Chit fund investors to get insurance cover against frauds

New Delhi: The government has accepted a parliamentary committee’s suggestion to provide insurance cover to chit fund subscribers to protect them against scams as part of the plan to amend Chit Fund Act of 2018.

The committee, which tabled the report in Parliament last week, has favoured insurance cover to secure money of people who see chit fund as an alternative means of getting higher and faster returns.

The move comes amid reports of many investors losing money in dubious schemes floated by chit funds.

“Keeping the recent Saradha-type chit fund scams in view, the government is taking steps to check such frauds. We are mulling inclusion of an element of insurance coverage for subscribers to such schemes in the bill, as suggested by the panel,” a finance minister source told Financial Chronicle on Monday.

“The finance ministry in association with the corporate affairs ministry is consulting market regulator Sebi and banking regulator RBI,” the source said.
“Sebi is also looking into chit fund issues and efforts are on to seize and sell assets of such companies to recover innocent investors’ money,” said the source.

The bill to amend the Chit Fund Act was introduced in the Lok Sabha in March and was referred to the standing committee on finance for scrutiny.

The report noted that mobilising short-term funds to meet various personal needs has been a chronic problem faced by people in developing countries like India.

“They have to often resort to high-interest loans from moneylenders and the informal sector, which leads to a huge burden on them,” the report said and added the banking sector has not been able to fill these gaps and meet people’s financial needs to the desired extent.

The All India Association of Chit Funds in their memorandum to the panel had requesting for allowing a chit fund firm to mention under their name as the Rotating Savings and Credit Association (ROSCA).

It would help distinguish their business from other unconnected business, it added. The bill proposes to incorporate the name ‘fraternity fund’ instead of the commonly known ‘chit fund’.

In this connection, the panel said the government might bring in further amendments to incorporate words, ROSCA institution, to the proposed name of fraternity fund. “These changes may help them in image make-over and brand building,” the report said.

The association had also contended that it’s not viable for individuals and partnership firms to run the business with a prescribed ceiling of aggregate chit fund amount — Rs 1 lakh for individuals and Rs 6 lakh for firms.