Millennium Post

Regulating chit funds a tough task

Notwithstanding the combined assault on the murky West Bengal chit fund operator, Sudipta Sen, his associates and group companies by the CBI, SEBI and Chief Minister Mamata Banerjee, it is business as usual for the country’s multi-lakh-crore rupee micro-finance and chit fund industry, including some 160 outfits from four eastern states – Assam, Bihar, Orissa and Bengal. The chit fund business is booming across the country with the expansion of economy. The rigorous banking regulations, restrictions on offering certain types of loans, regulated deposit and lending rates, the banking industry’s limited reach and growing underworld fund needs have led to a flourishing chit fund business across the country.

The chit fund business has never been so good following the realty and hospitality sector boom and the emergence of localised small building materials suppliers’ syndicates in every nook and corner. Increasing rural penetration of consumer products, including pharmaceuticals and cosmetics, requiring financially sound small stockists and distributors and changing lifestyle of the urban and semi-urban poor have added to the demand for short-term cash flow into the market. Side-by-side, the traditional high-risk, high-return business of funding underworld activities such as prostitution, drug trafficking, gun running, terror financing and food and drug adulteration, too are prospering. Banks don’t touch those businesses. The highly innovative lending rates – ranging from 0.50 per cent per day to five per cent per month – generate hugely attractive margins for chit fund operators. Agents and depositors are paid handsomely to ensure constant fund flow into the business. The fund sources vary from low earning domestic helps, rickshaw pullers, road-side barbers and cobblers, contractors’ labour, farmhands, low-paid shops and establishment employees, low category municipal and government employees to even office clerks, supervisors and Employees’ Provident Fund (EPF) pensioners.

The chit funds are normally collected as term deposits for periods between two and five years. A typical five-year chit fund deposit under the monthly recurring scheme offers 140 to 200 times return on the first saving installment amount on maturity. This means if one deposits Rs 100 per month, the maturity amount after five years will be Rs 14,000 to Rs 20,000. The weekly deposit rates are even more attractive to investors. Large investors may also be offered monthly returns. As against this, postal or bank monthly recurring deposit schemes offer just about 70 times the monthly deposit amount on a five-year maturity.

Chit operators invariably invest their profits in real estates, hotels, entertainment, film and tour and travel businesses. Those who fail to create good assets get into trouble during lean business phase. The police, the local mafia and influential political links are extremely important for business protection. Some of these elements are also engaged as collection agents at highly attractive commissions. Strong police and political networking are must for the success in this risky money multiplier business. Despite existence of several laws and regulatory mechanisms, most forms of chit fund business are illegal. Deposits collected are unsecured. There are as many fly-by-night operators in the business as the established ones some of which made it really big and diversified as Peerless, Sahara and Sundaram, becoming the country’s leading non-banking financial companies (NBFCs).

Officially, chit funds are supposedly governed by various state and central laws and SEBI and RBI regulations. In practice, operators write and follow their own rules with impunity. Neither RBI, nor SEBI has the machinery, manpower and capability to deal with such operators. Both RBI and SEBI have failed to control even more organised rogues from the corporate sector, including such large listed entities as Satyam Computers and Global Trust Bank, robbing the public and the government tens of thousands of crores of rupees. Out of some 15,000 listed companies, less than 30 per cent feature in daily stock trading list. SEBI had failed to prevent repeated stock market scams.

The central government’s chit fund act came into effect only in 1982, more than 20 years after Tamil Nadu, recognised as the birth place of this easy-money business, enacted India’s first such act. Even Andhra Pradesh (1971), Kerala and Maharashtra (both 1975) had their own chit fund acts in place before the central law came in. Karnataka (1983) and Delhi (2007) are the only two other states to have laws to regulate chit fund business, till now.

West Bengal, which witnessed the collapse of a number of large chit funds such as Sanchayita and Sanchayani in the 1980s under the Marxist government, is yet to enact a law. The state is estimated to have a combined chit subscribers’ base of over 10 million. The promoters enjoy full police and political protection to run their operations. Unfortunately for lakhs of poor unlucky investors in Saradha chit fund, its over ambitious promoter stretched the political networking part too far and wide linking very high-profile political personalities in the governments of West Bengal and Assam and even at the Centre. Journalists-turned-deal makers, having deep and easy penetrating ability into government and business organisations, too were engaged by Sen. One of them, a woman journalist, who once worked for the ABP group in Delhi, led Sen to the lawyer wife of the present union finance minister. It was like a rewind of the Nira Radia tape, exposing the role of the business-politico-media nexus in the great Indian telecom scam.

Had the Saradha chit fund fraud not been busted earlier this month by Mamata’s preemptive attack, it had the potential to heavily embarrass her government. She has always used attack as her best defence weapon before getting cornered. The sudden action has put her political rivals – CPM and Congress – on the back foot.

To ensure poor depositors’ safety and to prevent illegal money lending and laundering operations by chit fund promoters, both the central and state governments need to break the promoter-politician-police nexus at the ground level. This is not easy since all of them are direct beneficiaries of the business.

The proposed appointment of a national regulator may only open another avenue of corruption. There exist enough central and state laws and regulations to catch and punish cheats and financial fraudsters. (IPA)
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