Events & Issues
New Delhi, 13 May 2013
Saradha Scam & After
SOCIO-ECONOMIC FALLOUT
By Dhurjati Mukherjee
The Saradha crisis, which has
engulfed not only West Bengal but also the
neighbouring States of Bihar, Assam, Odisha and Jharkhand has raised many
questions which need to be addressed by the powers-that-be. Analyzing the
problem in depth, it clearly emerges that the policies of both the Central and
State governments are to blame for the crisis reaching such unprecedented
proportions. And, as usual it is the common man who takes the brunt of it
all.
The light-hearted nature of the Chit
Funds Act and the casual approach of the supervisory mechanism prompted many chit
funds to turn into Ponzi schemes. In 1999, the Securities & Exchange Board
of India (SEBI) brought out the SEBI (Collective Investment Scheme) Regulations
1999. There were eight instances given in the regulations as to what would not
constitute a CIS scheme or an arrangement falling within the meaning of chit
business as defined under clause (d) of Section 2 of the Chit Fund Act 1982 (40
of 1982).
Actions that the SEBI would take, as
per the Act, include criminal prosecution, passing directions to the person
concerned not to collect any money from the investor to launch any scheme,
prohibiting the person concerned from disposing of any property of the scheme
acquired in violation of the regulations, requiring the person concerned to
refund money or the assets to the concerned investors along with requisite
interest or otherwise collected under the scheme etc.
But unfortunately SEBI failed
miserably in its responsibility and did not function as a strict regulator and
carry out its duties of monitoring these companies. The moot question is: How
did the schemes of these companies escape the SEBI’s glare? In fact, this has
led to people seeking answers whether the “oversight” was due to political
lobbying and pressure or whether SEBI itself was part of the entire scam.
At the same time, many social
analysts are veering round to the view that the present crisis reflects the rot
that has set into the society, with a clamor to earn more by hook or by crook
and that greed surpassing all limits amongst the better off.
In this particular case, the Saradha
group was able to hoodwink the depositors from the economically weaker
sections, low income groups, as also by the middle class, specially in rural
areas, as apart from the high rates of interest they were being offered these
people had no other option and easy means of keeping their meager earnings. One
must keep in mind that most of those duped are not so financially literate as
to understand that such high rates of interest cannot be given by a company which
wants to do sustainable business.
Additionally, it is important to
look at the banking network in West Bengal
where financial inclusion is low, as per a study of the Reserve Bank of India
(RBI) conducted last year. So far only 9.805 villages with a population of
2.000 each have been covered against a target of 37,945 villages to be achieved
by March 2018. The banks obviously are primarily interested in concentrating in
the urban centres and therefore there has been no significant increase in the
rural network to the extent desired.
In such a situation, without a
proper banking network, villagers keep choosing among the so-called chit funds
that are presently quite active in almost every village. One estimate has it
that around 20 chit funds are found to be operating in every village.
Add to this, the cumbersome
procedures related to documentation which nationalized banks seek for opening
an account. This obviously is problematic for the villagers, specially the
illiterate and the self employed, and many of whom may not be having the
requisite documents sought. Additionally, the rate of interest offered by
nationalized banks too is a factor. It has been seen that the inflation rate
now appears to be higher than the normal rate of interest offered by the banks.
One can question, and quite justifiably, whether this is judicious? This action
may be attributed as the backdrop to the present crisis.
A different aspect of the present
chaotic situation which craves attention is the question of what happens to the
lakhs of agents, mostly belonging to the younger generation, employed if these
chit funds and/or micro finance institutions are not allowed to operate. How
will they earn a living and where are the jobs?
Underemployment and unemployment is a
major problem of the rural areas which has resulted in large-scale migration
from these places to the urban centers. Thus added to the financial crisis, it
is quite obvious that a socio-economic crisis of a huge dimension may impact
the rural scenario as in the current situation alternate means of earning a
livelihood appear remote for these agents.
Meanwhile, the Financial Sector
Legislative Reforms Commission (FSLRC), headed by Justice B. N. Srikrishna,
submitted its two-part report to the Finance Ministry in March, including a
draft bill which details the regulatory landscape to deal with the challenges
of the fast growing financial sector. It suggested setting up a ‘resolution
corporation’ which would watch all financial firms and intervene when the net
worth of the firm is near zero but not yet negative. It also called for
establishing a Financial Redressal Agency (FRA), which would have a nationwide
machinery to become a one-shop where consumers can carry complaints against all
financial firms.
Even the SEBI chairman recently
stated that the market regulator is “working extremely hard to ensure that the
savings of small investors are not put to risk”. But that doesn’t alone help
resolve the problem. The larger aspect of avenues of rural savings in areas far
off from banks, the question of agent’s employment etc. need to be considered.
Viewed in totality, the Saradha scam
has indeed again reiterated the fact that development has been lop-sided and
urban centric and a balanced approach is essential. The rural sector has to be
given priority in the planning process so that the economy of these areas
becomes strong and sustainable. This may at least safeguard the poor from
getting duped by the chit fund sharks and spare them of another Saradha-like crisis.
----INFA
(Copyright,
India News and Feature Alliance)
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