Big questions about small money

Updated: Jan 23 2007, 05:30am hrs
Chit funds, also known as Rosca (rotating savings and credit associations), are Indias oldest indigenous financial institution, catering to the credit gap in the countrys economy before the establishment of commercial banks. Operating in the informal financial sector, they signify a vital community-based, micro-credit, quasi-banking system. Internationally, such financial institutions have played a strong role in the development of countries like Japan and South Korea. The chit fund industry in India is estimated at Rs 20,000 crores (Ernst & Young), and accounts for 6% of countrys savings (Outlook Money, 15 March, 2003). Despite the prevalence of banks, chit funds hold great significance, as over 90% of financial assistance in India is provided by the small, informal sector (Spectrum, November-December 2005).

At the same time, the public perception of chit fund industry has been damaged by unscrupulous companies that have cheated on their subscribers, usually salaried individuals and small traders. This has led the government to regulate the industry with a heavy hand of bureaucracy. The Delhi government runs the chit fund department, administered by the department of finance, to control the activities of chit fund companies in the state under the Madras Chit Funds Act, 1961 and Delhi Chit Fund Rules, 1964. However, chit funds that started before 1961 are exempt from the provisions of the Act. At the moment, there are 374 authorised chit fund companies in the state, and those debarred are listed on the departments website.

To start a chit fund, a company firstly needs to obtain a certificate of incorporation from the registrar of companies. Then, it has to apply for the registration of its bylaws with the registrar of the chit fund department. If bylaws do not contradict the Act, or rules framed under it, the registrar issues a certificate of registration. The process does not end here. To actually launch the chit fund, the company needs to obtain a certificate of commencement from the registrar, which is granted when it provides security either by executing a mortgage of property to the registrars satisfaction, or depositing cash in an approved bank, or investing in government securities, to the tune of at least half the chit amount, and transferring th mortgage/deposited cash/securities in the registrars favour.

The chit fund department stipulates that the foreman (person responsible for conduct of the chit) is entitled to a commission/remuneration not exceeding 5% of chit amount, and that minutes of all chit proceedings and agreements should be filed with the registrar. In case of complaints or grievances, involved parties can either reach a mutual agreement through the chit fund panchayat or directly address the civil courts or consumer forums.

Now, first of all, it seems difficult to justify the existence of a separate department with 14 full-time officials, and budget of Rs 34 lakh for 2006-07 (spending Rs 1.6 crore from 1997-98 to 2004-05), to issue certificates of registration and commencement, keep record of minutes (most likely without ever reading them) and to create public awareness of chit fund companies through advertisements in newspapers (utilising only 3% of the total expenditure for advertising & publicity, 79% going into salaries). Why cannot companies get their certificates of registration, like the certificates of incorporations, from the registrar of companies, to lessen bureaucratic burden Why cannot the RBI take care of financial securities, as it does in the case of Himachal Pradesh Do we need a separate department for 374 companies, and spend Rs 34 lakh annually

Why cant the RBI take care of financial securities, as it does in the case of Himachal Pradesh Do we need a separate department for 374 companies, and spend Rs 34 lakh annually
Why not outsource the functions of chit fund panchayat to All India Association of Chit Funds (AIACF), an apex body at the national level that acts as a confederation of chit fund associations in India with the aim of promoting the efficient functioning of the chit fund business The AIACF could incorporate officials from the concerned government departments and some of the prominent (perhaps investment-wise) subscribers, which would not only fill the democratic deficit in the functioning, but take care of the interests of all stakeholders. Thirdly, is there any study done by the government to see that the chit fund companies working since before 1961 do, or will not, resort to cheating Why, then, are they exempt from the provisions of Madras Chit Funds Act Do separate laws or provisions govern them Fourthly, is there any proactive mechanism of tracing, recording and punishing chit fund companies that operate without proper registration Instead of simply notifying their names on the chit fund department website, why are they not shut down

Regarding the filing of minutes on a regular basis with the department, is it not possible to record them and give a stamped copy to subscribers Alternatively, like the once-in-a-while filing of chit agreements, minutes could annually be filed with the concerned office (which could also be AIACF) to ease the burden on government and on chit companies. Finally, why put the 5% cap on the foremans commission/remuneration, and not let it be decided in the chit agreement between the subscribers and the foreman/company

It is time to pay heed to the Union minister of state for law and justice, K Venkatapathy, that chit funds should come up with a self-regulatory body to monitor the industry (22 May, 2006). But, for that, government regulation will have to be minimised, if not ended, and priority given to the stakeholders, including that of the chit fund companies, who are looked upon as defaulters by default. Most of them are not.

The author is a member of the governance team, Centre for Civil Society. These are his personal views