Indian Economy, 5th edition (64 page)
Read Indian Economy, 5th edition Online
Authors: Ramesh Singh
iv.
Miscellaneous non-banking company (MNBC), i.e.
chit fund company
.
Since Nidhis come under one class of NBFCs, RBI is empowered to issue directions to them in matters relating to their deposit acceptance activities. However, in recognition of the fact that these Nidhis deal with their shareholder-members only, RBI has exempted the notified Nidhis from the core provisions of the RBI Act and other directions applicable to NBFCs. As on date
(February 2013)
RBI does not have any specified regulatory framework for Nidhis.
The Central Government in March 2000 constituted a Committee to examine the various aspects of the functioning of Nidhi Companies. There was no Government Notification defining the word ‘Nidhi’. Taking into consideration the manner of functioning of Nidhis and the recommendations of the
P. Sabanayagam Committee
in its report and also to prevent unscrupulous persons using the word ‘Nidhi’ in their name without being incorporated by Department of Company Affairs (DCA) and yet doing Nidhi business, the Committee suggested the following
definition
for Nidhis (a part of this definition is appearing in the new
Companies Bill 2012 (Section 406):
“Nidhi is a company formed with the exclusive object of cultivating the habit of thrift, savings and functioning for the mutual benefit of members by receiving deposits only from individuals enrolled as members and by lending only to individuals, also enrolled as members, and which functions as per Notification and Guidelines prescribed by the DCA. The word Nidhi shall not form part of the name of any company, firm or individual engaged in borrowing and lending money without incorporation by DCA and such contravention will attract penal action.”
Chit Fund
Recently, Chit Fund was in centre of news after the Kolkata-based
Saradha Chit Fund
scam came to light. Most of the media people were themselves not very clear about the ‘finer’ points related to the idea of ‘chits’ in India – but they kept on highlighting chits as they needed to report on the scam! Let us try understanding the Chits and some other similar concepts in India:
Chit funds (also known by their other names such as –
Chitty, Kuri, Miscellaneous Non-Banking Company
) are essentially saving institutions. They are of various forms and lack any standardised form. Chit funds have regular members who make periodical subscriptions to the fund. The periodic collection is given to some member of the chit funds selected on the basis of previously agreed criterion. The beneficiary is selected usually on the basis of bids or by draw of lots or in some cases by auction or by tender. In any case, each member of the chit fund is assured of his turn before the second round starts and any member becomes entitled to get periodic collection again. Chit funds are the Indian versions of ‘Rotating Savings and Credit Associations’ found across the globe.
Chit fund business is regulated under the Central Act of
Chit Funds Act, 1982
and the Rules framed under this Act by the various State Governments for this purpose. Central Government has not framed any Rules of operation for them. Thus, Registration and Regulation of Chit funds are carried out by
State Governments
under the Rules framed by them. Functionally, Chit funds are included in the definition of Non- Banking Financial Companies by RBI under the sub-head
miscellaneous non-banking company
(MNBC). But RBI has not laid out any separate regulatory framework for them.
Official Definition:
As per the Chit Funds Act 1982, chit means “a transaction whether called
chit, chit fund, chitty, kuri
or by
any other name
by or under which a person enters into an agreement with a specified number of persons that every one of them shall subscribe a certain sum of money (or a certain quantity of
grain
instead) by way of periodical installments over a definite period and that each such subscriber shall, in his turn, as determined by lot or by auction or by tender or in such other manner as may be specified in the chit agreement, be entitled to the prize amount”. A transaction is not a chit, if in such transaction –
i.
Some alone, but not all, of the subscribers get the prize amount without any liability to pay future subscriptions; or
ii.
All the subscribers get the chit amount by turns with a liability to pay future subscriptions.
1.
The discussion here is based on the updated informations released by the
RBI,
May 11, 2012.
2.
Based on the
RBI Nationalisation Act, 1949
and further announcements of the Government of India (MoF).
3.
RBI Act, 1934,
sub-section (1) of Section 42.
