Spotlight

New Delhi, 14 February 2019

Illicit Deposit Schemes

NEW LAW TO CHECK ROT

By Moin Qazi

The Union Cabinet has approved the Banning of Unregulated Deposit Schemes Bill, 2018 with the objective of effectively tackling the menace of illicit deposit-taking activities and prevent such schemes from duping poor and gullible people of their hard-earned savings.

Among the provisions is a ban on deposit takers from promoting, operating, issuing advertisements or accepting deposits in any unregulated scheme. Deposit Takers’ include all possible entities (including individuals) receiving or soliciting deposits, except specific entities such as those incorporated by legislation.

The Bill bans unregulated deposit taking activities altogether, by making them an offence ex-ante rather than the existing legislative-cum-regulatory framework which only comes into effect ex-post with considerable time lags. It provides for “severe punishment and heavy pecuniary fines” to act as a deterrent. Penalties could involve jail term as well as the sale of the offenders’ assets to pay back the defrauded party within set timelines

The principle is that the Bill would ban unregulated deposit taking activities altogether, by making them an offence ex-ante rather than the existing legislative-cum-regulatory framework that only comes into effect ex-post with considerable time lags.

The Bill creates three different types of offences: (i) running of unregulated deposit schemes, (ii) fraudulent default in regulated deposit schemes, and (iii) wrongful inducement in relation to unregulated deposit schemes.

India has always been a fertile ground for swindles that have milked mostly low-income households of millions of rupees. The financially illiterate are usually easy pickings. The investors have been periodically gulled by nefarious characters into dubious schemes. The poor have now become wary of investing money even in credible organizations. These mercenary agents use enticing traps to net gullible investors like sharks preying on small gold fishes in the big bad financial ocean.

According to a global survey by Standard & Poor’s, less than 25 per cent of adults are financially literate in South Asian countries. For an average Indian, financial literacy is yet to become a priority. India is home to 17.5 per cent of the world's population but nearly 76 per cent of its adult population does not understand basic financial concepts. 

People with robust financial skills and strong grasp of financial principles are able to better understand and negotiate the financial landscape and avoid financial pitfalls. Conversely, those with a lower degree of financial literacy struggle to understand money matters and the potential impact on their financial well-being. Financial ignorance carries significant costs and results in people spending more on transaction fees, getting over-extended with debts on account of them being ripe prospects for predatory practices.

On account of lack of proper awareness and failure of institutions to properly guide them, people buy insurance policies without planning and give up midway because they do not have money to pay the premium. Aggressive selling prevents the agents from properly assessing the consistency in income streams of the buyers for servicing their policies. The customers end up losing heavily due to harsh penalties. There’s a popular term to describe this, called mis-selling.

To blunt the potential for risk, it is more important than ever to arm customers, especially the newly-banked, with skills they need to borrow, save and move money prudently and to keep   distance from unscrupulous and dubious investment schemes that are likely to get them into serious trouble.

Whilst financial products can be hard to understand for even highly literate consumers, the lack of this basic understanding leads to extended levels of debt for the illiterate, vulnerable customers, pushing them deeper into indebtedness and poverty.

Financial ignorance carries significant costs and results in people spending more on transaction fees, getting overextended with debts on account of them being ripe prospects for predatory practices. They usually fall prey to aggressive marketing and end up with troublesome financial products. As per RBI data, during July, 2014 to May, 2018, 978 cases of unauthorised schemes were discussed in State Level Coordination Committee (SLCC) meetings in various States and were given to the respective law enforcement agencies in these States.

One area where India needs strong consumer protection measure is insurance services. On account of lack of proper awareness and failure of institutions to properly guide them, people buy insurance policies without planning and give up midway because they don’t have money to pay the premium. Aggressive selling prevents the agents from properly assessing the consistency in income streams of the buyers for servicing their policies. The customers end up losing heavily due to harsh penalties.

Persistency measures how long customers persist with their policies. The Insurance Regulatory and Development Authority of India (IRDAI), in its Handbook on Indian Insurance Statistics 2015-16, has provided persistency figures of the life insurance industry and the numbers are abysmal. For FY2016, the life insurance industry, on an average, had a persistency rate of 61% in the 13th month, which means: 1 year after the sale, only 61 out of every 100 policies were renewed. It shows the huge money customers are losing on account of bad financial planning and the mis-selling practices prevalent in the insurance industry.

The good news is that there are now several channels of information and resources to help the public build their financial stability. To safeguard the hard-earned money of investors and curb the pervasive menace of illegal money pooling by companies, the Reserve Bank of India (RBI) has set up a portal -- sachet.rbi.org.in -- to enable the public to obtain information about registered entities who accept deposits, get information regarding illegal acceptance of deposits, and lodge complaints. The portal also facilitates filing and tracking of complaints.  

While we should continue to make a case for strong regulations to protect consumers against unscrupulous firms, we must remember that good financial literacy among citizens is the most effective antidote against these moral abuses. To blunt the potential for risk, it’s more important than ever to arm customers with skills they need to responsibly borrow to get a business idea off the ground or to acquire an asset like a house, save to build their assets, insure to stay resilient through life’s worst moments without being pushed deeper into debt and to keep distance from unscrupulous and dubious investment schemes that have lacerated the financial lives of multitudes after they got into serious mess with these.  

Stories commonly abound of people having been stripped of every cent they earned by the time they realised they had been conned. Financial advisors and counsellors should be able to spot early and sometimes use subtle signals.

We need to practice what is now being emphasised as responsible finance, which has transparency and accountability and empathy as its foundational triad. Transparency implies objective communication about the products procedures, documentation and other necessary formalities required for making a financial transaction. Transparent processes result in greater trust and confidence in the financial system. It is important to ensure that over-zealousness does not result in over-indebtedness.

We must be mindful of the fact that these individuals have entered the formal financial system after a lot of pushing and prodding and it would be difficult to bring them back into the formal financial sector, if they leave feeling cheated/dejected.---INFA

(Copyright, India News & Feature Alliance)