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NEW DELHI (Reuters) - India will crack down on errant financial firms that raise funds, mainly from millions of rural poor customers, through loosely regulated credit cooperative societies, a senior official in the agriculture ministry said.
This follows a Reuters investigation that revealed an expansion in fund-raising by embattled conglomerate Sahara India Pariwar using four credit cooperatives in different parts of the country.
Reuters spoke to dozens of savers who said Sahara had not given them their money when their deposits matured. Instead, they complained, Sahara's agents and branch officials tried to persuade them to switch their matured savings deposits to new schemes offered through credit cooperatives run by Sahara.
Sahara has not responded to requests for comment by Reuters.
The federal government plans to penalize cooperatives that fail to repay investors when deposits come due or engage in other violations of regulations, a senior official from the Ministry of Agriculture's credit cooperatives division told Reuters.
The official, who has direct knowledge of the matter, did not want to be named as he was not authorized to speak to the media. Agriculture Minister Radha Mohan Singh and Secretary Siraj Hussain, the top bureaucrats in the ministry, did not immediately respond to emails seeking comment.
One measure under discussion is to either have an independent regulator supervise credit cooperatives or bring them under the purview of an existing regulator, such as the Securities and Exchange Board of India, which oversees India's stock markets, the official said.
Credit cooperatives are widely used by the rural poor. A lack of banking services in India - nearly two-fifths of its 1.27 billion people have no bank accounts - has helped shadow banks such as the credit cooperatives thrive for decades in Asia's third-largest economy.
"The idea is to make it more stringent by giving more teeth so that we are able to effectively protect investors' interest," the cooperatives division official said. "Various suggestions have been made and the top brass is very serious about this."
Under Indian law, credit cooperatives must be owned by their members, who are also the main customers. Cooperatives operating across state lines are registered not with the central bank, but with the cooperatives division of the Ministry of Agriculture.
Multi-state credit cooperatives would be better regulated under India's central bank, the Reserve Bank of India (RBI), said Bindu Ananth, head of the IFMR Finance Foundation, a non-profit group that seeks to broaden access to financial services.
"It's an anomaly that you have a class of deposit-taking institutions that is outside the ambit of the RBI," Ananth said.
The proposed regulatory changes from the credit cooperatives division in the farm ministry would come after Prime Minister Narendra Modi launched an ambitious project to widen banking services in India called the Jan Dhan Yojana, or People's Wealth Scheme. Since August of last year, it has opened 200 million new bank accounts.
The program seeks to curb the use of cash, limit corruption and rein in the informal, and often illegal, shadow banking activities conducted by some firms mostly in rural areas.
Sahara founder Subrata Roy, whose business empire includes hotels such as the New York Plaza and a Formula 1 racing team, has spent the last 21 months in jail for not complying with a Supreme Court order to return $5.4 billion to investors who put money in a 2008-11 time deposit plan. The markets regulator SEBI said it was illegal because it did not conform to India's market disclosure requirements.
Editing by Douglas Busvine and Bill Tarrant.