Financial Inclusion

Ponzi-Pyramid, NPS and the Pious Fraud

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TMC MP Kunal Gosh’s arrest perhaps has refreshed your memory of the horrific Saradha scam. If not, let me remind you. Saradha group of companies looted thousands of crores of rupees from the poor people of the states of West Bengal and Assam. It is alleged that West Bengal Chief Minister was fully aware of the detailed functioning of the company and her party was getting maximum benefits from the satellite television channels and newspaper owned by the company. Kunal Gosh claimed that those media houses were working under the direct instructions of TMC. In fact Mr. Gosh claimed that he was compelled to sack one of his editors to satisfy Didi! Same things happened in Assam. Saradha CMD Sudipta Sen himself alleged that a powerful minister of Gogoi cabinet, top cop of the police administration, journalists and even so called artists were benefited out of his fraudulent company.

Saradha was not the only company to loot the hard earn money of the poor investors of the state. There were many other ponzi companies like ABYSS, Ramel etc etc. We also noticed the operation of the fraudulent pyramid companies like Unipay2You, Royal Forex, Sambav etc in Assam. Those companies also looted thousands of crores. Some of the perpetrators were booked and many got spared.

Another such possible threat of pyramid scheme is going to be exposed through this article.  It may be shocking for you to know that government welfare scheme National Pension System is going to be used as a tool to fool the poor people of the state by some pyramid fraudsters.


National Pension Scheme is a social security scheme by government of India. It is meant to provide a secure retirement life to the citizen of the country keeping in mind the inflation, rising cost of living as well as increased life expectancy. Swavalamban Yojana is designed for the workers of unorganized sector under NPS. It is expected that the scheme will benefit the poor workers to great extend. Under this scheme if the subscriber pays a minimum yearly contribution of Rs. 1000 and maximum Rs. 12000; government will contribution another one thousand to their pension account i.e. Permanent Retirement Account Number (PRAN). This scheme will continue to till FY 2016-17 and may be extended also. No doubt it’s a very good scheme for the poor unorganized workers.

Now let’s see how the pyramid fraudsters are planning to the fool those poor unorganised workers. In the first week of this month (Nov’2013), an NGO (Non Government Organization) is register under the Societies Registration Act 1860. The organization has designed such a plan that you even can’t raise question to their noble (?) initiative! They will organize awareness camps to promote Swavalamban Pension Scheme (PRAN CARD). To get involved with the campaign you need to donate only Rs. 500/-. Yes! This is not a big deal. In fact they will be helping the poor to get their legitimate entitlements! But they have different plan to benefit you as well. What is the actual plan?

The subscriber needs to pay Rs. 500/- and the organization will liaison with the Point of Presence (PoP) to open his/her NPS account. Pension Fund Regulatory and Development Authority (PFRDA) have identified 58 PoPs all over the country. PoPs are basically banks (both PSU and private), private financial institutions and Department of Posts. The next move is very interesting. The subscriber will be qualified for an income as soon as he adds three subscribers (A, B and C) in his immediate downline and A and C again add three subscribers each as their immediate downline. The first subscriber (Top of the pyramid ToP) will get a bonus of Rs. 200/-.

Now, calculate the total amount received by the organization. The organization had added 13 NPS subscribers so far and had collected Rs. 6500/- from the bottom of the pyramid (BoP). The organization will be incurring the expenses Rs. 1300/- for their PRAN card and Rs. 200/- as bonus to the ToP. Thus their net profit is going to be approx Rs. 5000/- from the one single ToP!


Remember if the ToP somehow fails to add a single subscriber he/she will not be eligible to get the bonus amount of Rs. 200/-.

The organization has also a very lucrative award and reward plan. If there is a 100 pairs of countable (A and C only constitutes countable pair, B is not countable!) subscribers, the ToP subscriber will get a tab and if there is 25000 such pairs under the ToP, he will get a Skoda car!


Let us make it easy to guess the total benefit of the pyramid organization from such single ToP subscriber 25000x3x400=30000000. Yes, you are not mistaken; the fraudster can earn a hefty amount of approx Rs. 3 crores! So, giving a skoda car as incentive is not a big deal! We shouldn’t forget that the huge income of the fraudster is nothing other than the great loss to the poor people of the state.

