SETTING UP A REGISTERED CHIT FUND FOR UNDERSERVED SMALL BUSINESSES AND LOW INCOME HOUSEHOLDS: RURAL AND URBAN AREAS

Principal Investigators: Mudit Kapoor (ISB), Antoinette Schoar (MIT)
Research Team: Aneesh Mannava
LEAD Centre: Small Enterprise Finance Centre (SEFC)
Focus Area: SME Finance
Project Geography: Tamil Nadu, Karnataka, Andhra Pradesh, Maharashtra
Partner: All India Chit Fund Association, Bill & Melinda Gates Foundation
Status: Analysis

Background:

The registered Chit Fund industry in India is concentrated in urban and semi-urban areas but has a limited presence in rural areas. This is usually attributed to higher-costs of regulatory compliance and lower returns on rural chit schemes in comparison to urban chit schemes. This study tests the viability of running a rural chit scheme by setting up and comparing the costs of running rural chit schemes with the costs of running urban chit schemes.
The registered Chit Fund industry in India is concentrated in urban and semi-urban areas but has a limited presence in rural areas. One commonly cited reason for this is the high costs of regulatory compliance in rural areas under the Chit Fund Act. Since the ‘registrars of chits’ are only located in urban and semi-urban areas, rural chit companies have to bear a higher cost to meet regulatory requirements that require filings at a high frequency. Secondly, given the nature of the rural economy, it has been observed that the average value of chit schemes in rural areas is relatively smaller as compared to those in urban areas. However, a chit company can only charge 5% commission on the chit value under the Chit Fund Act. As a result, there are very few registered Chit Fund companies operating in rural areas.