And if there is one instrument that is both a credit and a savings instrument, it’s got to be the good ol’, scam-ridden chit fund. (View Highlight)
The size of India’s chit fund industry is bigger than Rs 75,000 crore (~US$9 billion), with around 50,000 registered chit funds operating across the country, according to data from the All India Association for Chit Funds. And the size of the un-registered segment is expected to be at least 50 times larger . (View Highlight)
Chit funds are a lifeline for many low-income households. (View Highlight)
Chit funds depend on a highly reliable group that comes together to save a fixed amount every month. This builds up into a tidy corpus, with the option for depositors to withdraw a part of it. And every month, the group gets together, and by way of bids, decides who gets dibs on the corpus. A foreman who manages the chit, is also paid a monthly fee. (View Highlight)
If there are 3 bidders Akshay, Simran, and Kuljit and they bid for Rs 95,000, Rs 90,000, and Rs 85,000, then the lowest bidder will get the amount after adjusting for foreman charges. Foreman charges are fixed at 5% of the total amount, i.e 5% of Rs 1 Lakh which is Rs 5,000 in this example. So, the lowest bidder, Kuljit, will now get a corpus of Rs 80,000.
To recap, out of the corpus of Rs 1 Lakh, Kuljit gets Rs 80,000, Foreman charges are Rs 5,000 and the remaining Rs 15,000 is the profit. This profit is shared equally among all the other 19 group members of chitters which sums up to Rs 750 per person. This is considered as the reward for not withdrawing money in this round, and functions as a proxy for interest. (View Highlight)
The whole thing works on the premise that, every month, whoever is in need only takes the amount that they need. And the two key rules to remember are: the less one person withdraws, the more beneficial it is for the rest of the members. And the later in the tenure you tap the corpus, the more you stand to benefit. (View Highlight)
As Selvi says, the foreman plays an important role here. They have to manage the fund, and even pitch in if one of the members chit doesn’t pay up that month. When I asked her how she decides which chit to enter, she said that was based on the relationship one had with the foreman. (View Highlight)
She said she didn’t know how an FD worked.
She understands the nuances of how a complicated product like a chit fund works. She knows how to manage the money going in and coming out; she can manage the risks involved; she deeply understands financial concepts. She is, without a doubt, what you’d normally call financially literate.
And that’s when it dawned on me. What she really lacked was financial products exposure. Something which we too often conflate with financial illiteracy . (View Highlight)
There is financial ‘illiteracy’ because the products we take into account when making such judgements were never meant for low-income households in the first place. As Dasgupta says, “the products we use are not customised for irregular cash flows. Most financial products are rigid watertight products made for the salaried class and then retrofitted for those with low income.” (View Highlight)
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