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Saradha Scam & After: SOCIO-ECONOMIC FALLOUT, By Dhurjati Mukherjee, 13 May, 2013 Print E-mail

Events & Issues

New Delhi, 13 May 2013

Saradha Scam & After


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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