Tuesday, May 21, 2013

ONCE AGAIN A SCAM....!!!!


                                                   

By Sneha Baby, Intern at CPPR

Saradha scam in West Bengal which came out on April 23rd  lead to the loss of small savings of the poor people and a full stop to the life of many agents who worked for the company. Who is responsible and whom should be blamed for scams like this. India has seen many scams but still not learnt from the mistakes. Why always poor people are targeted or becomes the prey of such fraudulent companies. The article looks through the reasons and tries to find a solution to put an end to it.

Background

As per the Securities Exchange Board of India (SEBI) notice, Saradha group collected money from the public promising either land or flat or to refund the money with a return of around 12-24 % .The Saradha group was able to attract people to be the agents for collecting the money as they were promised  a commission of 15-20% of the fund mobilised by them. This never came under the purview of RBI or SEBI because the documents submitted to the  Registrar of Companies did not mention any thing about mobilising money from public. This clearly shows the failure of the state and central govt and its regulatory bodies.

Reasons

Lack of financial is one of the main reasons for the rapid growth of Ponzi schemes in areas of West Bengal, Bihar, Orissa. If we look the banks in India perhaps has the lowest penetration among all other large economies. The number of banks in rural areas are very less as they are not able to cover their profit targets in these areas. More than 40 %Indians don't even  have a bank account and till now there is only sixty four banks in India.
Lower interest rates for small savings: Saradha group collected the money from the public promising that they will a pay higher returns for their investments in Saradha group. But the interest rates prevailing in the market was 8 - 9% because of slow growth of India. The expansion and consolidation of groups like Saradha began with the fall in the small savings between 2006-09, which was due to the faulty policies of the central government in terms of reducing the attractiveness of small savings by reducing interest rates on them. So it was obvious that people will invest in savings which gives higher returns.

Lack of economic activity is another reason. In West Bengal the proportion of informal workers is higher compared to the rest of the country. The share of manufacturing in GSDP in West Bengal has been steadily declining. Therefore, with a fall in the share of manufacturing, income of the informal workers was adversely affected. The number of employees in informal sector is very high that is the reason why many people joined as the agents of the Saradha group.

Need for an Independent Regulatory body

The only solution to curb the coming up of fraudulent companies like Saradha is by bringing an  independent regulatory body. The consumers should be assured to keep the promises by the financial firms and be protected with minimum loss. The Financial Sector Legislative Reforms Commission (FSLRC) have given recommendations in these aspects. The FSLRC proposed a Unified Financial Authority (UFA) to regulate all areas of finance other than banking and payments. According to this the collective investment schemes, chit fund etc .come under the UFA. This is very important in the case of chit funds as it comes under the domain of the state governments.