Of all the retail financial scams that have surfaced over the last few years, there appears to be more misconceptions--and perhaps deliberate misdirection--about the Saradha scam of West Bengal. For one, the name by which it is being referred to, which is the chit fund scam. Even though the company's name had the phrase 'chit fund' in it, this was not a chit fund scam. All the news that has come so far is that the scam relates to taking deposits and not running a chit fund.
This is not merely a pedantic point. It seems that this misconception is actually misguiding what other businesses are being investigated. We've read the news that the government is investigating chit funds and similar schemes. But Saradha's modus operandi was to take deposits in the guise of selling real estates. The company would take a booking amount for flats that were to be built. If the buyer wanted then after a certain period, he could cancel the purchase and get the money back with a certain (high) interest.
This is a very different kind of deal from chit funds and may actually be flourishing in many different parts of the country. For example, if you drive out of Delhi in any direction and keep an eye on the huge number of real estate hoardings that you will go past, you'll see a fair number that could be for similar schemes. These hoardings ask you to invest in real estate projects by buying flats, shops or offices and promise a guaranteed return of a certain percentage. The percentage is generally in the range of 15-18 per cent per annum and is prominently mentioned on the hoarding. There could well be many more such operations than just the ones who put up these hoardings. Are these schemes similar to the Saradha one? It certainly looks likely based on what the hoardings say. And yet, these hoardings have been around for at least four years now and no one has bothered to investigate.
Another conclusion that has been widely drawn from the Saradha scam is that India needs more banks. While that is true, the connection with this scam is not obvious. In Saradha as well as many non-formal financial systems across the country, it is not always the case that these are a second choice behind banks. Such deposit taking mechanisms (and all of them are not ponzi schemes) are widely used in urban and semi-urban areas where there is no lack of access to banking. The reasons for their flourishing are not that banks are not available. It's that many of them actually manage to deliver what they promise better than the banks do. Scams like Saradha ride on the coat-tails of informal systems that actually work.
However, on another level Saradha is a remarkable failure of regulatory mechanism. The ease with which this real estate trick kept it out of the grasp of the financial regulators shows the inadequacy of the whole mechanism. There have been a lot of ponzi schemes that have been caught out over the last few years. Yet, it is remarkable that each one flourished happily till it collapsed by itself. It's never the case that a regulator or a some law enforcement agency is able to detect it, understand it and put a stop to it while it is actually flourishing. It's only when the money has been eaten away and the depositors start getting turned away and the story is showing up on the news channels do the enforcers arrive.
Like the archetypal policemen of Bollywood, the law arrives only when the mayhem is over. Unfortunately for the victims of Saradha or other similar scams, there's one big difference from Bollywood--there's no hero. The villain has his way till through sheer luck, some accident trips him up and only then one hears the sirens in the distance.