column: While they were sleeping

Chit funds made steady inroads since 1990s, taking advantage of govt?s plan to scale down small saving schemes

Around 2003-04, the ubiquitous posters on the post office walls across India urging people to invest in government small savings schemes vanished. Their disappearance was deliberate. State and central government budget offices had been watching in horror as the flood of small savings was building up over the past few years. They moved to make people graduate out of small savings.

In five years since 1998-99, the sum had risen 120% to R60,209 crore. Coming on top of the outstanding small savings collection, this was catastrophic. Small savings as a percentage of bank deposits in 2003-04 had reached 29%.

After the governments battened down the hatches to let the tsunami subside, the percentage had come down to 16% by 2010-11. Small savings had not only shrunk in percentage terms but also in absolute numbers to that of 1999-2000.

The plan was to encourage middle-class investors to branch out to other, more attractive financial sector investments ranging from equity to pure play debt products like pension schemes. The remedy, instead, let fraud organisations like Saradha and others prosper.

One of the elements of the government plan was to dismantle the National Savings Organisation (NSO), which ran all the state-run small savings schemes. The option was for the states to run them as they saw fit. The states except West Bengal saw no need to advertise and more significantly pay high agency commissions to mobilise money they did not need. The government advertisements disappeared, to be replaced by those for private sector fund pools.

The Thirteenth Finance Commission said reforms required at the state level include discontinuing the practice of giving incentives ?such as cash awards to officials and other similar measures to promote subscription to small savings instruments. These measures also interfere with normal market dynamics. While most of these incentives, like awards to officials, have outlived their utility, all such incentives that either add to the cost of administration or affect normal market-linked subscription should be proactively withdrawn by the states.?

In West Bengal, this created a peculiar problem. It is a state where people save the most through the small savings window. State-wise collections data show 15% of these savings are from this state. No surprise that the tricksters would find this state their best bet to flourish.

The rationale for the governments at all levels to gradually withdraw from the small savings avenue was to keep the fisc in shape. For state governments, other options had opened up like banks and long-term financial institutions including retail to finance their loans at lower rates.

West Bengal, however, had a problem. It wanted the money?it was the only state which depended on the NSO collections to bridge its budget. But the government heading towards a financial distress found paying for agency commissions and advertisements costly to handle. It assumed the savings would still flow in and withdrew from active management of small savings.

Incidentally, Uttar Pradesh was, till some years ago, not among the largest mobiliser of small savings. It is now the second largest after West Bengal. No wonder that Sahara?s two such schemes found the state so fertile when the Securities and Exchange Board of India (Sebi) went investigating. After West Bengal the other large pools of savings are from Maharashtra and Gujarat.

But, in a market accustomed to safe returns and long-term security, this was a dangerous gap to open up.

So how did the winding down of in-your-face government activism to promote small savings combine with an underlying incentive to save nevertheless? There would be no definite answers to these but some indicators do show up.

A market research conducted by the National Savings Institute, the successor to the NSO as a research body, assess savings behaviour among adults in different states. In West Bengal it found that only 30% of those surveyed in the cohort of 21 to 35 years wanted to use government small savings. The percentage rose to 87% for those above 50 years. But, cutting across all groups, a huge percentage said they were risk-averse and preferred the safety of investment over the lure of high returns. At the same time, this is also the state where after the ads stopped the collections into government schemes tapered off significantly. The money was moving to companies promising land to trips to foreign destinations.

The final chain in this story is the role played by the ministry of corporate affairs at the Centre. Since 2010 when the activities of such funds began to surface, the ministry initially denied any responsibility to monitor them. In July 2010, it said in a press release that multi-level marketing companies did not fall under its ambit.

As matters heated up in 2011 and Parliament began to question insistently, the ministry said it was chasing the 87 companies, which had vanished, to prosecute them. Monitoring of multi-level marketing, it said, was the responsibility of state governments. The mother act, the Prize Chits and Money Circulation Schemes (Banning) Act of 1978, was to be administered by the finance ministry. From there to the latest decision on Thursday, to prosecute the Saradha group of companies, is a long way to travel.

subhomoy.bhattacharjee@expressindia.com