With an aim to further fortify the deposits-taking activities, the President of India, on 21 February 2019, promulgated the Banning of Unregulated Deposit Scheme Ordinance, 2019 (BUDs Ordinance) which will prohibit the illicit schemes used to dupe the financially illiterate and poor people.
On the regulatory front, various steps have been taken by the Reserve Bank of India (RBI) in the past to protect the interests of depositors dealing with deposit-taking non-banking financial companies (NBFCs). Also, acceptance of deposits by unincorporated bodies is prohibited under the RBI Act, 1934. The move will not only prohibit ill-gotten deposit schemes but will also protect the interests of small businesses and individuals of both regulated and unregulated deposit schemes.
When it comes to borrowing money for meeting various financial commitments, small businesses like partnership firms or proprietorship concerns raise fund from different sources which are largely informal. Enforcement of BUDs Ordinance will disallow various unregulated and unorganised deposit-taking activities.
Deposits for Partnership Firms and Proprietorship Concerns
To avoid numerous compliance obligations under the formal credit sector, the firms and individuals generally approach money-lenders, relatives, friends, etc, for availing loans and credits which are not regulated by any regulatory body like the RBI. This unorganised credit sector lacks proper lending practices and administration, failing which leads to the debt-trap and fraudulent schemes. This concern has now been addressed with the enforcement of BUDs Ordinance.
Banning Bonafide Borrowers!!!
By and large, these entrepreneurs are dependent on such informal financial sector where it is easier to obtain loans with nil documentation and compliances. Given this, any amount in the course of, or for the purpose of, business can be raised irrespective of the fact that it is obtained under an unregulated scheme. However, when it comes to borrowing money to meet other financial obligations/personal commitments, no relaxation has been provided.
The question that arises is: What will be the appropriate source of finance for genuine borrowers who are in need of very small amounts of funds but will face huge troubles in raising such funds from unregulated sources? It is expected that such a dilemma will be addressed by the government in one way or the other soon. However, in accordance with the currently prescribed matter, a brief analysis has been discussed below.
Case Studies and Analysis
In all the aforementioned cases, any amount received for or in the course of business is allowed to be accepted as deposits.
Analysis and Conclusion
While the government’s attempt to restrain the unregulated financial sector to help in keeping track of every deposit-taking transaction, whether regulated or not, is commendable, the real test will be the successful execution of the above proposal.
Furthermore, a problem arises when the common man would have to depend upon only a selected sector for every minute financial requirement of his. While approaching such a selected sector for fulfilling fund requirements will make the financial sector more organised, traceable and transparent, the fact remains, however, that such a high level of supervision will increase the difficulty for the weaker sections of the society.
Certain exemptions can be provided by the government for such small businesses and individuals requiring funds for their day-to-day financial commitments and, simultaneously, relaxing the lending norms under the formal and organised financial sector can also be provided.
(Shaifali Sharma works as executive at Vinod Kothari & Co)