4.
Annual Policy Statement 2010–11,
RBI
,
April 20, 2010, N. Delhi &
RBI
dated 17th March 2011.
5.
Economic Survey, 2006–07,
MoF, GoI, N. Delhi.
6.
RBI (Amendment) Act,
2006, GoI, N. Delhi.
7.
Credit and Monetary Policy,
April 1, 2007, op. cit.
8.
RBI Act, 1934
and
Banking Regulation Act, 1949
Section 24.
9.
Committee on Financial System
(CFS) headed by the then RBI Deputy Governor M. Narasimhan, 1991.
10.
Through an RBI announcement on 15th Feb. 2012.
11.
Ibid
12.
Stiglitz and Walsh,
Economics
,
op. cit., p. 629
–
630.
13.
Economic Survey 2001–02,
MoF, GoI, N. Delhi.
14.
The write-up is based on – the
RBI’s Credit & Monetary Policy, 2011-12
(in which the Scheme was introduced); and the
European Central Bank
, Frankfurt, Germany and
Federal Reserve System
(also known as the
Federal Reserve
, and informally as the
Fed
) Washington, DC, USA
15.
RBI Announcement,
RBI, MoF, GoI, New Delhi, Feb. 15, 2012.
16.
RBI Announcement,
RBI, MoF, GoI, New Delhi, Apr.5, 2010.
17.
As per the
Strategic Disinvestment Statement of 1999,
the Government had decided to cut its holding in them to 26 percent. The policy was put on hold once the UPA Government came to power.
18.
Y.V. Reddy,
Lectures on Economic and Financial Sector Reforms in India,
Oxford U. Press, N. Delhi, 2002, pp. 137–57.
19.
Repeated by the GoI many times i.e. the
New Industrial Policy 1991;
the Union Budget 1992–93; Eighth Five Year Plan (1992–97) Draft Approach;
etc.
20.
Announced by the Government while setting up the M. Narasimham
Committee on Finacial System
on August 14, 1991. See also
India 2001,
Pub. Div., GoI, N. Delhi.
21.
The Narasimham Committee handed over its report in record time within 3 months after it was set up.
22.
CFS,
op. cit.
23.
Ibid.
24.
Based on Y.V. Reddy, 2002, op. cit.
25.
Economic Survey 1998–99,
MoF, GoI, N. Delhi.
26.
Based on the Report of the
Committee on Banking Sector Reforms,
April, 1998 (Chairman: M. Narasimham).
27.
An integrated system of regulation and supervision was suggested by the Committee so that soundness of the financial system could be ensured—the concept of a financial
super-regulator
gets vindicated, as opines Y. V. Reddy, 2002, op. cited, p. 38.
28.
India 2007,
Pub. Div., GoI, N. Delhi and the further announcements by the RBI.
29.
The change was effected from May 20, 2007 as per the RBI announcement.
30.
Economic Survey 2001–02.
MoF, GoI, N. Delhi.
31.
Ibid.
32.
Economic Survey 2001-02
&
India 2002,
Pub. Div., GoI, N. Delhi.
33.
Economic Survey 2011–12,
MoF, GoI, N. Delhi.
34.
Through various legislations since the
RBI Nationalisation Act, 1949
and the
Banking Regulation Act, 1949
were enacted – and further
Amendments
to the Acts, MoF, GoI, New Delhi.
35.
Simon Cox (ed.),
Economics,
The Economist, 2007, op. cit., p. 145.
36.
The
BIS
is today a central bank for central bankers set up in 1930 in a round tower near Basel railway station in Switzerland as a private company owned by a number of central banks, one commercial bank (Citibank) and some private individuals. Today it functions as a meeting place for the bank regulators of many countries, a multilateral regulatory authority and a
clearing house
for many nations’
reserves
(i.e. foreign exchange). See
Tim Hindle,
Pocket Finance, The Economist, 2007, pp. 35
–
36.
37.
Investments made and loans forwarded by banks are known as risky assets.
38.
