Chit fund scams continue to be a problem for regulatory authorities. We have come across cases such as the Saradha Chit Fund, Sahara Financial, Rose Valley, PACL, fake cops, unauthorised colleges and courses. High-profile illegal schemes have mopped up more than Rs1 lakh crore.
Chit funds scams are an efficient evil. They lure unsuspecting people who are the most vulnerable economic class. The abilities of such people to pursue legal remedies to recover their investments are restricted by (a) cost in terms of time and expenses (b) stronger bargaining power of chit fund organisers v/s individual claimants (c) the size of the recovery amount itself (d) lack of collective mass action legal remedies.
While this is a laudable step, we would suggest a better framework as follows.
For any financial scam, a solution can be constructed using the Inform-Verify-Regulate-Remedy (IVRR) principle. First, ensure that people are adequately informed of what schemes are approved, what are their rights, and what are their responsibilities. Second, provide a mechanism for people to verify that they have indeed subscribed to the correct scheme.
Third, the government must provide such a regulatory framework that lawful schemes have ease of compliance while illegal operators find it difficult to comply.
Finally, those found guilty need to be punished with jail and punitive damages. The Indian legal system tends to provide for inadequate compensatory damages which dissuade wronged persons from filing legal action.
The solution proposed by the Indian government addresses the last two Rs of the solution – first, they provide for regulations so as to define which schemes are approved and second, they provide the remedy.
Previously the remedy would be penal – fines and jail for the perpetrators of the scams. But these remedies are incomplete as they do not help recover the money from the perpetrators. This government is trying to improve upon this part of the problem.
However, we need to resolve the first two parts of the framework as well.
Improving the Inform-Verify Part of the Framework
Rajeev Singhal, ex-CQO at CRISIL (@rajeevsinghal) had proposed a solution for this. To inform the interested subscribers of a scheme, we should have a toll-free number. And each approved scheme should have a unique identification (ID) number. The caller will call the toll-free number and enter the scheme number. The system can then provide information on automated voice, short SMS stream or WhatsApp or any such medium as the caller chooses, based on his phone number.
It will tell you the status of the scheme, whether it is approved or not, latest update, important terms of contract. It will then provide a unique number. The caller can enter into the contract with that specific number. A copy of the verified contract can be uploaded to caller’s digital locker. The caller will be signed up for alert service - where she will receive all alerts about the scheme organisers’, government’s alerts on the scheme, and government’s alerts on the organiser.
In a future version, we may have a chit fund clearing house system which verifies the contract and scheme subscriber chooses, subscriber’s payments etc. and organisers details.
Financial scams need to be addressed comprehensively. The solution cannot be restricted to regulation and remedy. Over-regulation simply increases costs for genuine firms while offering no protection against the unscrupulous operators.
I have no doubt the specific parts of the solution proposed above can be improved. However, the Inform-Verify-Regulate-Remedy framework provides preventive and remedial system and, thus, a comprehensive protection for customers.
The idea of this solution comes from Rajeev Singhal, former CQO, CRISIL, he can be reached at @rajeevsinghal on twitter.