Ordinance Bans Unregulated Deposit Schemes Offered by Builders, Jewellers
With an aim to further fortify the deposits-taking activities, the President, on 21 February 2019, promulgated the Banning of Unregulated Deposit Scheme Ordinance, 2019 (BUDs Ordinance), which will interdict the illicit schemes that are 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 offered by builders and jewellers 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 sources which are largely informal.
 
With the enforcement of the Ordinance, the question arises whether money can be borrowed from either of the regulated and unregulated means and, if yes, can the raised funds be used for business purpose or for other purposes as well? The answers to these questions and the applicability of proposed prohibition as stated under the Ordinance have been discussed in this article.
 
Deposits for Partnership Firms and Proprietorship Concerns 
To avoid 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 it leads the borrower into a debt-trap and fraudulent schemes. This concern has now been addressed with the enforcement of the BUDs Ordinance. 
 
Applicability of the BUDs Ordinance
Whether a transaction will be prohibited under BUDs Ordinance shall be ascertained by applying the following criteria:
 
1. Deposit 
a. The amount received shall be a ‘deposit’ in terms of Section 2(4) of the Ordinance, i.e., amount received is ‘by way of an advance or loan or in any other form’ and with a ‘promise of return’. Therefore, not every receipt of money is prohibited but one must apply these factors to check the applicability.  
 
b. Where the amount received is a deposit but falls under the exemption list, the BUDs Ordinance shall not apply. The said list also exempts the amount received for the purpose of 'business' and bearing a 'genuine connection to such business' implying that the scope of exemption shall be expanded by taking a liberal interpretation. Also, the onus to prove genuine connection to business shall be on the person requesting it. 
 
2. Unregulated Deposit Scheme 
To qualify the acceptance of a deposit by any deposit taker as an Unregulated Deposit Scheme:
a. Firstly, it should be in the form of 'scheme or arrangement', which is generally characterised by repetition or a pattern.
 
b. The deposits shall be taken 'by way of business' which indicates that the scheme/arrangement has the business of accepting such deposits. This requirement depicts the very intent of the Ordinance, so that the amount received in the normal course without any commercial intent is not unnecessary prohibited. 
 
c. The scheme is not a Regulated Deposit Scheme prescribed under column (3) of the first schedule of the Ordinance.
 
The ‘3-Yes-No Test’
 
For a better understanding, one may refer to the table below:
 
 
Banning Bonafide Borrowers!
By and large, these entrepreneurs are dependent on informal financial sectors 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 defined u/s 2(17). The term ‘scheme or arrangement’ and ‘by way of business’ clearly excludes the bonafide borrowers. Therefore, when it comes to borrowing money to meet other financial obligations, whether for business or personal commitments, no prohibition has been provided subject to the conditions discussed above. A similar approach is adopted under UK law wherein deposit-taking activities are prohibited only when it is carried on by way of business by an unregulated entity.
 
Case Studies and Analysis
 
 
In all the aforementioned prohibited cases, it is assumed that the amount is accepted under Unregulated Deposit Scheme; further, any amount received for, or in the course of business, is allowed to be accepted as deposits.
 
Analysis and Conclusion
While government’s attempt to prohibit the exploitation of unregulated financial sector is appreciable, the real test will be successful execution of the above proposal. Seemingly, the list of exemptions is narrow which is making the acceptance of deposit from the public more stringent. The government should come up with a clear set of exclusions to avoid the confusion of when a receipt of money is prohibited.
 
Furthermore, it can be concluded that the 'Aam Admi' including small businessmen are not prohibited from approaching either the regulated or unregulated sector to meet their financial requirements; however, the prohibition is only on the exploitation of unregulated deposit schemes whereby the deposits are accepted by way of business and the said funds are rotated in the market to gain undue financial benefits out of it. The intention of the government seems only to prohibit those transactions that lure the public into illicit schemes and transactions which lead to drowning of investments in most of the cases. 
 
(Shaifali Sharma is an executive at Vinod Kothari & Co
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COMMENTS

R shah

4 days ago

From point 4 is inter corporate deposits banned?
and does this mean all illegal laundering stops X lends to Y - Same money goes to Z - Z transferred to A?

Prakash K Pandya

7 days ago

The analysis in the table as to from whom it can be accepted in not correct interpretation of law. The definition of 'deposit' under the BUDs Ordinance u/s.2(4) excludes may things. One important exemption is under clause (l) which says 'an amount reeived in the course of or for the purpose of business and bearing a genuine connection to such business' is permitted. Then it gives a list of items which are only illustrations and such illustrated items are permitted category of receipt of money.

