Legend would have it that ‘a pen is mightier that sword’ and for good reason. But if you were to go by a recent study by the Small Enterprise and Finance Centre (SEFC) at IFMR, the tiny pen can tell you a thing or two about the preferences of the guy who bought and sold that pen. Intrigued? Read on.
The spotlight on marquee multinationals and big brands aside, small and medium enterprises are at the heart of the nation’s economy. It can be a complex endeavor to understand the multitude factors that interplay when it comes to the way they approach their business – key amongst which would be ethnicity, thanks to the vast diversity that exists across the nation.
Dwelling deep, does ethnicity influence the choices that small business owners make when it comes approaching business decisions and strategies employed towards trade? There have been no systematic studies that have been able to document its holding good; precisely an outcome that SEFC set out to close on. The research set out to test whether indeed there are important differences in trading strategies and business practices across small business owners that come from different ethnic backgrounds.
For this purpose SEFC, after careful deliberation and keeping in mind a few factors, identified the wholesale pen industry for its research. Parrys, a locality in North Chennai, with a name sounding similar to an exotic foreign capital was chosen for research. For a visitor, Parrys can be anything but its similar sounding cousin: Chaotic, dusty, crowded and fast-paced, yet the locality has a rhythm of its own. Sandya Kumar, senior researcher on the study calls it “a wonderland for researchers and one of the best places to study small enterprises in Chennai”.
SEFC adopted an audit-study approach to the research, simulating a transaction in real-time, for which it identified a total of 47 entrepreneurs from 3 different communities – Marwaris, Tamilians and Andhrites. These entrepreneurs (called auditors) after extensive training and under strict supervision were asked to hit the wholesale market with a tailor-made script to follow. They visited 107 shops owned by mixed ethnicities and placed orders for pens – both customized and non-customized. The investigation lasted for a year and the research findings conclude that ethnicity of the parties involved did play an important role in determining the features of the business transaction.
In-depth findings of the study can be viewed in the presentation below:
What’s your opinion?
By Preethi Rao
After the successful completion of the first phase of our Chit Fund Research, Small Enterprise Finance Centre (SEFC) is entering into the second phase that involves 3 year long, rigorous, on-the-ground experiments. Our findings from the study titled “Chit Funds as an innovative access to finance for low income households” point to the fact that though Chit Funds are an important source of finance for small businesses and low-income households in India, there has been a general exodus of low value chit schemes from the registered Chit Fund market. This is mainly because registered Chit Funds find it less lucrative to serve the poor due to the increased cost of operating such schemes imposed by the regulators.
We find that the Chit Fund industry addresses the savings needs of people, is considered very safe and also offers loans at lower interest rates than moneylenders. In order that these benefits reach the poor, we propose to test different schemes for the poor in collaboration with Chit Fund companies across India and understand how Chit Funds can be developed as an innovative access to finance for low-income households. In particular we propose to test the following:-
1. Impact of setting up registered Chit Funds in rural areas – Majority of the poor people in India live in the rural areas. Under this pilot project, we propose to collaborate with volunteering chit companies to start a registered chit scheme in one village in each of the four states – Tamil Nadu, Andhra Pradesh, Karnataka and Delhi. We will document the costs of registration and implementation of the schemes as well as the defaults and repayment behavior of the rural chit members. We will compare the costs and member behavior to that of an urban scheme with similar characteristics to understand what are the costs and benefits to chit companies to do business in rural areas and thus serve the poor in these areas.
2. Impact of altering collateral/guarantee requirements – Most of the poor people in India are unable to provide collateral or guarantee for the loans they require as they do not have access to any property of significant value nor are they able to provide guarantees from trusted people (like government employees). Under this pilot project, we propose to work with volunteering chit companies to start low value chit schemes where the members are asked to provide nil or lower collateral or guarantee than in a usual scheme. We will study the defaults and repayment behavior in the schemes to understand the impact of lowering collateral and guarantee requirements.
3. Developing a credit scoring model for Chit Funds – Given the long history of chit funds in India, the information that each chit company will have on its members will be humongous. Under this pilot project, we propose to look at the data available with the chit companies, put the data in an analyzable format and finally build prediction models using the data that would help Chit Funds to foresee the repayment behavior of the members.
In order to explain the nuances of the research projects and to gain cooperation from the participants we have conducted in-depth meetings and discussions with chit fund companies in Tamil Nadu and Karnataka and we propose to conduct similar meetings in the other two states i.e. Andhra Pradesh and Delhi. So far, the participating chit fund companies have expressed interest in the proposed projects and are very enthusiastic to take it forward.
To learn more about how chit fund is an innovative access to finance for low-income households, write to preethi.rao [at] ifmr.ac.in or sharon.buteau [at] ifmr.ac.in or leave a comment below. We would love to hear what you have to say.
Preethi Rao is a senior research associate with the Small Enterprise Finance Centre at IFMR Research.
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:
- 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).
- 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.
- 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).
- 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.
- 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.