The capital of a bank was classified into Tier-I and Tier-II. While Tier-I comprises share capital and disclosed reserves, Tier-II includes revaluation reserves, hybrid capital and subordinated debt of a bank. As per the provision Tier-II capital should not exceed the Tier I capital. The risk-weighting depends upon the type of assets—for example it is 100 per cent on private sector loans while only 20 per cent for short-term loans.
39.
The RBI is a member of the Board of the BIS. The financial sector reforms commenced in India in the fiscal 1992
–
93 after the report submitted by the Narasimham Committee on Financial system (CFS).
40.
Committee on Banking Sector Reforms
(M Narasimhan Committee-II), MoF, GoI, New Delhi, April 1998.
41.
Economic Survey 2006–07,
MoF, GoI, N. Delhi.
42.
D. M. Nachane, Partha Ray and Saibal Ghosh,
India Development Report 2004–05,
Oxford University Press, N. Delhi, 2005, p. 171.
43.
IDR 2004-05,
op. cit., p. 172.
44.
G-10 comprises Belgium, Canada, France, Germany, Italy, Japan, The Netherlands, Sweden, UK, and USA; later the group incorporated Luxembourg, Switzerland and recently Spain in its fold.
45.
Bank of International Settlemets,
Basel, Switzerland, May 15, 2012.
46.
Reserve Bank of India,
MoF, GoI, New Delhi, May 5, 2012.
47.
Basel III
norms prescribe a minimum regulatory capital of 10.5 per cent for banks by January 1, 2019. This includes a minimum of 6 per cent
Tier I
capital, plus a minimum of 2 per cent
Tier II
capital, and a 2.5 per cent capital conservation buffer. For this buffer, banks are expected to set aside profits made during good times so that it can be drawn upon during periods of stress.
48.
The working group was set up in December 1997 under the chairmanship of Y. V. Reddy (the then Deputy Governor, RBI) which submitted its report in June 1998.
49.
‘Other’ deposits with RBI comprise mainly: (i) deposits of quasi-government; other financial institutions including primary dealers, (ii) balances in the accounts of foreign Central Banks and Governments, and (iii) accounts of international agencies such as the International Monetary Fund.
50.
Y. V. Reddy, the RBI Governor,
The Economic Times,
N. Delhi, September 11, 2006.
51.
S. Sundararajan,
Book of Financial Terms,
Tata McGraw-Hill, N. Delhi, 2004, p. 44.
52.
Ibid.
53.
As per the latest update by the
RBI,
May 11, 2012.
54.
The part of ‘Authorised Capital’ (the limit upto which a company can issue shares) which has been actually ‘paid’ by the shareholders is known as the ‘Paid-up Capital’ of a company. [for detailed analysis of different kind of ‘Capitals’ of a company refer the
Chapter 14: Security Market in India
].
55.
Though this sub-topic originally belongs to the
Chapter 14: Security Market in India
, it has been discussed here to make the new guidelines of setting-up banks an ‘easy-to-understand’ thing for the readers.
56.
Mutual Benefit Society
(also known
globally
as ‘benefit society’ or ‘mutual aid society’) is an organization, or voluntary association formed to provide
mutual aid, benefit,
or
insurance for relief
from common difficulties. Such organizations may be formally organized with charters and established customs, or may arise
ad hoc
to meet unique needs of a particular time and place. They may be organized around a shared ethnic background, religion, occupation, geographical region or other basis. Benefits may include money or assistance for sickness, retirement, education, birth of a baby, funeral and medical expenses, unemployment. Often benefit societies provide a social or educational framework for members and their families to support each other and contribute to the wider community.
A benefit society may have some common features – members having equivalent opportunity in the organization; members having equivalent benefits; aid goes to needy (stronger helping the weaker); payment of benefits by collection of funds from the members; educating others about a group’s interest; preserving cultural traditions; and mutual defence.
Examples of benefit societies include
trade unions, self-help groups,
etc. It is believed that such societies predate human culture are found around the world.