Demonetisation: Why govt should relax norms for the persecuted chit fund industry
Though the chit fund industry is large, growing and provides useful financial services to those who are otherwise excluded from formal institutions like commercial banks, the government, even otherwise, has imposed stringent rules that has stymied its progress
The move by the government to demonetise Rs 500 and Rs 1,000 notes by replacing them with new Rs 500 and Rs 2000 notes has taken the country with surprise. The move by the government is to tackle the menace of black money, corruption, terror funding and fake currency.
From an industry perspective, we think that this is a very welcome move by the government and which has taken the black money hoarders with surprise.
It is arguably the boldest decision ever taken by the Government of India to curb the black money and reboot the entire financial system. It is very powerful in the sense that it will completely transform the way people of India deal with cash, accounting and paying taxes while using their money.
However, opinion on this decision is very far from a consensus in both the expert and the non-expert realm. The first question raised against this move is the significance of cash as a component of the money laundering networks in India. Economists have argued that this move has left the biggest chunk of black money untouched – the stacks that lie in undisclosed accounts in Swiss Banks.
The next question that may be raised is the preparedness of the government and the banks regarding implementation of a move of this scale. The argument provided for why this move was announced and administered overnight is that it denies hoarders
of black money the chance to dispose of it. While that may appear to be sound logic, it has also apparently impacted the banking system’s ability to ensure a smooth transition. Several ATMs across the nation continue to be useless by virtue of not
having enough fresh notes, while the ones that are refilled are attacked by painfully long lines and eventually emptied at once.
This in turn is the third major question raised against this policy – who is affected the most? The removal of large sums of legal tender unquestionably affects all individuals who need to engage in cash transactions in some form. Those with access
to plastic money are less directly impacted even in the short term, but in both the long and short term, specific sections have been disproportionately hit. Disenfranchised groups who lack the access to ID documents are chief among these.
The rural poor who lack the infrastructure to set up deposit accounts and who currently hold all their money in cash form have been directly hit. Even those who do have access to accounts among them struggle with ill prepared banks and post offices, small and dispersed in number, and the need to take off several crucial hours from work – sometimes in vain. It is also difficult to estimate the numbers of women across the board that will be potentially irrecoverably impacted by this policy – women who do not inform their families of hidden stashes of cash, who are otherwise fully dependent on male members of the family and who stand to lose years of savings because they cannot confess to their presence.
Chit fund, the industry I represent, is an indigenous financial institution serving as an instrument to save and borrow at the same time. It is considered to be one of the efficient financial instruments that cater to the needs of the poor.
Primary users of chit funds are daily wage earners, salaried individuals, housewives and micro, small and medium enterprises (MSME). It is used by households for consumption purposes like marriage, buying property, education and also as a way to
save free cash to provide for unforeseen emergencies and to help MSME to accumulate capital.
Though the chit fund industry is large, growing and provides useful financial services to those who are otherwise excluded from formal institutions like commercial banks, the government, even otherwise, has imposed stringent rules that has stymied its progress. For example, the government has fixed the commission at 5 percent of chit value for the chit fund operators for the last fifty years. However, the costs of running a chit have increased manifold during the same time. This has resulted in exodus of many smaller value schemes from registered space to the unregistered space, thus increasing the risk for members. In light of the heightened importance of financial inclusion in the country, it is very ironic that the government has persecuted a sector which efficiently caters to the financial needs of those who are otherwise excluded from the formal banking sector.
While demonetisation is a big boost to the Registered Chit Fund industry, as it would weed out the unregistered operators, it has also, simultaneously, indirectly hit the working of the registered industry. The above referred users of chit fund are used to
making cash payments for their monthly installments and even in case of cheque payments, they first deposit cash in their banks accounts. This cash payment, out of their daily income, is definitely not ‘Black Money’ and still they are being
inconvenienced due to demonetisation. In the absence/delay of this substantial collection, the legitimate chit operators will find it difficult to honor their payout commitments to the subscribers.
In the above scenario, few suggestions for relaxation of norms that could be given are listed below.
a. Allow chit fund companies to accept old high denomination (OHD) currency, till 30 December 2016, only in respect of those transactions wherein the chit subscriber gives a undertaking of it not being unaccounted money. This would help those who are willing to deposit OHD in their account but are unable due to the prevailing chaos at banks.
b. Other financial intermediaries can also be roped in, according to their specific needs, on similar lines.
c. The OHD accepting companies can be directed to file a declaration along with necessary supporting documents at the end of the stipulated period which would act as a deterrent to any misuse of the relaxation.
It would seem that my wish list is quite long, but the above-listed financial intermediaries, can also help in OHD exchange process if due precautions are put in place. This will also, to some extent, help control the chaos at banks.
While it is too soon to declare whether the long-term gains are indeed forthcoming, the “short term” sacrifices have been more than just significant. They have been immensely painful.
As we all know, nations were never built in a day and stepping stones like these may not be easy to traverse but are essential to reach the final destination. While the masses are ready for these adjustments and sacrifices, the Government should also
fine tune the existing legislations and facilitate smoother transition and take necessary steps in this regard.
To conclude, demonetisation comes with immense benefit but the government of India should also consider about informal sector where most of the payment is in cash only. Hence we can say the move is good but Utilitarian Principle would make it further better.
The writer is general secretary of All India Association of Chit Funds (AIACF).
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