Chit cheats

As entrepreneurship sprouts up around India,some of what well see grow will be,frankly,weeds. Many of the small non-banking financial companies that serve those without access to Indias more formal financial sector are fly-by-night operators. And chit funds can often be extremely useful; in Kerala,for example,they have helped as means of micro-savings and insurance. But,given that there are more than enough horrific stories of extortion and swindling particularly directed towards the most vulnerable sections of society,those with the least recourse it is unsurprising that governments have felt the need to regulate their activity.

One such attempt was made by the Tamil Nadu government in 1997,called the Tamil Nadu Protection of Interests of Depositors in Finance Establishments Act. It allowed for,among other things,the recovery from the companies assets of the dues they owed their subscribers. Meanwhile,however,the Bombay high court was called upon to examine a similar law in Maharashtra,and declared it unconstitutional,saying that only Parliament could make such a law. As the Madras high court upheld the constitutionality of the TN version of the law,the matter landed eventually with the Supreme Court,which ruled on Tuesday in favour of the Madras high court. The SC was moved by both the numbers till July 2002,the judgment said,almost Rs 2,000 crore had been swindled from TNs poor and also the methods,in which these depositors were often given a small passbook as a token of acknowledgement of their deposit8230; which was an unsecured promise executed on a waste paper,and by the profile of those swindled,senior citizens above 80 years,senior citizens between 60 and 80 years,widows,handicapped,those driven out by wards,retired government servants and pensioners,and persons living below the poverty line.

While states can now regulate their NBFCs without fear of crossing constitutional boundaries,it remains the fact that this is a gaping hole in Indias regulatory structure. The SC pointed out that neither the RBI Act nor the Banking Regulation Act covers them. The Centre should move to fill this gap.