Finance Minister releases SEFC’s Chit Fund Report

Recently Ms. Preethi Rao and Ms. Sharon Buteau, from the Small Enterprise Finance Centre (SEFC), IFMR, had their report on chit funds titled ‘Chit funds as an innovative access to finance for low-income households’ released by the Indian Finance Minister, Mr. Pranab Mukherjee.

The report prepared by the two under the guidance of Professor Mudit Kapoor of ISB, Hyderabad and Professor Antoinette Schoar of MIT Sloan School of Management, US, in summary, brings out the results of a two year long study involving data collection on the size of the registered Chit Fund industry, how it serves the members, what is the cost of funds and finally what is the size of its unregulated counterparts.

This study was conducted in five different states in India including Tamil Nadu, Andhra Pradesh, Karnataka, Kerala and Delhi.

The main findings of the report are listed below:

1. The registered chit fund industry is much larger than regulators and participants previously estimated. The percentage of households participating in registered chit funds is between 5-10% of the total household population (except Delhi). On average the money circulated via chits is around Rs. 50000 per household (except Kerala).

2. The recent trend in the chit fund industry shows a move towards fewer but much larger chit schemes over the last decade. These findings suggest that registered chit funds are moving away from serving the very poor.
3. These trends are concerning, since historically chit funds provided access to financial services for the poor. The research shows that on average 50% of chit fund members are below the poverty line (household income of less than Rs.62.5 per day).
4. A survey of chit fund members shows that for the majority of participants in chit funds this is their primary financial instrument. In fact almost 2/3rds of the participants use the chit for savings purposes rather than borrowing. 96% of registered chit fund members consider the chit company they participate in to be safe. Even chit members who are not currently participating in chit funds think they are safe.

5. Analysis of the bidding data of participants in chit funds shows that on average the interest rates are comparable to other financial vehicles for the poor such as MFI loans. Moreover, the interest rates that participants are willing to bid in the chit funds respond to changes in the credit conditions in the broader financial market.