Saradha bankruptcy and its socio-economic backdrop – time to look at broad spectrum

While several issues of political affiliation in association to the recent bankruptcy of Saradha Chit-fund organization are widely discussed, one of the basic issues, i.e. why people invest in chit funds is not getting the attention it deserves. Rational Choice minded scholars would argue that since these organisations project a lucrative rate of interest, people applying their rational mind choose to invest here instead of nationalized banks. In this process the investors either undermine or are unaware about the risk involved. This is perhaps only one of the reasons applicable especially in urban and semi-urban places where people have options to choose between banks and chit funds. Several places of rural West Bengal represent a considerably different story.

The most evident problem which rural West Bengal, perhaps the entire rural India faces is the lack of people’s access to formal banks. In rural West Bengal most of the nationalised banks are strategically located near block offices and near major road and railway connections; hence, the distribution of banking service is extremely uneven. If a person with little banking knowledge has to do banking s/he will lose a-man-day of employment the cost of which is often too high to bear. Understaffing and poor infrastructure in many rural banks make it a hard task to manage the workload which delays the services, eventually making people disinterested in bank. In 2009 when MGNREGS initiates direct bank transfer of money I do fieldwork in Bardhaman, Murshidabad, Purba Medinipur and Purulia to find out huge crisis that the banking staff and Panchayat people face in opening up the bank accounts. Several Post Offices and Banks simply refuse to open more than a stipulated number of accounts because of staff shortage. Banks and PO employees clearly state their unwillingness to open zero balance accounts for persons who will not be able to save money and will require regular assistance in banking. In consequence people see banks as alien place. In fact, it can be said the rapid expansion of chit funds and people’s lack of interests in banking reflect on the failure of the development of banking behaviour through MGNREGS fund transfer.

A more recent fieldwork in Gorabari Panchayat region Bankura where people were displaced due to the construction of Kangsabati River Dam in late 1950s shows that people could not save the compensation money because of the lack of banks at that time. The Gorabari branch of Allahabad bank is no older than 15 years and villagers still avoid going to banks. The compensation money is spent in different festivals and rituals. Many reported that they kept a significant amount in terracotta jars underground – a popular method of saving cash earlier, which was lost because of monsoon flood. The only asset they could create is livestock. While people from 60 years back have lost cash because of lack of banks, in 2013 people from more than a dozen villages around the acquired land of Jindal Steel Works (JSW) in Salboni invested a considerable amount in chit funds via several known agents. The rest of the money is used to purchase luxury goods like motor cycles, televisions, etc. Similar trend is also noticed in Manipur in 2007, where people earning extra money from a hybrid variety of pigs, have invested in chit funds and purchased luxury items. However, in Manipur with NGO intervention the ill effect is minimised.

While going to bank means loss of a man day, chit fund agents come directly. When banks in the form of chit funds come home, it becomes a phenomenal event in a place where getting assistance in petty tasks like filling up a withdrawal form in a bank is a serious constraint. Reflections such as “I have kept my money to Saradha bank because Mr. X of our locality told it will give return” show people’s trust on person rather than organisation – a feature which has a long history in agriculture based rural society. After Saradha bankruptcy several agents are absconded which reflects that chit fund organisations often take advantage of the social capital (social networks) of their agents based on trust to expand their business. People’s interest in chit funds, hence, is not always the calculation of profit and loss. To understand the actual fact behind the growth of chit funds, it is important to look at the means of information flow in villages, and people’s savings behaviour. Most of the people I have interviewed told that they have invested because somebody else has. The decisions for investment often have a friendship and kinship base. When people from the villages around the JSW project got their compensation package, agents from all over the investment companies came and convinced them to invest. When one villager is convinced others follow.

In sum, it is important to note that although bringing a legal provision for regulating these organisations would certainly make things better, meanwhile in-depth study of rural people’s savings behaviour and making policies accordingly should be given adequate attention. With strict regulatory mechanism, adequate understanding of people’s savings behaviour aided by a spread of banking services in rural places the rise and ill effects of chit funds can be stopped.