For 75-year-old pensioner Sova Sengupta the collapse of Indian property-to-media empire Saradha Group, to which she had entrusted her life’s savings with the promise of a handsome return, spelt financial ruin.
“I’d deposited 100,000 rupees ($1,800). I lost all my savings,” the widow wept after police last month revealed that Saradha, headquartered in the West Bengal state capital of Kolkata, had gone bust with losses of hundreds of millions of dollars.
The popularity of Saradha highlighted the huge shortage of banks to cater for India’s population of 1.2 billion people, with many turning to unregulated and risky services, leaving them vulnerable to exorbitant lending rates and deception.
Sengupta was just one of some 350,000 small savers who saw their money vanish in a scam which offered to multiply savings four-fold over seven years.
Cash from new investors was used to pay off old ones, while promoters skimmed money off to make themselves rich, police said of the typical Ponzi scheme. At least 10 depositors committed suicide, they added.
“Indians have participated in informal savings schemes for time immemorial,” said T.S. Sivaramakrishnan, who heads a regulated national savings association of what are known locally in India as chit funds.
“That’s why many are content to put their money in these vehicles,” he told AFP. “Many of these people aren’t financially sophisticated so they get taken in by these scamsters who offer unrealistic returns.”
Around 480 million Indians, mostly living in the country’s 630,000 villages, have no banking access, according to the country’s central bank, which in February launched a push to expand regulated financial services in the rural hinterland.
“The fruits of the banking industry have not reached a substantial part of the population,” said N.S.N. Reddy, chief manager of the state-run Andhra Bank in India’s south.
Aside from a lack of banks, another barrier for savers is a lack of identity certificates.
“For the common man, the opening of a bank account is a Herculean task,” Reddy said. To open accounts, savers must produce an array of documents such as birth certificates or residence proofs that many poor people in India do not possess.
Many of India’s so-called “unbanked” store their savings by investing in gold jewellery and gold bars but they also turn to the parallel banking system which can be highly risky.
Many in Asia’s third largest economy are easily duped by get-rich-quick schemes and when they need money are forced to turn to unscrupulous lenders, said Sivaramakrishnan.
Microfinance institutions, which loan small sums to the needy who are unable to get credit from mainstream banks are stepping into the breach, but even they have been rapped by the central bank for exorbitant lending rates.
The problem is made more acute by the fact Indians have one of the highest household savings rates in the world at 30 percent of gross domestic product.
In the case of Saradha, up to 350,000 investors were cheated of $730 million, according to state officials, though some court documents have mentioned figures in the billions.
As part of its smoke-and-mirrors act, the group branched into TV stations, newspapers, education, construction and travel. It also gained respectability by becoming close to West Bengal state’s ruling Trinamool Congress.
But in the end the scheme turned out to be like any Ponzi scheme — the Saradha Group went broke and savers were left empty-handed, police said.
Now the conglomerate’s head, Sudipta Sen, is in custody facing fraud charges.
“The repeated sprouting of dubious Ponzi schemes across the country points to a failure of the formal saving and banking system” and the need for fast reform, commented the Economic Times newspaper in a recent editorial.
West Bengal chief minister Mamata Banerjee, who told despairing investors “what’s gone is gone”, had a change of heart after a political backlash and now plans a fund to bail out those who were “the poorest of the poor”.
She says she will raise money through a tax on cigarettes and has advised people to “smoke a little more” to help out the investors.
Economist Avirup Sarkar of the Indian Statistical Institute based in Kolkata told AFP: “What we really need is more regulation and more banks so people don’t get cheated like this.”
India's 'unbanked' masses get fleeced