Now let’s examine why such scheme is viable to operate in Assam only. The reason behind the rise of ponzi schemes like Saradha, Jeevan Suraksha, Ramel etc is same with the case of this pyramid schemes. Lack of financial literacy, financial inclusion and the anti-poor attitude of the formal financial system are the major reason behind this menace. Financial literacy is a must to protect the financial vulnerability of the poor of the state. Moreover, the status of financial inclusion is worse in Assam. Business Correspondent model ‘Swabhiman’ has become a liability for the banks. At the same time the 58 PoPs identified by Pension Fund Regulatory and Development Authority (PFRDA) are not poor friendly. The fraudsters can read the weakness of the financial system in Assam and they are making cash on it.

This fraud scheme is reaching the interior parts of the state like wildfire. Districts like Barpeta, Nagaon, Dhubri etc are more prone. In fact a huge network has already been built within a couple of days. Some of the subscribers are even thinking that this is the only way to get the PRAN card!

The fear is not only to lose the Rs. 500 alone, but to lose the entire life savings of the poor unorganized workers. Our fear is based on some crucial documents. We have accessed some documents which clearly indicate that even some of the government machinery is also involved in this fraud campaign. We are not disclosing those documents here to help the administration to nab the fraudsters.

We hope, government will wake up and take action against those fraudsters.

Financial Fraud and the Bottom of Pyramid

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THE present scenario of the financial fraud in the state reminds the incident occurred in Colombia in 2008. As many as 4 million Colombian invested in the dubious pyramid schemes. When the schemes collapsed, the country witnessed an unprecedented turmoil. The investors of those schemes demonstrated a violent protest in 13 cities of the country. The Colombian government was forced to declare a state of emergency to restore law and order in the country.

Though lately, our government has initiated a CBI probe into Ponzi scams of the state. It is alleged that minister, politician, journalist, media houses and even so called artist were involved in the scams. More shocking part of the story is that head of the state police administration was allegedly protecting the Ponzi boss and his illegal activities. Under such a situation how the common man can expect that law enforcing agencies will be protecting their interest? At the same time knowledge and competence of law enforcing agencies are to be relooked. It was reported that police raided the office of Bandhan Microfinance and arrested its employees. If the investing officials even can’t differentiate between a Ponzi company and microfinance company, how they will control the financial fraud in the state. Lack of financial knowledge among the masses as well as law enforcing agencies is a matter of great concern.

When financial services are treated as a fundamental need of human being, a large number of populations are excluded from the ambit of organized financial sector. More than 50% of Indians are yet to be included in the formal financial system. The scenario in Northeast is more grimmer and alarming than the other parts of the country. Out of 90 unbanked development blocks of the country, 80 are in Northeastern states. The marginalized section of the society or the so called bottom of the pyramid never gets access to financial services from the bank. This group is always vulnerable to financial fraud by Ponzi, Pyramid and Chit fund companies. Because those fake financial companies are the last resort for these poor people to meet their financial services needs.

It is proven that financial inclusion and financial literacy is the most efficient tool to protect the bottom of the pyramid from financial frauds. As like as financial inclusion, the level of financial literacy in the country is also worst in world ranking. Only 35% of Indians are financially literate and ignorance in more among the women. Along with many countries India has also adopted financial literacy plan, but notable result is still awaited.

Say, for a while we believe that after CBI investigation some culprits will be brought to justice but does it mean that the investors to get back their hard earn money? Who can assure that such dubious companies will not emerge after a few years in different shape or even capable of causing more damage to the state economy? Perhaps nobody can assure! It is reported that state government is thinking to create a commission to look after the activities of fake financial entities. Question arises, why government is not interested to find out the root cause and administers appropriate remedies. Think for a while, if the victims of the Ponzi, Pyramid or Chit Fund companies would have a bank accounts and were aware about the financial eco-system or even the average ROI in savings would they have been interested to invest/deposit in fake financial companies? No doubt the answer will definitely be a big NO. Then why the government is interested to tackle the issue with temporary and ineffective measures? Is someone from political class yet left to be benefited?

These scams have not only victimized the large numbers of depositors but a good number of agents and field workers who  have lost their job and means of livelihood. This will have a severe impact on the economy of the state. Government should think about their issues as well. As we have discussed that banking penetration in the state is poor and due to poor road connectivity and geographical disadvantages banks are not interested to open new brick and mortar branches in the rural areas. Keeping in mind the jobless agents and field workers government may push the branchless banking by appointing them as banking correspondent of banks at their respective areas. This will not only increase the banking penetration in the state, also can rehabilitate the agents and field workers as far as their livelihood is concerned.

