Demonetization and Chit Funds

Lot has been spoken, written, interpreted and forecasted on Currency Demonetization already. I was waiting on something to be written for Chit funds as well. I am going to attend one of the diamond jubliee celebrations of a chit fund association in Tamilnadu, where there will be veterans, academicians, politicians who will be talking about the impact, and how the registered Chit fund industry is gearing it up to take it further. Here are my 2 cents as to how demonetization will impact this industry. 

While all of us love to earn money and spend it on our needs, growth and luxuries, we tend to move away from understanding some of the basic principles of money. Talking about Micro, Small and Medium Enterprises, or savers (employees) who are trying to grow their funds, everyone wants the best for their hard earned money. 

Recently there was a beautiful article in Your Story – “Disorganised chit funds will remain working capital lifeline for micro SMBs”. The author has beautifully portrayed the importance of this disorganized sector of the industry. Some key things. 

  1. Credit is fundamental to commerce and chit funds can be used more effectively than being treated as taboo. 
  2. As per Crisil, there are 45M MSMEs that use this form of lending and savings platform. 
  3. Around 400M Indians are estimated to be using such disorganized services. 
  4. There are towns where women thrive in this business and helped them to set up small business units. 

and the author went to recommend that government should do something to formalize the industry, rather than going after such platforms. 

Fundamentally, politicians have been claiming that this is a problem of banking reach. But I think economists were right in identifying that it is beyond making banking accessible to these segments. It is about the accessibility to credit in the system based on socio economic norms. This is where Chit Funds have been more successful than any other formal sector of financial services. In Chit funds, trust plays a vital role and this trust is built based on knowing the person in real, understanding his business locally, taking some minimum guarantees (to help protect the interests of the group). No other financial institution can do this to help the local businesses and build trust along the way. Existing financial institutions, depends mostly on your cash flow, historical information – that too recent historical information.

While 8M kirana retailers depend on mostly disorganized sector of chit funds, I think it is time for them to start looking at registered chit funds as the way to go. Money raised in the chit funds can be used as a loan and can be declared appropriately while filing the returns. Instead of doing a chit on individual, you can start putting it on your firm name and use it for much better opportunities. 

With the impact of demonetization, no matter how fast or how soon we move to a cashless economy, when India is moving to more of digital payments, it makes all the more sense for all registered Chit fund companies also to gear up for accepting digital currency and take part in this big move. 

Here are the few things which I feel Chit fund industry should look forward to do. 

  1. Educate the customer the importance of this move. Help them to understand that it is going to do more good to them. 
  2. Make systems and process more subscriber friendly, by making it more transparent.  
  3. Leverage technology to participate in this big move. 
  4. All state associations should come together as one entity and make a representation to the GOI, asking why this industry should get its due significance. 

If, an industry is celebrating golden jubliee – 60 years of existence, that means to say this system is approved by the people and more importantly trusted by them to a very large extent. At ChitMonks, we are trying to leverage technology to bring the best of these services and help both the chit fund industry and the subscribers to make the best of this beautiful system which has been the defect banking industry to Millions of Indians. 

To conclude, my guru says, “Money in the hands of Good people will do enormous Good to the Society”. The statement doesn’t tell you, if you are good or not. So, as long as you are good, you have the moral responsibility of making more and more money. Let’s hope this demonetization will open doors for good people to be more rich.