Banking Central | Lessons for investors from Popular Finance scam

Banking Central | Lessons for investors from Popular Finance scam

© Dinesh Unnikrishnan
Banking Central | Lessons for investors from Popular Finance scam

It is like a song playing on loop. Taken by the promise of higher returns, gullible, maybe even greedy, investors handover their hard-earned money to a finance company, only to find their money gone. It has been happening with alarming regularity but that doesn’t seem to deter people.

The tale of Kerala’s Popular Finance, a finance company in the news for an alleged Rs 2000-crore fraud, is yet another rude awakening for such investors. As investigations progress, shocking details are emerging about the extent of the fraud orchestrated by the promoters, basically, one family that ran the company.

Consider this: the promoters operated 1,760 accounts across different banks, had investments in several countries to which the money raised from local investors was routed and illegally ran many subsidiaries.

And, none of this happened overnight.

The fraud was in the making for years, as has been detailed in an earlier column.

Popular Finance did everything that a finance firm that collects money from the public shouldn’t do. And thousands of customers in Kerala, including employees of the organisation who supposedly knew how Popular functioned, too, put in their hard-earned money in the company. Some of them even encouraged their friends and family to do the same.


Popular offered as high as 18 percent returns on investments. It paid the interest to depositors regularly for years till everything came to a grinding halt one day. A bank fixed deposit (FD) gives 7-9 percent and mutual funds and equities typically give 3-4 percent higher returns on an average but no one could match what Popular offered. And that’s what made the firm ‘Popular’ in Kerala.

Local reports have quoted investigators as saying that while Popular owes its customers around Rs 2,000 crore, its assets that can be immediately attached are worth only about Rs 125 crore.

This means depositors have a long wait ahead—for the sleuths to track the money moved abroad and get it back.

Another reason why people queued up at Popular is the legacy the company built over decades. What began in 1965 as a chit-fund in Vakayar, a sleepy town in Pathanamthitta district of Kerala, by one TK Daniel and his family, soon grew into a full-fledged finance firm. Investors grew to trust the family name and smart marketing as well as the promise of quick returns did the rest.

Most of these investors are NRIs who put almost their life-savings in Popular. Local businessmen and even retired professionals trusted Popular with their money.

There are a few lessons for investors in the Popular episode. One, do not put all your money in a single firm, no matter how big the promised returns are. Financial institutions are susceptible to industry whirlwinds, economic undercurrents and, as events like Popular show, to massive frauds. It makes sense to invest across asset classes and different companies to lower the risk.

Two, check the credentials and make sure the company is doing business as permitted by the regulatory approvals. A background check can be done by approaching registered financial advisers or by visiting websites of the concerned regulators or authorities.

Third, be wary when someone approaches you with unusually higher returns in a short time. If it is too good to be true, it probably is. Regulators, both the Reserve Bank of India and the Securities and Exchange Board of India, have repeatedly reminded investors to be cautious but few pay heed.

Return of capital, the assurance that the principal amount gets back to the depositors or investors, is even more important than return on capital at a time when the financial market fights an unprecedented crisis, liquidity issues and asset-quality problems. The numbers of frauds have been going up in RBI-monitored commercial banks.

In the last one year, there have been cases where investors have raised charges of misselling or fraud. Punjab and Maharashtra Co-operative (PMC) Bank and the Yes Bank AT1 bond episode are two such examples. There are hundreds of unauthorised chit funds that have collapsed over years. Also, numerous co-operative banks have faced RBI’s wrath for mismanagement. Investors have suffered big in all these cases.

Even after one year, there is no resolution in sight for PMC Bank customers. Here, too, investors put their money seeking higher returns. These include even RBI officers.

Yes Bank’s AT1 Bondholders are now engaged in a bitter court battle with the bank to get their money back. Yes Bank, which was bailed out by a bank consortium in March, had written off Rs 8,415 crore worth of bonds. Investors allege large scale misselling.

Popular is the latest event where investors have been duped but unlikely to be the last till depositors exercise caution and do background checks before making investment decisions.

 (Banking Central is a weekly column that keeps a close watch and connects the dots about the sector’s most important events for readers.)

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