At the same time government should approach other channels to promote financial inclusion and financial literacy. We have the largest network of post offices in the world. These post offices are going to be equipped with Core Banking System (CBS) very soon. If government wishes, these post offices have the potentiality to be the ‘change agent’ as far as financial inclusion is concerned. In the same way there are numbers of professionally managed microfinance companies working in the urban as well as rural areas of the state. These MFIs are doing a tremendous job in terms of woman empowerment and livelihood generation. These MFIs can be approached to promote financial literacy. Two major players RGVN and Ujjivan have already started financial literacy from their own. Government can incentivize their projects to attract more players to incorporate financial literacy programme in their microfinance programmes. That will benefit the MFIs as well. Financial literacy amongst the client will help the MFIs to manage NPA, ghost loan, loan sharing and multiple borrowing. Alternatively government can introduce financial literacy in the school curriculum too.

The only necessary thing is good intention of the government to root-out the financial fraud to protect the bottom of the pyramid.

Financial Literacy and Microfinance Institutions

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“We must remember that the purpose of microcredit is to eliminate poverty in the shortest possible period of time” – Mohammed Yunus.

Union Rural Development Minister Jayram Ramesh made a statement in the recent Microfinance India Summit at New Delhi that microfinance has raised more questions that it has answered. Somehow, there is building a consensus that microfinance institutions are not being able to deliver the desired outcomes. Does the government has been able played its desired role to make the microfinance industry as an agent of social transformation or the microfinance institutions have been diverted to hardcore profit making entity? The Andra crisis has taught us that making profit out poverty is not only unethical, it is dangerous too! Hence, where is the way out? Is re-designing of microfinance intervention is need of the hour? If that is, what should be done? What should be incorporated with the present setup? Financial Literacy can be one of the most promising tools to socialize the microfinance interventions.

Last year, “Organization of Economic Cooperation and Development (OECD)” held an workshop on financial literacy in New Delhi and observed that Financial Literacy is a combination of financial awareness, knowledge, skills, attitude and behaviour necessary necessary to make sound financial decisions and ultimately achieve individual financial well being.

The significance of Financial Literacy is being gaining momentum globally. Most recently, countries like USA, UK, Czech Republic, Netherlands, New Zealand, Spain and India have come up with detailed strategy for financial literacy. Last year, Credit Card Company VISA has also conducted a survey to know the state of Financial Literacy. The “VISA Global Financial Literacy Barometer Survey” covered 28 countries and India stood at 23rd position. The survey report reveals that only 35% of Indian is financially literate and ignorance is more among the women.

Many organizations in India too have been taking Financial Literacy initiatives. RBI has their “Project Financial Literacy”. This project is being operationalized through films, comics in English as well as in other vernacular languages. They are organizing quiz programs among school student to aware them about the financial ecosystem. SEBI has also initiated the their financial literacy program as a part of the investor education plan. IRDA and PFRDA also have initiated financial literacy programs. Interestingly, private company like Money Wizard has also started an economically viable model of financial literacy.

The present state of Financial Literacy shows that the steps taken by regulatory bodies like RBI, SEBI etc or banks (Financial Literacy and Credit Counselling Programs) are not being able reach the masses. And most importantly, these initiatives are least successful to cater the most vulnerable section of the society. A few months back, RBI has organized quiz among the school students. I got the opportunity to be present in one of such program held at District Library, Guwahati. Most of the students are from the reputed private English medium schools of Guwahati. Question arises, what will be outcome? Will it reach the marginalized section of the society? No doubt same thing is being repeated in the maximum programs of SEBI, IRDA, and PFRDA etc. These programs are not being able to reach the most needy target group. To reach this target group MFI may be the most viable channel.

Microfinance institutions should take the Financial Literacy initiatives not only to benefit the customers, but for their own prosperity too. It is always less risky to lend money to a financially literate customers. The financial literacy among the microfinance clients may minimize the risk of over-lending, ghost loan and NPA. Proper loan utilization is a major challenge in this vertical. Financial Literacy may help the MFI to overcome the challenge. Another major challenge of microfinance operation is credit appraisal. It’s like the challenge faced by a vetenary doctor. If financial literacy can enable the clients to assess their own creditworthiness, it become much easier for the microfinance practioner to provide the credit remedy as like as a physician. Financial Literacy can be a game changer for the MFIs in terms of efficiency and profit maximization. If the clients can be motivated to open bank accounts and disbursement can be done in cashless mode, a number of benefits can be garnered. Cashless disbursement will not only minimize the paper work and TAT (Turn Around Time) but also it can almost zeroed the cash-in-transit risk.

