This study examines the Chit Fund model in India and tests the viability of running a rural chit scheme by setting up and comparing the costs of running rural and urban chit schemes.
The Chit fund model is an easy and innovative method of access to finance for low-income households that caters to different sections of the society. 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.
A collaboration with All India Chit Fund Association and the Bill & Melinda Gates Foundation, the study was spread across five Indian states – Andhra Pradesh, Tamil Nadu, Karnataka, Kerala and Delhi. In order to understand the intricacies of the Chit Fund model in India, the size of the registered Chit Fund industry, its manner of serving the members, cost of funds and size of its unregulated counterparts were examined. To study the size of the industry, data was collected from the Office of the Registrar of Chits in the five states on the number and type of Chit Fund schemes registered over the years. A sample of around 400 Chit Fund members from each of the five states were surveyed in order to understand the profile of Chit Fund members and how they use the Chit Fund money. Data was also collected from different chit companies from the five states, on how members bid during monthly auctions over the years, to examine the average interest rate of Chit Fund loans. Interviews were conducted with managers and members of registered Chit Funds about their view of the unregistered Chit Fund industry to arrive at a guess-estimate of the size of the industry.
Money circulated in the registered chit fund industry ranges from 10 per cent to 50 per cent of bank finance when compared to the total deposits and credits in the bank. The number of chit schemes registered has been reducing over the years. The average percentage change in the number of schemes registered from 2003 to 2006 is approximately a negative 10 per cent. While the number of schemes has reduced, the total value of registered chit schemes increased by approximately 13 per cent from 2003 to 2006. The survey of chit fund members shows that as much as 72 per cent of the members participate in chit funds for saving. Additionally, 96 per cent of the current and non-current chit fund members think that chit funds are safe. Majority of the current and non-current chit fund members belong to low-income households.
The results from this study underscore the importance of Chit Funds as a savings and borrowing vehicle for the poor and lower income households in India. Data obtained through the study have enabled an estimate of the size of the registered chit industry for the first time. Study insights also suggest that low-income chit members are well aware of how to navigate the bidding process, as no difference in bidding behaviour between the poor and the rest of the population as observed. Findings indicate that most funds have moved away from smaller chit schemes and mainly offer large schemes, limiting the participation of poorer borrowers who are often left without any institutional savings options.