“People lose money due to their greed and ignorance” – words of a politician when a Chit Fund Scam surfaced some time back in India. Poor people lost their life savings, some committed suicide. Even though not a new phenomenon in South Asia, but why these Scams are attempted? What is the recipe? Who are the Chefs? How are they cooked?
But before that, what is a Chit Fund? It is a savings scheme, sometimes known as co-operatives or Dhikuti, where an entity enters into an agreement with people to deposit certain amount through periodical installments and promises a specific return upon maturity. Originally developed for easy access to money, the available funds are loaned at higher interest rate mostly to members who cannot borrow from banks. This in turn yields higher return for the depositors.
But, as they say - “something is rotten in the state of Denmark”. Why should somebody borrow at a higher rate? One would do that only when other organized lenders, mainly banks, refuse to lend. That happens when risk is greater than return, mainly for a shaky venture with inadequate collateral. Co-operative thus takes a risk by lending to these ventures at higher interest rate. Actually, such schemes can work only with integrity, strict governance and transparency. No financial institution prints money – they make money by lending at a higher rate than borrowing.
If properly executed, co-operatives or chit funds are good for small borrowers and investors. But before investing, to avoid potential loss, one must ask hard questions like where lending is happening, what are the checks and balances to ensure safety of investment! But in reality something else happens. Schemes turn into Scams. We need to acknowledge that only USP of such schemes are better return. Why people deposit blindly without crosschecking? Greed; a phenomenon which exists in abundance. It is that limitless yearning to acquire more that drives the desire. Coupled with ignorance and illiteracy, it leads to a situation when one cannot be pragmatic enough to calculate associated risks. A cunning mind flourishes while dealing with them by selling an unrealistic dream, fueling their greed. Investment happens without considering the danger and they get conned at the end. Then we hear cases of people losing money, promoters absconding, depositors committing suicide; mayhem and carnage.
Once in a village, a stranger announced that he will buy frogs at Rs 10 each. The villagers, seeing many frogs around, started catching them. As supply diminished, the efforts stopped. Then price was jacked up to Rs 20. Enthusiasm returned, but only for some time. However, seed of greed was firmly sowed. When the stranger announced that he would go away for 7 days and his assistant will remain, he will come back on 8th day and buy frogs at Rs. 80 apiece; the greed soared. People went berserk but no frogs were found. On 7th day, the assistant, against a commitment of 20%, connived with some villagers to sell some frogs from his cages, which was bought earlier, at Rs. 50. Next day they were to sell those back at Rs 80 to the boss. Words spread; soon every frog got sold back. Villagers borrowed like crazy, some put in their life savings to buy as many as possible. Then they never saw the stranger or his assistant!
What does this teach us? Socrates said - “He who is not contented with what he has, would not be contented with what he would like to have”. A nation with lot of poverty will have lot of latent greed; a nation not educationally advanced will have a high level of Ignorance. A nation with a population burden will be saddled with limited choice. A cunning mind, seeing those combinations, will start scheming and plotting to con.
To prevent such scams, people need to be educated. There is nothing called Easy Money. One must not expect government to bail out the victims. Even prompt, harsh punishment by authority and recovery of loss is a big utopia. There is no guarantee that Politicians and Ministers are not involved. If any scheme guarantees a phenomenal return, one should be very careful, understand the entire dynamics and exercise caution before investing. Researching about scheme structure and antecedents of promoters will be a good preventive measure. Even Government endorsement of scheme can be designed. One must not open his/her purse before due diligence and be analytical and pragmatic to seek facts while judging such schemes. We must not ignore any warning signs or suspicion. Aldous Huxley said – “Facts do not cease to exist because they are ignored”. We must seek facts.
