Ponzi scheme
Topic: Banking Regulation, NPAs and Financial Stability · NCERT: Beyond NCERT
Meaning
A Ponzi scheme is a fraud. It promises high returns and pays earlier investors with money taken from new investors, not from real profits. It survives only while new money keeps coming in. When inflows slow down, it cannot pay, and it collapses. The last investors to join usually lose the most. In India, such schemes are targeted by the Banning of Unregulated Deposit Schemes Act 2019.
Example
A scheme promises a 5% return every month. It pays the first investors out of deposits from later ones. The Saradha scheme (2013) collapsed in this way, and lakhs of small savers lost their money.
Don't confuse with
- Chit fund: this is a legal, state-regulated savings-cum-borrowing group under the Chit Funds Act 1982. Members get back pooled contributions from the group, and there is no promise of returns from outside the group.
Related concepts
- Letter of undertaking
- Know Your Customer
- Legal Entity Identifier
- Chit fund
- Subprime lending
- Systemic risk
- Stress test