AAR

1 week ago

Will this be applicable for already in progress deposit schemes?

Banks in No Hurry To Link Repo with Interest Rates
Public sector banks (PSBs) are in no hurry to follow big brother State Bank of India (SBI) in linking their deposit and lending rates to the repo rate of the Reserve Bank of India (RBI) , which may further irk RBI for not transmitting the lower interest rates to the customers.
 
While some of them do admit that, ultimately, linking to repo rate might happen but they are not firm on the time of such commitment. 
 
Also, several PSBs have not responded when asked if they planned to go for the external benchmark linking with repo rate.
 
A Punjab National Bank source told IANS: "No decision has been taken, but bank will take a call soon. Other banks have to follow suit sooner or later."
 
A Bank of India source said no such decision has been taken.
 
Bank of Baroda did not respond to the queries sent on the same.
 
These banks, along with SBI, corner majority of the lendings and deposits. The IDBI Bank which has LIC (Life Insurance Corporation of India) as promoter, too, did not respond to queries.
 
The SBI had caused a raised eyebrow when it linked deposit, loan interest to RBI's repo rates voluntarily.
 
While the RBI guidance was to pass on the benefit of falling interest rates to borrowers by linking lending rate to an external benchmark, SBI also linked its savings bank rates (over a limit of Rs1 lakh) to the external benchmark.
 
By doing this SBI became the first bank to announce linking its interest rates on deposits and loans to an external benchmark from 1 May, 2019. This was expected to be followed by peers.
 
RBI governor, Shaktikanta Das, in February, met the top lenders asking them to pass on the benefit of repo rate cut to the customers after it had reduced its repo rate by 25 basis points to 6.25%. 
 
Many bankers said the mismatch between deposits and credit growth, and competition from the government for small-savings offering over 8% returns in many schemes, raise their cost of capital, restraining them to transmit monetary policy easing. 
 
The 25 basis-point cut in repo rate is too small to have any impact on lending rates just yet, they had said. The lending rate offered by commercial banks is in the range of 8.15% to 8.55%. 
 
Anil Gupta, vice-president and sector head of financial sector ratings ICRA, said: "All PSU banks will follow it. There was a diktat from the RBI to banks to link lending rates from April 1 onwards. 
 
"For them earning a stable spread is more important. For them it is important if their lending rates are going down, then their liabilities (deposit rates) should also go down and vice versa to maintain the stable margin to cover operating costs and earn profits."
 
"There was need for regulatory requirement here to transmit the lower rates to the small borrowers. 
 
"Linking the savings deposit rate with policy rate will help faster re-pricing of liabilities for banks and help in protecting their profit margins", Mr Gupta said.
 
PSBs are cautious and "are not in favour of cutting rates as deposits and household financial savings are at low-level even while policy rates are down; the rates paid by the government on small savings are significantly higher than bank deposit rates. 
 
"Savings schemes of the government through post offices return between 7% and 9% annually along with tax benefits, while over a two year term deposit with banks, give them a return of 6.8%.
 
"Bank deposits are also growing at a much slower pace than credit forcing lenders to offer higher rates to get depositors. While bank lending has been growing at more than 14% year-on-year as of February, deposit growth has been at 9%," as per RBI data.
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
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Aadhaar BHIM Transactions Fall 30% in Past 5 Months
There has been a steady decline in the number of transactions on the government-owned Aadhaar Bharat Interface for Money (BHIM) app that is based on the unified payments interface (UPI). During the past five months, retail payments of BHIM fell almost 30% to 12.83 million transactions, shows the latest data from National Payments Corporation of India (NPCI).
 
As per NPCI data, from October 2018 to February 2019, retail payments on the NPCI platform using BHIM fell 30% to 12.83 million transactions while the value, in rupee terms, also witnessed a steep fall of 31% to Rs56.24 billion.
 
Source: NPCI
 
During October 2018, the total number of retail payment transactions on the Aadhaar-BHIM were recorded at 18.27 million with a value of Rs82.06 billion, the data shows. This was the highest in both volume and value terms recorded during the first 11 months of FY18-19.
 
As per reports, the deceleration is a result of the delay in BHIM Aadhaar PoS (point of sale) deployment and the fact that many users do not have  smartphones which are essential for executing the transactions.
 
According to a Business Standard report quoting a banker, increased transaction time and the fact that customers also were not comfortable in sharing their biometrics details, were also factors that led to the decline. 
 
