Case of oversight

It would be easy to dismiss the Saradha chit fund debacle now playing out in West Bengal as just another instance of avaricious investors throwing caution to the winds when tempted with high returns only to cry foul when the gamble failed. But this incident is also a pointer to systemic deficiencies in the way the Indian financial sector is being regulated today. Even as the Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI) and the Ministry of Corporate Affairs formulate elaborate rules for registered mutual funds, banks and listed companies, there are many entities out there who are able to raise vast amounts of public money by operating in a no-man’s land, where these regulators are oblivious to the goings-on or, if aware, are wary of treading.

Chit funds, in fact, fall into just this category. On paper, they are governed by a central Chit Funds Act 1982 as well as specific Chit Fund Acts enacted by different states. As regulation of chit funds is a State subject, both RBI and SEBI exclude chit funds from the purview of their regulations for deposit-taking finance companies or collective investment schemes. But these very exclusions allow chit funds to collect public money without any of the controls or checks imposed on regulated firms — capital adequacy norms, risk controls or even basic financial disclosures. But the increasing incidence of such scams and the quantum of public money involved in it, suggests that it may now be time for regulators to shed their reservations about treading on each other’s toes, and make a collective effort to expand the regulatory net by pushing for legislative changes. If this results in some overlap of jurisdictions, so be it. After all, such overlaps exist even now with listed banks accountable to SEBI for their dealings with shareholders and to RBI, on depositor protection. The Saradha incident also provides ammunition for policymakers to lean on the State governments to tweak their chit fund laws, to grant SEBI or RBI powers to seek information and inspect the books of chit funds. Financial institutions, as a class, are prone to the risk of ‘contagion’. Not only can the operational failure of an entity be transmitted to others, bad reputation too can fasten on just as well to other entities, to the detriment of the industry as a whole.

But there is another aspect to this episode. If people with limited means or those running small businesses flock to unorganised entities for their credit needs despite the latters’ exorbitant costs, it is also because they find it difficult to access the formal financial system. Making banks and NBFCs more accessible to them will certainly help wean them away from such spurious operators of chits or other mutual benefit schemes. The technology today available in the form of the mobile communications network and electronic payment systems, has made it possible for banks to track the status of their borrowers and facilitate transactions at a fraction of the costs they used to incur earlier. It is time they used this reach to take banking services to the small customers’ doorstep.

Read also: >A Ponzi empire crumbles in Bengal

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