Checking unregulated deposit schemes can help the poor

The Union Cabinet has approved a bill for amendments to the Banning of Unregulated Deposit Schemes Bill, 2018 with the objective of effectively tackling the menace of illicit deposit-taking activities, and prevents such schemes from duping poor and gullible people of their hard-earned savings.

Among the provisions is a ban on deposit takers from promoting, operating, issuing advertisements or accepting deposits in any unregulated scheme. “Deposit takers” include all possible entities (including individuals) receiving or soliciting deposits, except specific entities such as those incorporated by legislation. The Bill bans unregulated deposit-taking activities altogether, by making them an offence ex-ante rather than the existing legislative-cum-regulatory framework which only comes into effect ex-post with considerable time lags.

The bill stipulates “severe punishment and heavy pecuniary fines” to act as deterrent penalties .It has adequate provisions for disgorgement or repayment of deposits in cases where such schemes nonetheless manage to raise deposits illegally. It also provides for attachment of properties or assets and subsequent realisation of assets for repayment to depositors. Clear-cut timelines have been provided for attachment of property and restitution to depositors. The bill also enables creation of an online central database for collection and sharing of information on deposit-taking activities in the country. The bill creates three different types of offences: (i) running of unregulated deposit schemes, (ii) fraudulent default in regulated deposit schemes, and (iii) wrongful inducement in relation to unregulated deposit schemes.

India has always been a fertile ground for swindles that have bilked mostly low-income households of millions of rupees. The financially illiterate are usually easy pickings. Investors have been periodically gulled by nefarious characters into dubious schemes. The poor have now become wary of investing money even in credible organisations. These mercenary agents use enticing traps to net gullible investors like sharks preying on small gold fishes in the big bad financial ocean.

Financial ignorance carries significant costs and results in people spending more on transaction fees, getting overextended with debts on account of them being ripe prospects for predatory practices. They usually fall prey to aggressive marketing and end up with troublesome financial products. As per RBI data, between July 2014 and May 2018, 978 cases of unauthorised schemes were given to the respective law enforcement agencies in the states. The CBI has lodged about 166 cases in the last four years related to chit funds and multi-crore scams, with the maximum in West Bengal and Odisha.

People with robust financial skills and a strong grasp of financial principles are able to better understand and negotiate the financial landscape and avoid financial pitfalls. Conversely, people with a lower degree of financial literacy struggle to understand money matters and the potential impact on their financial well-being. Financial ignorance carries significant costs and results in people spending more on transaction fees, getting overextended with debts on account of them being ripe prospects for predatory practices.

On account of lack of proper awareness and failure of institutions to properly guide them, people buy insurance policies without planning and give up midway because they do not have money to pay the premiums. Aggressive selling prevents the agents from properly assessing the consistency in income streams of the buyers for servicing their policies. The customers end up losing heavily due to harsh penalties. There’s a popular term to describe this, called mis-selling.

Aggressive pushing of products by insurance providers without adequately assessing the consistency in income streams of the buyers for servicing their policies can mean more harm to the poor. Instances of mis-selling of financial products to households need to be tackled by overhauling the regulatory framework. Disclosure requirements for insurance and pension products need to be strengthened to make it easier for consumers to understand them.

To blunt the potential for risk, it is now more important than ever to arm customers, especially the newly banked, with skills they need to borrow, save and move money prudently and to keep a distance from unscrupulous and dubious investment schemes that are likely get them into serious trouble.

Whilst financial products can be hard to understand for even highly literate consumers, the lack of this basic understanding leads to extended levels of debt for illiterate, vulnerable customers, pushing them deeper into indebtedness and poverty.

It is almost impossible to salvage failed insurance policies. Several banked customers can’t manage even modest sums of money. Financial inclusion and financial literacy or financial capabilities are two sides of the equation. Financial inclusion works on the supply side by providing financial markets/services that people demand whereas financial literacy stimulates the demand side by making people aware of what they need. Therefore, financial inclusion and financial education must move in concert; each triggers a supportive reaction in the other.

There are now several channels of information and resources to help the public build their financial stability. To safeguard the hard-earned money of investors and curb the pervasive menace of illegal money pooling by companies, the Reserve Bank of India (RBI) has set up a portal — sachet.rbi.org.in — to enable the public to obtain information about registered entities who accept deposits, get information regarding illegal acceptance of deposits, and lodge complaints. The portal also facilitates filing and tracking of complaints.

Financial education programmes focused on just imparting knowledge will not yield optimal results unless backed by a suitable product that demonstrates its proper use. Cognitive constraints rather than lack of attention are a key barrier to improving financial knowledge. Those aspects in which a service provider was involved in the programmes saw better understanding and product usage, according to the United Nations Development Program’s (UNDP’s) report on financial literacy programmes in India. It gave consumers a better handle on some of the financial nuances and enhanced their prospects for a stronger financial foundation. These hands-on and minds-on interventions improve basic awareness of financial choices and attitudes and lead to sound financial decisions.

While we should continue to make a case for strong regulations to protect consumers against unscrupulous firms, we must remember that good financial literacy among citizens is the most effective antidote against these moral abuses. To blunt the potential for risk, it’s more important than ever to arm customers with skills they need to responsibly borrow to get a business idea off the ground or to acquire an asset like a house, save to build their assets, insure to stay resilient through life’s worst moments without being pushed deeper into debt and to keep a distance from unscrupulous and dubious investment schemes that have lacerated the financial lives of multitudes after they got into a serious mess with them.

Stories commonly abound of people having been stripped of every cent they earned by the time they realised they’d been conned. Financial advisors and counsellors should be able to spot early and sometimes subtle signals.

The good news is that there are now several channels of information and resources to help the public build their financial stability.

We need to practice what is now being emphasised as responsible finance which has transparency and accountability and empathy as its foundational triad. Transparency implies objective communication about the products procedures, documentation and other necessary formalities required for making a financial transaction. Transparent processes result in greater trust and confidence in the financial system. It is important to ensure that overzealousness does not result in over-indebtedness.

We must be mindful of the fact that these individuals have entered the formal financial system after a lot of pushing and prodding and it would be difficult to bring them back into the formal financial sector, if they leave feeling cheated/dejected.

The writer is a member of the Niti Aayog’s National Committee on Financial Literacy and Inclusion for Women