Fraud and Cheating Due to Lack of Financial Infrastructure in Rural India

While exploring the need for financial services in the villages of Uttar Pradesh (UP) and Gujarat in India, I came across several cases of systematic cheating and fraud that need to be urgently addressed by the policymakers. This is largely due to lack of financial infrastructure and continued existence of unsatisfied demands for financial services, particularly the savings, and to some extent insurance services, which encourages unscrupulous companies and people to take advantage of the situation and cheat the villagers. As a strategy, such companies employ local people as their agents. These agents influence the people in the area to deposit money, using their easy access to the communities in their own as well as in surrounding villages.

In the villages of Kanpur Dehat district, a company called Asma offered the villagers various savings products both in Recurring as well as in Term Deposit categories. The company appointed local agents, who would collect the deposits at the doorsteps of the customers. When time for maturity of the instruments arrived, the company simply vanished, vacating its office premises in Kanpur. The people could not recover their money from the agents as the agents themselves did not have many assets and belonged to their own larger communities. Their complaints to the authorities did not result even in a proper investigation, and of course the company and its management remained untraced.

I observed similar phenomena in various forms in Dahod, a largely tribal district of Gujarat. Here different private finance companies lure the villagers to purchase automobiles financed by them. As the people in the area are mostly uneducated and are not very methodical in tracking the instalments being due, they usually default on the payment of the regular instalments. The companies have hired goons who then confiscate the vehicles, thus making the people poorer by their down-payments and the paid loan instalments. These vehicles are then used or further sold by such companies. In one case in Andhari village, the client could not repay his third instalment and his vehicle, which was bought to be used for public transport, was snatched away from him. He had earlier sold off his fields to make a down-payment of INR 52,000. Worse still, the vehicle was put to use by the finance company where it met an accident killing a man. As the vehicle documents were in the respondent’s name, he got a court notice enclosing a demand of INR 1.2 million as compensation by the family of the deceased.

Illiterate villagers, particularly women, in several rural areas allege that agents, representing both public and private sector companies, also indulge in cheating the people. Taking advantage of the lack of literacy among their clients, they either provide receipts of lower amounts than deposited, or give them forged receipts. The companies also refuse to entertain them on the ground that they will honour the commitment only if they have received the money as per the companies’ official records.

The agents also misinform the clients about the products and the status of their companies. The agents of M/s PACL India Ltd. were found to be selling their investment products in the villages of Dahod district as Recurring Deposits maintaining that their company was a bank. Although their paper instruments contained the details of the products (which involve allotting a land plot to the client and the payment on maturity depends on the appreciation of the value of the land plot after the company develops it), the clients were not able to read them as the instructions were in English. Thus the clients were vulnerable to be misinformed and misguided. The agents of PACL were also alleged to be under-reporting the deposits[i].

Migrant labourers of Dahod district keep their savings with their employers only. While coming back to their villages they leave the money, surplus of their needs, with their employers. This mechanism makes them vulnerable to the risk of losing their money. Being illiterate, they can be easily manipulated while rendering the accounts for their money, especially when the larger amounts are accumulated than they are used to. Moreover, their families are also deprived of their savings at the time of their untimely deaths as nobody, other than them, knows the exact amount being kept with their employers. Many instances were reported when people felt that they had not got back the entire amount either belonging to them or to their deceased relatives.

Whenever a wage labourer gets her wages she attempts to save some amount for future use after providing for immediate consumption and repayments. As the inflow is highly uncertain she has to frequently dig into her savings to keep afloat. Poor households therefore need savings mechanisms that allow frequent transactions with very small amounts. For want of such mechanisms, the villagers who do not have bank accounts keep the money in their houses, attracting the risk of thefts and destruction due to fire or collapse of their mud houses during rains. Even the households having bank accounts, as a result of financial inclusion drives or other programmes of the government, do not use these accounts for saving their money. This is because travelling to the bank to deposit or withdraw money encroaches upon their working hours. The post-office hours of functioning also clash with their working hours. That is why they always welcome people who deliver the savings products at their doorsteps.

This partly explains the success of deposit collecting organisations as well as that of Life Insurance Corporation (LIC) employing local agents to collect deposits, or insurance premia in case of LIC. These local agents attend to their clients when they are back from their work and are at their homes. The needs for savings must be very strong as the villagers keep using these savings mechanisms in the face of the risk of being cheated in the manner described above. There is also a tendency to treat life insurance premia of the LIC as a kind of savings mechanism, but there is again a risk of defaulting on the rigid payment schedules of LIC and losing out the entire deposit, if the insurance policy is discontinued before the completion of a minimum lock-in period. In most cases, such period is three years, and I did not find even one LIC client in my interactions in several villages who was successful to hold an LIC policy beyond that period. An enterprising young man in Dahod district plying a small vehicle for public transport defaulted on his policy and lost INR 2,700 paid for three premia, as his brother fell sick and he did not have money to pay the next premium. He has however acquired another LIC policy after about a year, which strongly demonstrates his need for savings instruments that do not impinge on his working hours.


[i] PACL, headquartered at Jaipur, is currently facing several court cases on multiple charges of fraud and embezzlement of people’s money.


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