The RBI has deregulated the savings rates for those depositing money in the banks. This should be considered a welcome move by depositors. The issue of deregulating savings rates needs to be welcomed. The RBI’s attempt to regulate the banking sector should be commended, though much is desired in its ability to police the financial sector, especially its ability to implement its own orders. This is clearly visible in its ability to crack the whip when it comes to not-so-legal deposit collection by companies of doubtful veracity. Based on its own disastrous experience of regulating fly-by-night deposit seeking companies in the 1990s, the RBI should know that turning a blind eye could have devastating long-term consequences. The problem of vanishing savings is always felt during times of economic slowdown. During the early part of the 1990s, there was a rush to collect deposits taking advantage of the buoyant economy, as a consequence of capital inflows in the early phase of globalisation.
A cursory reading of RBI the Second Quarter Review (2011-12) clearly points to the travails of the corporate sector. At the end of the First Quarter, corporate sectors sales were up 22.5%, but raw material costs were up 23% and Staff Costs up 27.7%, Interest payments were up 21.7% and profits up a paltry 6%. The Mid Quarter Review is due on 16th December 2011 and should indicate growing problems. Added to this is the deceleration in credit growth. In short, there is a liquidity crunch, which is likely to aggravate with problems in Europe. It has been pointed out that by 2014 EU banks (the largest lenders to emerging markets) are likely to deleverage to the tune of about US$2.5 trillion. While the Macroeconomic complexities have been pointed out a number of times, a major issue that has largely gone unnoticed is the likely problems we will have over the next few quarters. Tighter liquidity conditions usually mean that a number of small and medium businesses, especially those in the informal sector will face major difficulties in order to meet their daily working capital requirements. A number of fly-by-night companies with dubious business model collect deposits in a completely illegal but complex manner. Such companies vary from plantation companies to pyramid schemes. Invariably, these companies are the first to disappear taking with them millions of deposits, as in the period 1996-2005 in AP.
The present day scenario in rural and small town Andhra Pradesh is instructive of the problem at hand for the RBI. A number of companies, usually with a “Gold” suffix or a prefix collect deposits from middle and lower classes. These “deposits” are in reality complexly structured frauds in complete contravention of the law. They are often marketed as innocuous savings products for the poor and the lower classes. They tend to collect small amounts ranging from Rs.10 to Rs.50 per day with the promise of returning the amount collected after 2-3 years. They contract to sell the plot at Rs.7200 and agree to buy it back at Rs.8000 after two years. At times, they are essentially pyramid schemes marketed as savings products along with income generation opportunities for the poor (usually those classified as Below the Poverty Line by the Government). In one particular scheme (marketed to a 60 year old Below the poverty line pensioner in Kurnool district) they supposedly sold a piece of land (150 sq yards) which was immediately followed by a reverse sale agreement. Interestingly, the site is stated to be in a distant village in Khamman district - hundreds of miles from the present place of residence of the old lady. The "plot" sold to them has no details about the registered survey number, schedule of land, location, etc., indicating that this is probably a fictitious agreement. This complex agreement is necessary as the company is neither allowed to accept deposits by the RBI nor is it registered as a SEBI approved Collective Investment Scheme. In other words, the company is operating outside the law using the sale contract as the basis for its illegal activities.
A cursory reading of RBI the Second Quarter Review (2011-12) clearly points to the travails of the corporate sector. At the end of the First Quarter, corporate sectors sales were up 22.5%, but raw material costs were up 23% and Staff Costs up 27.7%, Interest payments were up 21.7% and profits up a paltry 6%. The Mid Quarter Review is due on 16th December 2011 and should indicate growing problems. Added to this is the deceleration in credit growth. In short, there is a liquidity crunch, which is likely to aggravate with problems in Europe. It has been pointed out that by 2014 EU banks (the largest lenders to emerging markets) are likely to deleverage to the tune of about US$2.5 trillion. While the Macroeconomic complexities have been pointed out a number of times, a major issue that has largely gone unnoticed is the likely problems we will have over the next few quarters. Tighter liquidity conditions usually mean that a number of small and medium businesses, especially those in the informal sector will face major difficulties in order to meet their daily working capital requirements. A number of fly-by-night companies with dubious business model collect deposits in a completely illegal but complex manner. Such companies vary from plantation companies to pyramid schemes. Invariably, these companies are the first to disappear taking with them millions of deposits, as in the period 1996-2005 in AP.
The present day scenario in rural and small town Andhra Pradesh is instructive of the problem at hand for the RBI. A number of companies, usually with a “Gold” suffix or a prefix collect deposits from middle and lower classes. These “deposits” are in reality complexly structured frauds in complete contravention of the law. They are often marketed as innocuous savings products for the poor and the lower classes. They tend to collect small amounts ranging from Rs.10 to Rs.50 per day with the promise of returning the amount collected after 2-3 years. They contract to sell the plot at Rs.7200 and agree to buy it back at Rs.8000 after two years. At times, they are essentially pyramid schemes marketed as savings products along with income generation opportunities for the poor (usually those classified as Below the Poverty Line by the Government). In one particular scheme (marketed to a 60 year old Below the poverty line pensioner in Kurnool district) they supposedly sold a piece of land (150 sq yards) which was immediately followed by a reverse sale agreement. Interestingly, the site is stated to be in a distant village in Khamman district - hundreds of miles from the present place of residence of the old lady. The "plot" sold to them has no details about the registered survey number, schedule of land, location, etc., indicating that this is probably a fictitious agreement. This complex agreement is necessary as the company is neither allowed to accept deposits by the RBI nor is it registered as a SEBI approved Collective Investment Scheme. In other words, the company is operating outside the law using the sale contract as the basis for its illegal activities.
The problem with such schemes is that, usually pyramid schemes is that they are first to flee once the easy liquidity conditions evaporate. This is because these schemes usually function like a Ponzi or money circulation scheme – new deposits are used to repay the old deposits, etc. Once they are unable to repay the deposits, they vanish. This is a segment that the RBI needs to regulate in order to avoid the unsavoury problems witnessed in the 1990s.
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