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Business News/ Industry / Tougher rules tackle only part of India’s ‘shadow bank’ troubles
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Tougher rules tackle only part of India’s ‘shadow bank’ troubles

Govt needs to do more to get to grips with the roughly 18,000 collective investment funds raising money from small investors, say analysts

Rules unveiled on Monday by the central bank, demanding more reserves and tougher rules on loans, cover the roughly 12,000 NBFCs that are registered with the RBI. Photo: BloombergPremium
Rules unveiled on Monday by the central bank, demanding more reserves and tougher rules on loans, cover the roughly 12,000 NBFCs that are registered with the RBI. Photo: Bloomberg

Mumbai: The Reserve Bank of India (RBI) may have tightened rules for the country’s “shadow banks" this week, but it has yet to tackle the complex problem of unregulated, “chit" or small investment funds that serve hundreds of millions of villagers and small businesses.

India, analysts say, needs to do more to get to grips with the roughly 18,000 collective investment funds raising money from small investors, often by promising exaggerated returns.

Although these funds are legally supervised by states, they attract little scrutiny from the country’s under-resourced regulators. Meanwhile, both the RBI and the government are grappling with the practicalities of the problem, and neither has indicated how they will tackle it.

Little data exists on how much money these funds have raised from investors, but it adds up. A fund run by media conglomerate Saradha Group in West Bengal state went bust last year, wiping out as much as $3.7 billion in deposits.

The problem is accentuated as large banks are reluctant to push into less profitable areas, leaving 41% of households in India without bank accounts and an easy target for chit funds.

“With newer scams coming up, it requires a combined regulator approach and ideas," said Mangesh Kulkarni, analyst at brokerage Almondz Global Securities. “The government needs to take more steps, to decide which entity needs to come under which regulator. I don’t think RBI can take a call on its own."

Rules unveiled on Monday by the central bank, demanding more reserves and tougher rules on loans, cover the roughly 12,000 non-banking finance companies (NBFCs) that are registered with the RBI.

These NBFCs play a key role in extending banking and credit to areas that traditional finance cannot reach. But operating alongside these are about 18,000 funds that are far less regulated.

State finance officials say they have limited resources or financial know-how to oversee these funds and say the country needs to accelerate the availability of banking resources.

“We need a special intelligence collection team consisting of bankers and skilled professionals who can gather information, identify problems in financial schemes," said Arvind Srivastava, secretary in the budget and resources division with Karnataka.

“Increased banking coverage where people do not have access to banks would help," he added.

Meanwhile, a policy maker with direct knowledge of the RBI’s policy making discussions said the central bank governor, Raghuram Rajan, was debating the role the central bank could take in regulating NBFCs not already registered with it.

“(Rajan) is apprehensive," he said. “We need more market intelligence and greater co-ordination with other regulators." Reuters

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Published: 13 Nov 2014, 01:12 PM IST
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