Ujjivan Financial Services Pvt. Ltd. one of the best MFI of country has initiated financial literacy holistically. In the first phase they screened a video film called Sankalp on debt management, ghost loan and credit bureau to their all customers in vernacular languages across the country. In second phase they have started a five module Diksha program. They have targeted to impart financial literacy to more than 10 lakhs clients. After successful completion of the training, they are coordinating with the bank to open the savings bank accounts for the graduated customers. Now, they are using those accounts to do cashless disbursement. The result so far is inspirational.

These developments may give a change re-think on the significance of Financial Literacy to the microfinance institutions, development practioners and policy makers as well.

Rampant Growth of Fake Financial Institution in Assam and Role of Financial Literacy

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Assam is going through a very tough time. The devastating flood has washed out everything of the farmer of the state. The GS Road molestation case has made the Assamese ashamed and the violence in lower Assam has created a humanitarian crisis. All along this, relentless blow from the fake financial institution has created havoc in the state. The gravity of the issue pulled out the masses to the street and compelled the government to disclose the list of 119 NBFCs operating the state along with fake financial institutions in the state assembly.

The issue of fake financial institution has been grabbing the headline for the last couple of months. It came to light that as many as 29 NBFCs were taking deposit from the customers, violating the RBI norms. Taking the advantage of poor governance and careless attitude of RBI these fake financial institutions collects huge amount and disappears all of a sudden.

It is observed that the victims of these financial frauds are basically poor men and women of the state. Now, question arises, why the government is not being able to protect the hard-earned money of the poor people of the state or why the RBI being the watch dog of the financial sector seems to be blind to these issues and surprisingly why the people do deposit their money to these institutions. The last question, isn’t more thought provoking?

Yes, the poor people of the state are compelled to go to these institutions to meet their need of various financial services. Dr. Ela Bhatt, founder of SEWA (Self Employed Women’s Association) and known to be the mother of microfinace observed that financial services are to be treated as fundamental need of a human being. But when this fundamental need is not addressed by the state and its concerned agencies, the poor are compelled to knock the door of the fake financial institutions. The rampant growth of fake financial institutions is fuelled by lack of financial inclusion.

Study shows that financial inclusion can bring prosperity and also can work as a powerful weapon to alleviate poverty. But the scenario in the state and in the country as a whole is not encouraging at all. More than 50% people of the country are still outside the ambit of mainstream financial system. These excluded people are the bottom of pyramid. They excluded as the mainstream financial institutions like banks treat them unworthy to bank upon! The situation in Assam and North Eastern states are more pathetic. The data shows that India has 90 un-banked blocks and it is unbelievable that out of these 90 un-banked blocks 80s are in NE states. RBI has introduced policy to compensate revenue loss of the commercial banks for five years to open new branches in the region to minimise the gap. But no result observed so far.
Best way to check the financial fraud is to educate the people about their financials and the eco-system as whole. Till date government has not taken remarkable financial literacy initiative in the state, besides cautious advertisement in the newspapers, which causes negative impact on the target group. They become more conservative as far as financial risks taking are concern. On the other hand RBI regional office’s role in financial literacy is more pathetic. An NBFC named Sunmarg Microfinance Institution had collected lakhs of amount from the people of Assam and now the company is on its way to abscond. The same company was barred to collect deposit from public in West Bengal. So called watch dog RBI’s regional office at Guwahati couldn’t trace out the smell of fraudulent activities of the said company in this region. The FLCC (Financial Literacy and Credit Counselling) programme in the state has become a white elephant. The PSU banks attitude seems to be reluctant as earlier. They seem to be overburdened!

On the contrary, ray of hope is being shown by some private companies in the region. Most recently, Microfinance Company has taken massive financial literacy drive in Assam and North Eastern states. RGVN (Rastriya Grameen Vikas Nidhi) in collaboration with CRISIL has started their financial literacy programme called Pragati in Assam. Dr. Amiya Kumar Sarma, Executive Director of RGVN is optimist that Pragati will make a positive impact on the society. Another leading microfinance institution of the country Ujjivan Financial Services Pvt. Ltd has also taken a huge financial literacy programme in Assam and Meghalaya. They have already educated around 10000 women in Assam and Meghalaya through multimedia training programme called Sankalp in collaboration with Unitus and Lok Foundation. Mr. Samit Ghosh, Managing Director of Ujjivan Financial Services Pvt. Ltd. says that Sankalp has played a tremendous role in the field of financial literacy. He also added that copy of Sankalp has been provided to BRAC to do financial training in Bangladesh. This month Ujjivan has started another financial literacy programme called Diksha through a well trained and well equipped dedicated team in Assam.

