fully cooperated with the ED investigation, “Some of our merchants were investigated by law enforcement about a year and a half ago. We have fully cooperated and shared KYC and other details. The authorities were satisfied with our due diligence -process.”
Modus operandi
The investigation has revealed that the accused lending companies would set up call centers across India. The lending period was between 7 and 60 days. Apper deducts 15–25% of the microloan at the time of payment itself to cover processing costs. They would charge exorbitant interest with high processing fees coupled with GST charges. While sanctioning the loan, all the contact details, photos and personal details of the borrowers were fetched from the loan app. Then family members and friends of the borrower were called using foul language.
“… These companies used spoofing technologies to hide their identity and called customers and forced them to repay the previous loan amounts. In certain cases, the borrower ended up paying 150 to 450 percent of the loan amount,” an officer explained.
The ED’s investigation is based on predicate offenses specified in 40 FIRs filed by various state police forces, including six cases of abetment to suicide registered in Telangana. The federal agency has attached assets of Rs 158 crore of four NBFCs namely Kudos, Rhino, Acemoney and Pioneer lying in their bank and payment gateway accounts.
Recently, the RBI has introduced stricter practices to be followed by NBFCs and their service partners – following the episode of the Chinese loan apps – through the latest digital lending guidelines.
