Why Chit Funds should not be abolished?

Updated: Friday, April 26, 2013, 14:08 [IST]

Sitting in a barber shop recently, I saw an agent come and collect money on behalf of a Chit Fund. I knew how it worked, because I had been exposed to it time and again in an unorganised way in Mumbai. I asked my barber whether it worked for him and his answer was an astounding "Yes".

"It helps me to save money and I can bid for it when I need a lumpsum amount". Folks like this barber, bid for the money during times of marriage or other household functions. The recent Saradha Group Chit Fund has left investors high and dry as investors have lost money in a group that has allegedly defrauded them.

Now many cynics argue that Chit Funds should be abolished. I don't buy that argument. Recently, there was a money laundering allegations against three top private sector banks in the country. Nothing will ever happen to these banks, because if something nefarious were to be revealed there could be chaos in the banking system and the stock markets. Also, it does not mean we should shut banks, because there were problems alleged.

If one apple is rotten in the basket, it does not mean we dump the entire basket that includes the good apples as well.

Why Chit Funds are good?

Small time artisans like barbers, mechanics, pan beedi shop owners use chit funds as a means to save and bid for a lumpsum amount when they need the money. Some of them are not educated and have limited understanding of a recurring deposit of a bank. They hence use Chit Funds.

Also, Chit Funds are regulated and also run by government entities as well, providing high safety. In Kerala, Chit Funds are regulated by the Kerala Chitties Act 1975, while in Karnataka it is regulated by the Chit Funds (Karnataka) Rules 1983. Similarly, in Andhra Pradesh, Maharashtra, New Delhi etc.

In Kerala, the Kerala State Financial Enterprises Limited, a state owned government company runs a chit fund. Ditto for some other states.

Also, companies like Shriram Chits have been doing business for decades now. In fact, in Kerala there are as many as 5000 chit funds and most work in an organised way.

Till our artisan folks have better understanding and education on benefits of the banking system, they will pursue the simple and easy chit funds.

At the moment we do not need to abolish Chit Funds, what needs to be abolished is the powerful nexus between politicians and promoters that often lead to a down fall, as in the case of the Saradha Group.

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