Last September, the Supreme Court declared Section 57 of the Aadhaar Act as unconstitutional and prohibited use of Aadhaar by bank account-holders, e-wallet or mobile wallet users and mobile subscribers, among others.
 
Even before the apex court decision, State Bank of India (SBI), the country's largest lender, had disabled pay to Aadhaar functionality from its BHIM SBI Pay app citing regulatory guidelines. 
 
In fact, NPCI, which developed and promotes UPI and BHIM, itself had asked banks to discontinue Aadhaar-based payments through the UPI and immediate payment system (IMPS) channels. Pay to Aadhaar is an additional functionality in UPI and IMPS where the payer can transfer funds to the beneficiary using an Aadhaar number.
 
"Aadhaar number is a sensitive information and the revised framework about its usage in the payment landscape is still evolving. With this background, we proposed removal of ‘Pay to Aadhaar’ functionality in both UPI and IMPS before the steering committee (meeting held on 5 July 2018). The proposal of removing the Aadhaar number functionality was approved by the steering committee,” NPCI had said in a circular issued on 17 July 2018.
 
Following the apex court judgement, in December 2018, SBI decided to discontinue Aadhaar-based payment system (AEPS). 
 
However, Unique Identification Authority of India (UIDAI), the Authority that provides Aadhaar number, asked banks not to discontinue the AEPS. In a circular sent to banks, NPCI and Reserve Bank of India (RBI), UIDAI said, "...any action to discontinue such payment/ receipt mechanism (AEPS, BHIM, Aadhaar Pay) or bank accounts by banks, on the ground that it is not possible to distinguish their use for delivery of welfare benefits or other purposes may be held contrary to Section 7 of Aadhaar Act and Puttaswamy-II judgment as it will result in creating obstruction in delivery of benefits and may cause denial in deserving cases."
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COMMENTS

tanay

6 days ago

Are transactions done via Google Pay or payzapp, Paytm-UPI and phonePe included in this 12 million transaction data??

Umadevi

1 week ago

Many including Moneylife opposed Aadhaar on the petty excuse of privacy invasion.Linking of Aadhaar & PAN was also questioned. Now why moneylife is coming out with this statistics?...

REPLY

venkat

In Reply to Umadevi 7 days ago

valid points ms uma devi, i also feel the same, given the fact that already RBI has informed to stop aadhar based transactions...

Meenal Mamdani

1 week ago

Again, confusion because the govt has not thought through the scheme, not talked to the interested parties, just rolled out the scheme with a catchy title, BHIM, to attract those who venerate Dr. Ambedkar. So typical of this Modi govt.
They are more interested in the buzz that accompanies the initial roll out than in making sure that the scheme is really workable.

Same with demonetization, GST roll out, Swacch Bharat Abhiyan, etc etc etc.

The gossip is that the Rafale deal that has become an albatross round the govt's neck is also part of the same hunger for buzz/recognition of the Chief. Apparently the Chief was so keen to show that He alone can do it, that he overrode his own officials and announced it as his own ability to make quick decisions, even though the officials wanted to iron out a few things and announce it later. So apparently the Rafale deal has more hubris than corruption in it.

REPLY

Umadevi

In Reply to Meenal Mamdani 1 week ago

You cannot wait for perfection for changes to roll out. Things will get perfect in due course only...Otherwise nothing will see light....Also officials do not want any reforms....

Pankaj

In Reply to Umadevi 6 days ago

When you (the government) are launching a scheme at national level, it has to be near perfect as it touches lives of over hundred crore citizens in various ways. Imperfection can even result into fatal losses to many citizens. Secondly, being an "experienced" Indian citizens, I know government schemes rarely become perfect in due course of time. So I will not buy your argument that things get perfect in due course of time. If your argument was true, we had better air quality today compared to 5 years ago. We had better roads and ease of commuting today than it was 5 years age. But even such basic stuff is only getting worse over time. Peace.

venkat

In Reply to Umadevi 7 days ago

the above are valid points...

Logical Indian

In Reply to Meenal Mamdani 1 week ago

Clearly a khangress supporter will blame anything going wrong on modi.

Pankaj

In Reply to Logical Indian 6 days ago

Most lame statement ever. The trend in India is "If you do not understand the problem and the way it can be solved, just give it political colors".

Chetan Kadam

In Reply to Meenal Mamdani 1 week ago

What was wrong in BHIM? as per your opinion

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