The Government of India has introduced the Amendment Bill to facilitate orderly growth of the chit funds sector and to remove the bottlenecks being faced by the sector. It is also expected to enable greater financial access for people (consumers).
Amendments are being made to sections 2, 11, 16, 17, 21 and 85 of Chit Funds Act, 1982.
- The fund names such as ‘chit’, ‘chit fund’, ‘chitty’ and ‘kuri’ will also include ‘fraternity fund’ (sections 2 and 11) to signify its inherent nature and distinguish its working from prize chits, which are banned under a separate legislation.
- The amendment provides for allowing the mandatory presence of two subscribers, either in person or through video conferencing, while the bids are being opened. Thus, after the words ‘two subscribers’, the words ‘present in person or through video conferencing duly recorded by the foreman’ shall be inserted (sections 16 and 17).
In a chit fund
Enrolled members commit to contribute a certain sum of money as their subscription/membership fee every month towards a fixed sum, which is available to him once he completes the fund period without offering any bids. The total amount that he paid overall will be far less than the amount he gets by way of repayment. This is the interest or profit earned by him. The returns are said to be better than bank deposit savings rate.
Also Read: What are chit funds?
- Substitute ‘5% commission’ with ‘7% commission’ (Section 21) to increase the ceiling of foreman’s commission.
- Replace ‘one hundred rupees’ with the words ‘such amount as may be specified, by notification in the Official Gazette, by the State Government’ (Section 85), so as to confer power upon the state government to specify the amount up to which any chit fund shall be exempted under the said section.
It is expected that consumers will now be able to access chit funds as a progressive financial product in the investment market, with more stringent regulations to ensure the orderly growth of the sector. In the past, various stakeholders had expressed their concerns regarding challenges being faced by the chit business. Eventually the central government constituted a key advisory group to review the existing legal, regulatory and institutional framework for chit funds and suggest initiatives.
The Parliamentary Standing Committee on Finance, in its ‘Report on Efficacy of Regulation of Collective Investment Schemes (CIS), Chit Funds, etc.’, had recommended the finalizing of the legislative and administrative proposals for strengthening and streamlining of the chit funds sector.
Pitfalls that Affect the Business
- The chit fund sector is plagued by a large number of subscribers running away/disappearing with the loan funds and discontinuing the subscription after receiving such benefits, thereby jeopardizing the fund structure of the business.
- Many subscribers shift their places of residence/business and are unable to continue their subscription, thereby affecting the smooth running of the chit fund.
- At times the foreman (promoter who organizes the chit-fund business) also disappears with the corpus fund, leaving the subscribers with no clue about the future/continuance of the fund.
- There are stray cases of employee frauds in chit-fund companies, committed on their own or in collusion with subscribers, thereby eroding the trust of consumers in the sector.
- Weak regulatory framework makes it relatively easy for errant chit-fund companies to get away with fraudulent activities.
- Chit-fund companies do not insist on some form of collateral security that is equal to the amount loaned to subscribers. This anomaly often attracts unscrupulous individuals who get into the chit-fund business as subscribers.
- Chit-fund business profits have been found to be used in money-laundering activities.
In early 2014, when the Saradha scam affected hundreds of small investors, the government constituted an inter-ministerial group to strengthen the regulators. It introduced an ordinance to give more powers to market regulator SEBI to regulate illegal collective investment schemes. SEBI was given powers to regulate any pooling of funds under an investment contract having a corpus of Rs 100 crore or more, and attach assets in case of non-compliance. The SEBI chairman was also given powers to authorize search-and-seizure operations as part of efforts to crack down on ponzi schemes.
It has been suggested by a section of the industry that there should be provision for insurance coverage for the subscribers/members, the cost of which will be borne by the chit-fund company. Other suggestions include improving financial literacy to help consumers differentiate organized and unorganized players, and some sort of a rating mechanism.