Even as policymakers are supporting the concept of “a single law and a single regulator” to tackle the menace of chit funds and ponzi schemes, the Saradha fiasco has made one thing evident - most of these organisations know how to circumvent various norms under different departments. Chit funds operating in India show that businesses can thrive on a lethal combination of powerful politicians and toothless regulators.
Not to forget the gullible and greedy investors, who should also be blamed equally. According to financial experts, usually, chit funds promise to pay a higher than the prevalent market rate of returns to investors out of their capital or from the capital of subsequent investors but not from the operating profits of the enterprise. In most of these scams, it is seen, the perpetrators have bought time by stalling and abusing the lax legal process.
Unlike the well-developed economies, where the regulators are quick to get hold of the situation and shut shop for miscreants, India has a long list of fly by night operators. Basically, older and bigger the chit fund entity, more capital is at stake. However, there is no escape from the fact that chit funds more often than not, do collapse at some point.
There are two factors that work in pulling the curtains on the chit funds. Firstly, if the regulators prohibit collection of new deposits, then the chain of collection-refund-collection is ended. Secondly, if the chit fund shuts shop and becomes a fugitive. In India , there has been a spate of chit fund scams but the investors refuse to learn and the regulators remain overworked and understaffed.
Experts suggest a number of measures to prevent such white collar, economic crimes. First, Sebi should have more powers to close down dicey chit fund companies who defraud the poor masses. Second, there should be a banking system aided by microfinance companies that go from door-to-door in rural areas to fulfil banking needs. Third, post offices can double up as banking facilities and lastly, investor education is of utmost importance. In addition to the above, the punishment meted out to companies duping investors of their money should be punished in a way which sets forbidding example.
But, one thing that overrides all other issues in a chit fund disaster is that because the chit fund schemes are designed in such a way, the longer they exist, the more real cash loss is incurred and a larger quantum of capital is eroded. Just by freezing the assets of the promoter and bringing back the money siphoned off by a few office bearers of the company does not serve the purpose. The important point remains that merely giving powers to regulators will not solve multi-faceted problem which needs to be solved all at the same time. This includes more advanced technology, more staff and of course, more powers to the regulator to bring some respect to chit fund companies.