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The Reserve Bank of India (RBI)'s recent decision to allow non-residential Indians (NRIs) to invest in chit fund companies could boost the sector, which suffered huge loss of reputation owing to the chain-marketing scam - often mistakenly referred to as the "chit fund scam".
In a circular dated June 11, the RBI allowed NRIs to invest in chit fund companies on a non-repatriation basis, subject to certain conditions. The current size of the legalised chit fund sector is pegged at Rs 30,000 crore.
"At present, if an NRI is willing to invest in chit funds, they do so are through their relatives. The sector has the potential to attract as much as Rs 5,000 crore annually from NRIs. NRI investments at KSFE chit funds through Indian relatives could be close to Rs 300 crore a month," said an official with the Kerala State Finance Enterprises (KSFE), a Kerala government enterprise.
KSFE, one of the biggest chit fund companies in India, grew its turnover by 18 per cent in 2014-15 over the previous year to Rs 14,883 crore. For Kerala-based chit fund companies, bulk of the investments come from the Gulf countries, which are routed through their relatives based in India.
To invest in a chit fund, a formal agreement has to be signed between the investor and the organiser. However, the sector has many questions about allowing NRIs to invest in chit funds. It has sought clarifications from RBI on the subject.
"There is a lot of potential for investments from NRIs. However, we have to get a number of clarifications from the government. For one, NRIs should be allowed to invest through power of attorney to their representatives in India," said T S Sivaramakrishnan, general-secretary, All Indian Association of Chit Funds.
Under a chit fund scheme, a foreman enters into an agreement with a number of subscribers. Each subscriber agrees to pay a sum for a certain period and each of them, as determined by a lot or an auction, is entitled to a prize amount.
While chit funds are one of the oldest financial instruments, the funds have also been a perennial source of scams. This is despite the fact that there are well-defined laws under the Chit Funds Act, 1982 to regulate them. One of the key reasons for the scams is the huge clout of unregistered chit fund, without any legal backing.
