A Key Advisory Group on Chit Fund and Nidhi companies, set up by the Union government in September 2011 to review the regulatory framework for them, has recommended amendment of Chit Fund Act, 1982.
The Group had representatives from Reserve Bank of India, Indian Banks’ Association, AIACF, a representative body of chit fund companies, PHDCCI and a few other prominent commerce bodies. “The Act is a modified version of the Cochin Kuries Act, 1932 and naturally not in tune with the liberalization policies and the financial sector reforms, and thus has to be modernised”.
Amendment of Chit Fund Act, 1982, is the first requirement if chit funds have to be encouraged to play a more effective role in the financial inclusion programme, the report said. The committee pointed out that punitive action for defaults on the part of foreman would not be a solace to the subscribers. Extending insurance coverage to secure the investment would be a prudent initiative, according to the panel.
The committee observed that the chit foreman finds it difficult to raise money to honour his commitment to subscribers as RBI has prohibited chit companies from accepting any deposit from the public. Securitization could be a right step to enable the foreman to arrange liquidity, the panel said in its recommendations. “The chit fund association’s request to allow undertaking fee-based activity like selling insurance policies and other financial products seemed fair,” the committee said. The availability of credit history is essential for it. Setting up a grievance redressal cell is another suggestion made by the panel. The cell should have representatives of the Registrar of Chit Funds, chit associations and the subscribing public.
The committee has mooted the introduction of ratings for chit companies. “To be successful and acceptable at an increased size and scale, chit funds need transparent processes, risk identification and management strategies, increased use of technology and financial strength to bear the risks.” Performance rating could be done by agencies such as MCRIL and CRISIL, the panel said.
Another important recommendation is the constitution of an internal monitoring body akin to Bar Association of India, Institute of Chartered Accountants of India and Medical Council of India. Formation of an independent advisory committee would be a simple solution in sorting out complaints in the sector. The committee has stressed the need for sharing information among the registrars of chit funds.