The "chit fund" scandals of recent years - such as Saradha or Sahara - have focused largely on deposit-taking schemes that grew so large that they came to the attention of regulators and law enforcement. But looking only at such large outfits does not reveal the true size or nature of the problem. Many other major sources of such fraud exist. For example, there are "multi-state co-operative societies", which under a current regulatory loophole are allowed to accept deposits from large numbers of people. Some - perhaps many - of these are outfits with limited real utility and strong political connections. Many have been involved in cases of fraud. But they are not at present regulated by either the RBI, or the securities regulator, or even the Ministry of Corporate Affairs. Technically they are registered under the Ministry of Agriculture - which may not have the competence and wherewithal to track and control a mushrooming problem. Legislation on the "banning of unregulated deposit schemes" has been drafted following inter-ministerial consultations in order to address this regulatory gap - but it is yet to see the light of day. Given the political connections of many such outfits, gaining consensus will not be easy.
However, such legislation, with closer co-operation between regulators and law enforcement at both central and state levels, is becoming ever more urgent. As financial inclusion proceeds, and digital technology spreads to areas, which were hitherto unconnected, the potential for fraud will increase manifold. Many previously unconnected Indians will need resources that allow them to tell real financial products from those designed just to lure the unsuspecting. The global experience on this is instructive. In China, for example, where opening a deposit account on a mobile phone is enviably easy, there has also been an explosion of financial fraud, which has led to considerable, if suppressed, popular anger.
Indian regulators and governments must try to get ahead of this curve. Mr Rajan's comments on fly-by-night operators came at the launch of one such initiative - a website meant to try and provide information on all entities that are permitted to take deposits, and which can be used to file complaints. But the larger solution to the problem has always remained the same - increasing access to high-quality retail finance for most Indians. Better designed regulation is vital; but, as long as deposit schemes penetrate further and deeper than real financial products, the problem will only grow.