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BW Businessworld

Pyramids Of Faith

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The dramatic unravelling of the West Bengal-based Saradha group has turned the spotlight on financial pyramid schemes that part hundreds of thousands of investors from their hard-earned cash. It will probably take months, if not years, to gauge the full extent of the damage the collapse of Saradha has caused. 
The rash of dubious financial pyramid companies is not restricted to West Bengal. They are to be found in every part of the country — and indeed in all countries of the world. Many of them flourish for years and collect enormous sums of money before they finally go bust. 
What is it that makes investors trust their savings with unregulated groups that have no real business models and are often not registered with any of the financial regulators? To an extent, as far as India is concerned, it can be explained by the fact that the very poor and those in remote rural areas often do not have access to the formal, organised financial players. Groups such as Saradha manage to take root not just because they promise abnormal returns, but also because they develop a network of agents that reaches out to people who other financial players would turn away. These groups are also willing to collect extremely small sums of money and service, at least initially, investors whom banks and the bigger non-banking financial companies are ignoring.
Investors often trust them because they don a cloak of respectability — by associating themselves with politicians and other prominent public figures and advertising heavily. As long as the going is good, no one bothers to scrutinise their claims too closely. 
But that is only a partial explanation. The other part — greed — is often not discussed at all. The fact is that it is not just the poor and the poorly educated who get taken in by these get-rich-quick schemes. Even members of the rich and the middle-income groups routinely trust their money with schemes that promise unsustainable returns. In India, several financial pyramid schemes have actually targeted the well-off.
In his story on page 34, assistant editor Abraham C. Mathews looks at some prominent financial pyramid schemes that have targeted Indian investors. One of them openly declares that it is not an investment company but in the business of redistributing wealth. But it still manages to attract enough investors. On the other hand, each time a financial fraud is exposed, it hurts the business of legitimate chit fund players in the country. On page 42, senior assistant editor Shailesh Menon looks at the important role that the legitimate chit fund industry plays.

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(This story was published in BW | Businessworld Issue Dated 03-06-2013)