The poor people of the state only can be protected from those fake financial institutions by educating them and bringing them under the umbrella of organised financial system. The failure of the mainstream financial institutions to embrace the bottom of the pyramid literally strengthens the need of a specialized limited liability banking model in India too. Such low cost banking models are viable and working fine in countries like Indonesia, Philippines, Bangladesh etc. But the commitment of our government towards financial inclusion and poverty alleviation seems to be illusive!

International Workshop on Inclusive Financial Innovation at XLRI, Jamshedpur

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Last month I got an invitation from Professor HK Pradan of XLRI Jamshedpur to attend the three-day International Workshop on Inclusive Financial Innovation: Making Finance and Insurance Markets Work for the Poor, conducted during March 1-3, 2012 XLRI Jamshedpur and it was a great learning experience in deed.

The international event was graced by eminent personalities from finance domain with focus on financial inclusion, academia, business leaders from the microfinance industry and financial institution, NGO workers and field level practitioners. The event brought them all in single platform to discuss the challenges and issues concerned to financial inclusion.
Father E Abraham, Director of XLRI Jamshedpur argued that credit should be given the status of basic needs like food, cloth, shelter, education etc. He also condemned the coercive collection practice of some MFIs in Andra Pradesh referring the recent article published in Hindu regarding the AP Microfinance crisis.

Dr. David Dror, Chairman of Micro Insurance Academy (MIA) New Delhi while delivering his inaugural presentation stressed on micro health insurance. Dr. Dror argued for a demand driven, community based insurance, where the community assesses their own risk and designs their insurance for a right price. His research and expertise on community based health insurance has opened the doors of opportunity to serve the under privileged in a profitable business way. According to Dr. Dror charity can’t provide a long term permanent solution to any kind of problem.

Basix group of companies were represented by Dr S.S. Tabrez Nasar, Associate Director, BASIX Academy for Livelihoods and Micro Banking Practice and Mihir Sahana, Director Indian Grameen Services. They presented case studies of potato growers of Jharkhand. The innovative livelihood development project was taken by Basix, where farmers were given credit by Basix and potato were bought by Pepsico at a pre determined price. Dr. Nasar said that credit without insurance is one kind of responsibility and stressed on weather insurance. (Basix is the first organization to adopt weather insurance in collaboration of ICICI Lombard)

Another innovative model was presented by Dr. Rangan Varadan, CEO of Microgram. Dr. Varadan said that financial inclusion doesn’t mean merely opening a no frill bank account or providing just credit. Credit is necessary but it is not sufficient, to uplift the poor, an ecosystem is needed, that encourages the customer orientation of products and ownership among of the beneficiaries. He also stated that Microgram has started such model on profit sharing between customers and the investors.

In a penal discussion Dr. Muhammad Masudur Rahaman from Bangladesh Microcredit Regulatory Authority advocated sustainable microfinance. In his note he advocated “financial inclusion for poverty eradication”. He also suggested regulatory reform for Indian microfinance industry to allow MFIs to offer other financial products like savings, insurance and remittance etc to scale up the poverty alleviation initiative. He refers the importance of creating specialized bank like Bangladesh Grameen Bank and wholesale funding agency for microfinance. He criticized the supply driven microfinance approach in India, where demand side (customer orientation) is ignored. Dr. Alok Misra CEO, Micro-Credit Rating International Limited (M-CRIL) supporting Dr. Rahman said that our government is not taking the risk to allow the MFIs to offer savings for merely regulatory comfort. Dr. Misra also predicts that if the MFIs are allowed to take savings, it will build a holistic relationship between customer and MFIs and will also decrease the cost of credit.

Another important outcome of the workshop was call for forming an international research network on inclusive finance like SSRN (Social Science Research Network). Dr. HK Pradan, Professor of Finance and Economics, XLRI Jamshedpur, the mentor and architect of the focused event said that such network will help to share and recognize the innovative ideas among the industry giant, academia, policy maker and field level practitioners to bring out the poor from the misery of poverty cycle.

The valedictory function of the three day international event was addressed by SBI Managing Director, Mr. A Krishna Kumar. He is optimistic regarding the Business Correspondence model for financial inclusion for the maximum out reach.