A bill to raise the monetary limits for chit funds by three times and the commission for the person managing the fund to 7 per cent from the current 5 was approved by Lok Sabha on Wednesday.
The Chit Funds (Amendment) Bill, 2019 also introduces words such as "fraternity fund", "rotating savings" and "credit institution" to make chit funds more respectable, said Minister of State for Finance Anurag Thakur.
Piloting the bill, he said that chit funds are legal and should not be confused with unregulated deposit schemes or ponzi schemes wherein several people have lost their money.
According to the bill, it is proposed to raise the maximum chit amount from Rs 1 lakh to Rs 3 lakh for those managed by individuals or less than four partners, and from Rs 6 lakh to Rs 18 lakh for firms with four or more partners.
The maximum commission for the 'foreman', who is responsible for managing the chit, is proposed to be raised from 5 per cent to 7 per cent.
The bill also allows the foreman a right to lien against the credit balance from subscribers.
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It proposes to substitute terms like 'chit amount', 'dividend' and 'prize amount' with 'gross chit amount', 'share of discount' and 'net chit fund' respectively, Thakur said.
The bill further proposes to allow subscribers to join the process of drawing chits through video-conferencing.
The bill also removes the limit of Rs 100, and allows the state governments to specify the base amount over which the provisions of the Act would apply, Thakur said.
Responding to various issues raised by members during the debate, he said chit fund subscribers can opt for insurance but the government cannot make it mandatory as it would add to their burden.
He also said that Supreme Court-appointed committees looking into financial frauds should complete their work within stipulated time frame and all efforts should be made to ensure that poor people get their money as quickly as possible.
On compensating poor people from money collected under the GST, he said that it was something which can only be considered by the GST Council.
Recalling various initiatives with regard to economy and financial inclusion undertaken by the NDA government, Thakur asserted India will become a USD 5 trillion economy by 2024.
Participating in the debate, several BJP members lauded the government's move, saying this will help protect the money of the economically weaker section.
Saugata Roy (TMC), however, questioned the delay in bringing the bill. He said the bill was also introduced in the last Lok Sabha but was then forwarded to the Standing Committee on Finance.
The panel gave its recommendations in August 2018 but it has taken more than a year for the government to bring the fresh bill with amendments, he said.
"We have to address the anomalies in the financial system," he said.
Anurag Sharma (BJP) said there are over 30,000 registered chit funds in the country and the unregularised would be more than 100 times the number. He stressed that more people should be brought in the formal sector.
Meenakshi Lekhi (BJP) said there was a need for financial literacy in the country to avoid people from falling into the trap of such financial system.
She said people who invest in chit funds are many a time unaware that when banking system gives an interest rate of nearly 8-9 per cent, then how can one provide an interest of nearly 30 to 40 per cent.
P P Chowdhary (BJP) said the amendments to the bill may appear small but will have long term ramifications in saving people's money.
Party colleague Rajiv Pratap Rudy demanded that the government should inquire into the "delay" in approval of Mudra loan in Saran districts.
He said that out of 23,000 applications for Mudra loan, only 800-900 have been approved in Saran.