Some chit chat

To protect investors, make the formal financial system more accessible and attractive

News of investors losing their life savings in Ponzi schemes like Saradha has become recurrent in recent times. It seems that as long as the real estate sector was booming, these schemes were able to survive as new money kept coming in. But with employment and incomes growing slowly, finding new investors to pay off old ones might have become more difficult. It should not be surprising if many more such schemes collapse in coming days.

Chit funds alone attract millions of investors. It is estimated that registered chit funds have collected Rs 300 billion worth of deposits. The real story apparently lies in unregistered funds, who, it is estimated, have collected Rs 30 trillion. This is nearly half of the Rs 64.8 trillion held in commercial banks (in February 2013). But while all chit funds may not be fraudulent, the danger of some being so, given the weaknesses in regulation, is very high.

The origins of India's unregulated financial system lie in the poor and outdated financial regulatory system that India has clung on to. The banking regulator is proud of the fact that there have been no bank failures, no complex derivatives and the banking system survived the global crisis — a system, it claims, that offers an example for the world to learn from. The sad reality is, however, that as much as half the Indian population does not have access to this banking system. Even those who have access often find it unattractive. Interest rates paid to depositors have been pushed down through years of policies of administered interest rates and lack of competition in banking. Regulatory requirements for priority sector lending and holding of government bonds have further resulted in lower returns. The result is low or negative real interest rates for depositors.

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