SOMETHING TO BANK ON
- The chit fund scandal shows that small savers have few options

Sunanda K. Datta-Ray

Ironically, the chit fund scam pays tribute to the thrift and industry of Bengali workers. It also indicts the negligence and greed of our rulers. It would never have mushroomed to these enormous proportions if small people throughout the countryside had the benefit of safe savings schemes. I think back to the gleaming efficiency of Singapore's POSBANK (now merged with DBS) and remember how difficult I found it to believe at first that the bright blue sign above beautifully designed air-conditioned interiors where the service was quick and courteous, stood for Post Office Savings Bank. POSBANK flourished on another planet, far removed from the dusty indifference, callous service, dog-eared passbooks and grasping commission agents of the Indian original.

Strictly speaking, the dozens of companies in the news are not chit funds at all. They must be registered and regulated by the state government and operate like kitty parties under the Chit Funds Act of 1982. By that definition, West Bengal has only one chit fund. The others are all money-collecting schemes. Honest wage-earners who cannot afford to put by more than a few rupees every day, week or month give the money in good faith. They make the sacrifice for a son's education, a daughter's marriage or old age medical treatment. It's their insurance for the proverbial rainy day. Then, one fine morning, they find their savings gone.

There is no consolation in the knowledge that greed and theft are neither modern nor exclusively Indian vices. The 'greater fool' theory of economics holds that money can be made by buying securities, whether overvalued or not, and selling later at a profit because an even greater fool will always pay more. The European marketing craze over tulips in the 1600s — one of the earliest recorded instances of exploited gullibility — became so notorious that the term "tulip mania" was used to denote large economic bubbles. That was before Britain was wracked by what history books call the South Sea Bubble. Tales of phenomenal trading profits sent the South Sea Company's shares rocketing sky-high until complex financial, legal, political, and cultural factors contributed to the collapse in 1720, and the ruin of thousands. Around the same time, a Scots-born adventurer set up a bank in France and gave rise to another epidemic in which some people made immense fortunes. But thousands of families were ruined and the French government almost driven to bankruptcy when the massive fabric of false credit fell to the ground. More recent scandals involve the "magnificent failure" of cultivating groundnuts in Tanganyika and the ostrich farm scam which attracted more than 2,800 customers and boasted a £21 million turnover until it emerged that instead of buying ostriches, the promoters were siphoning millions of pounds of investors' money into offshore accounts.

Gopala Rao, the former clerk in princely Mysore who duped people in the 1940s with attractive interest on deposits, Charles Ponzi who set up his finance company just before the American Securities Exchange Commission was established in 1934, and Bernie Madoff, a fraudulent American wealth manager, offer closer parallels to what is happening here. There are no prizes for guessing who West Bengal's Opposition leader, Surjya Kanta Mishra, had in mind when he said that some marketing companies mobilized between Rs 15,000 and Rs 16,000 crore in the past few years and invested the money in real estate and media organizations.

Such swindles flourish only if authority allows (or encourages) them to do so. It was rumoured that the Left Front government delayed cracking down on Sanchaita until an important minister's family had got back its deposits. Bengal's savers are not speculators. They are drawn by the promise of high returns. Nor are the real estate and media organizations Mishra mentioned central to the fraud. They might absorb surplus funds and yield additional revenue. No doubt they earn political gratitude. But the main business of mushroom schemes with fancy names is to rob Peter to pay Paul. Since there is little productive activity or income generation, one saver's capital is used to pay another saver's interest. Such manipulation is bound to be exposed sooner or later.

Leaving aside the accusations in Sudipta Sen's long and barely literate letter to the Central Bureau of Investigation, one needs fasten only on one incontrovertible fact reported in this newspaper. In 2011, the West Bengal chief minister inaugurated 10 mobile health units donated by Saradha for the people of Jungle Mahal. If Sen did not already bask in Trinamul Congress favour when Mamata Banerjee agreed to the inauguration, he must have done so as a result of his generous gift. No wonder no one thought of inquiring how "a strong follower of Maa Saradha (wife of Sri Sri Ram Krishna Paramhansha Deb)" who has always "fully dedicated" himself to her and believed himself "to be the only son of Maa Saradha" amassed enough riches to buy and give away 10 mobile health units. Even if she swallowed hook, line and sinker Sen's plea that he was in "business not for becoming a rich man but to establish the ideals and ideoiogies (sic) of Maa Saradha, to help poor and needy people, and to give better life to the people of rural and semi-urban area", Banerjee would have been singularly lacking in courtesy if she did not show some gratitude for his munificence.

It's a moot point whether the Central or state government is responsible for criminals who prey on the hopes and aspirations of the poor. Both, is the commonsense answer. New Delhi has been quick to point out it's the state government's job to appoint a regulator under Section 61 of the Chit Funds Act. But whatever the constitutional division of powers between state and Centre, the Reserve Bank of India cannot run away from its duty to save the country from the financial equivalent of the law of the jungle. Since the Securities and Exchange Board of India had earlier acted against some companies that run dubious deposit schemes, it can't shirk the responsibility either. But there are strong suggestions that West Bengal's political establishment, the police who are its handmaidens (as they are of any party in power) and even the law courts frustrate Sebi moves to protect ordinary citizens.

On December 23, 2009 West Bengal's state assembly unanimously passed the protection of interest of depositors in financial institutions bill, proposing life imprisonment for convicts. It has been awaiting presidential assent since January 2010. Arguing that the entire base of collecting and investing money has changed drastically since 2008 when the bill was drafted, the state government announced last month — before the storm broke — that it is trying to recast the measure. The new law promises to have more teeth, providing New Delhi doesn't again sit on it.

It remains to be seen if Mamata Banerjee's protective measures shore up confidence. Unlike earlier crises, this one affects voters in the mofussil. The unrest in Malda could be a pointer to a wider public reaction. The chief minister's verbal inanity ("Ja gechhe ta gechhe") recalling her earlier insensitive response to a student's death, doesn't inspire confidence in her caring, mature leadership. But more important than Trinamul's future is the public dilemma. Gautam Deb, the Marxist leader, laments that West Bengal's small savings and post office collections were only Rs 194 crore during the April-October period last year against the targeted Rs 8,370 crore. But the fall isn't only because of competition from high-yielding chit funds. Many workers queue at long-distance bus stands to send their savings home through a known villager. There are few banks in the interior. PAN card and KYC formalities baffle even townspeople. Worst of all, post offices and their staff are not reliable. Where does the ordinary man take his money?

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