COLLATERAL AND GUARANTEE

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, Delhi, Andhra Pradesh
Partner: All India Chit Fund Association, Bill & Melinda Gates Foundation
Status: Analysis

Background:

Like other financial institutions, Chit Funds have collateral and guarantee requirements for participants to ensure the payment of monthly dues and repayment of the value of the ‘pot’. However, these requirements can act as obstacles to the participation of low-income households in Chit Funds. This study aims to test the impact of lowering collateral and guarantee requirements on the sustainability of Chit Funds.

Chit Fund companies need to ensure the continued (re)payment of members’ monthly instalments, especially for those chit members who have borrowed from the chit scheme, i.e. bid on the chit and won. Registered Chit Funds tend to resort to different forms of collateral and guarantee requirements to solve this problem.

While these requirements are well suited to screen middle and upper class borrowers, they limit the participation of low-income households in the registered Chit Fund industry because very often, these households have neither the assets nor the connections to furnish as collateral or guarantee. This is particularly disadvantageous for these households when Chit Funds are the only financial institutions operating in their area.