MUMBAI, April 15: Far from high-street banks and the roller-coaster stock market, a quaint, almost unknown world of private finance is feeling the tremors of the clamp down on dance bars across Maharashtra.

The impending closure of 700 dance bars in the city and another 650 in the state will affect more than the livelihood of people associated with the business. At risk is the collapse of a 50-year-old financing system that has helped entrepreneurship flourish.

All hell may break loose in the Rs 250 crore private-finance industry that has helped stewards set up their own bars, restaurants and even financed 'Udupi' chains all over the country.

Even in the organised banking sector, a few co-operative banks have exposures to dance bars; besides, there could be defaults on bank loans given for purchase of restaurant properties and home loans given to owners, stewards and bar girls. While all this could be a small portion of bank loans, the bigger threat is being felt by the unofficial financing sector.

The damage could be severe because the funding is based entirely on trust, without any contract or collateral. The dealings are in cash and the liabilities cannot be enforced in a court of law.

A couple of years ago, when the municipal corporation demolished a few dance bars as part of a road-widening operation, there was a major crisis in these funds (better known as 'BC' funds) as the owners of the demolished restaurants defaulted.

Hoteliers say that if a few restaurants going out of business could have this impact, the fallout of 750 bars closing down would be significantly higher. Most bar and restaurants are funded through the unofficial Chit Fund (BC) route.

It's fascinating how a BC operates: a fund organiser invites around 19 businessmen to create a monthly fund pool, for say Rs 20 lakh, with each member contributing an equal amount. The organiser is the pivot of the BC, and has the last word.

The pool of money created every month is auctioned to the highest bidder. So, if a borrower (who is also a member and contributor to the pool) bids Rs 5 lakh for the Rs 20-lakh pool, the bid amount will be reduced from the pool and he will get Rs 15 lakh.

Each member, therefore, contributes only Rs 75,000, instead of Rs 1 lakh. The amount the borrower repays would depend on the demand and supply of funds.

In the next month, the pool is created afresh by new contributions from the members. The per-member contribution will depend on the demand. The higher the demand, the steeper the discount. The member who has already borrowed cannot bid again.

A new bidder (from the remaining members) steps in. If he quotes a higher discount, the contribution required will be less. It is through the monthly contribution that the first borrower repays the money. If the discount is high, it benefits the persons who have already borrowed in the previous months, and those who would borrow subsequently. The process is repeated every month, with fewer members bidding, but everybody contributing.

In case of a default, the organiser makes good the money. But if there are too many defaults, there is a risk that the organiser may go bankrupt. The only solace is that the fund business is not as big as it was a few years ago, thanks to the desperation of banks to lend. In recent years, there has been an increased dependence on the banking sector for funds. But this only means that some of the risk has been passed on to the official sector.

A co-operative bank has large exposure to the small restaurant business. In addition to taking loans on restaurant premises, bar owners have availed of housing loans on the basis of tax returns, so have stewards and bar girls. A private bank has provided home loans for bar girls on the basis of employment letters from their employers.

The economics of a dance-bar restaurant is completely different from any other retail business or the 'Udupi' joints. The rentals are usually 100% higher, and those who can raise the funds prefer to buy their own. The cost of setting up a 1000-sq-ft property in suburban Mumbai is over Rs 1 crore.

Next comes the interiors, for which the cost could go up to Rs 50 lakh. Each bar has to cough up Rs 2 lakh per year as excise fees, Rs 3.6 lakh as entertainment tax for hosting live performance, and Rs 45,000 as other municipal taxes. In addition, there are 47 licences to be acquired. But the real cost is the amount of money required to be spent in the process of acquiring the permission and the protection money that they end up paying.

“Given this cost structure, a bar can break even in the city only if it generates revenues of Rs 25,000 per day,” says a Mumbai-based hotelier. So far, restaurants have been managing to generate such revenues by hiking liquor prices 300% and getting a cut on the tips that the bar dancers earn. But with no dancers to draw in the crowds, cash flows will be a fraction of what they were.

Bar-owners are seething over the fact that it was only days ago that they had paid their full-year licence fees for running a permit room. “Had the government given notice of their intention earlier, many of these permit rooms would not have renewed their permits, as the restaurants are unviable without the dance bars,” said another hotelier.

In fact, in March when the government amended the Shops & Establishments Act, 1948, enabling women to work night shifts, bar owners felt that they could expect a more tolerant attitude from the government. This was because the Shops & Establishment Act had been used in the past to pull up restaurateurs employing women.

Many of the bars and restaurants have turned into dance bars because they were unable to attract customers otherwise.

In fact, several bars & restaurants near Panvel on the old Mumbai-Pune route transformed themselves into dance bars as they fell into recession after the expressway came up. The changeover requires large investments, most of which are sourced from the BC fund.

Those in the industry say that once a restaurant starts operating as a dance bar, it would be very difficult for it to get 'family' business. Sources feel that dance bar patrons are likely to move to discos and pubs in their quest for entertainment.

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