Penny drops after Rs 568-cr scams: Will Bengalureans finally be safe from crooks?

Bengaluru: Bengalureans lost a staggering Rs 568.2 crore to shady deposit schemes run by fraudulent financial firms — both regulated and unregulated — over the last five years, official data reveals.

Of this, Rs 272.2 crore was lost to illegal financial entities, including Non-Banking Financial Companies (NBFCs), while Rs 295.9 crore was lost to regulated institutions like cooperative societies, as per data from the City Crime Record Bureau (CCRB).

MA Saleem, Director General of Police (DGP), Criminal Investigation Department (CID), explained that, as per the Reserve Bank of India (RBI) guidelines, no institution is allowed to accept funds from the public as “deposits”. However, shady firms register themselves as chit funds or other lending entities and gradually roll out deposit schemes to make quick profits — an illegal practice.

A CID investigator appointed to handle financial frauds noted that such schemes were rampant in the early 2000s, but had declined over time. Nonetheless, these fraudulent operations still persist for several reasons.

Data supports this assessment. Such cases declined year-on-year: there were 89 cases in 2021, 49 in 2022, 35 in 2023, and 32 in 2024.

The investigator cited four major factors contributing to the decline: lack of market insight or viable ideas, an imagined sense of belonging, alluring schemes, and seemingly strong business plans.

“These institutions mainly target depositors by leveraging community and cultural ties to gain their trust,” he explained. “People tend to trust firms run by individuals from their own community, language group, or place of origin. Fraudsters carefully push this narrative to gain trust and then roll out attractive offers.”

For example, more than 80% of the victims of the Popular Finance scam, which came to light in 2020, were from Kerala. The company, headquartered in Pathanamthitta, Kerala, was one of the most trusted finance firms in the state.

Targeting Malayali residents in Karnataka, the firm opened over 20 branches — mostly in Bengaluru — in 2013. Many Malayalis entrusted their savings to the firm. In the end, over 2,000 people lost more than Rs 100 crore to the scam.

As information about these schemes often spreads by word of mouth, depositors typically skip market or scheme-specific research. Had they done so, they would have realised that such deposit-return schemes are illegal.

Investigations revealed that these firms lure investors with highly attractive annual returns, ranging from 12% to 20%.

Saleem said up to 4% was promised in monthly returns in some cases — a staggering 48% annually.

Investigators say these companies operate with well-planned business strategies designed to mislead people. They either exploit loopholes in RBI regulations or function outside the RBI’s monitoring network to attract investments. They strategically approach influential individuals to promote their schemes and bring in more investors.

The inevitable collapse

These companies collect deposits and offer returns as promised — at least initially. However, most do not invest the money externally, or only invest in their own businesses. When business losses occur and it's time to pay returns, they become dependent on new deposits to cover existing obligations. Once this cycle breaks, the company collapses financially.

The RBI’s market intelligence wing tracks such schemes nationwide and reports them to the state-level coordination committee during monthly meetings. Following this, police initiate investigations against the fraudulent firms.

Also, when depositors stop receiving returns, they approach the police and file complaints.

Financial frauds are prosecuted under two different laws: Banning of Unregulated Deposit Schemes Act (BUDS) and the Karnataka Protection of Interest of Depositors in Financial Establishments Act (KPIDFE).

The BUDS Act applies to unregulated deposit schemes, while the KPIDFE Act is used when regulated institutions like cooperative banks are involved in fraud. Scams involving more than Rs 50 crore are handled by the CID. Data shows that 587 such cases have been investigated by the CID in Bengaluru over the last 10 years.

The decline in cases

The police credit the fall in such cases to the growing popularity of online investment avenues such as the stock market, mutual fund SIPs, and corporate investments. However, older generations still prefer traditional methods, making them more vulnerable to fraud.

Investigators also believe increased public awareness has played a major role. The 2019 IMA scam had a significant impact in curbing such fraudulent schemes.

Many victims await refunds

According to investigators, recovering and returning money in financial fraud cases is a long and complex process. Major scams like Popular Finance involve multiple investigative agencies. When various agencies seize properties, coordinating liquidation and equitable distribution of assets to victims becomes difficult — and rarely happens smoothly.