Advantages of chit funds in unorganized segment

Advantages of chit funds in unorganized segment

In India chit funds are quite popular and surprisingly more so in the unorganized or unregistered sector. The reasons for this popularity could be traced to the flexible mature in which these chit funds are managed and run. There could be debates on the basic nature of this financial operation, but there are no doubts about its flexibility and convenient operability.

Chit funds are flexible

This is the principal advantage on which the success of chit funds depends. Any person could become a member as long as you are known to the foreman. Though there is a theoretical limit on the bids that could be made, in reality borrowings could be beyond this limit, of course subject to pot amount collected. Flexibility lies also with amount that could be saved. In registered bodies though there is a fixed amount of savings, this does not hold true in the unorganized sector. For this reason, chit funds in the unregistered sector are hugely popular.

Best option for people in need

It is not always easy to get loans for people who do not work in the organized sector. They mostly depend on moneylenders who are mostly scrupulous and manipulative. Interest charged by these moneylenders on borrowings is also exorbitantly high. In comparison, borrowing from chit funds is simpler. There are no needs for any documentation like submission of IT returns or salary slips.

Option to borrow even after first instalment

Subscribers to a chit fund could borrow even after paying their first instalment. Such an option is not available with any form of finance schemes. Even in term deposits, borrowings are permissible after a minimum gestation period. This is the reason that motivates more members to join a chit fund. In spite of its many drawbacks, people still tilt towards saving in chit funds.

Returns are higher after the entire term period

Total dividend earned by members is higher compared to any other deposit scheme in organized sector such as in banks or private financial institutes. This benefit is enjoyed by members who keep their contributions till the end of entire term of a chit fund. The interest accrued in case of non-failure of instalment payments by any member is higher than any corresponding term deposit or savings schemes available in the market.

Prize money at your own disposal

Prize money that you are awarded is entirely yours and it is up to your discretion on how to use it. Members are not required to disclose the manner of spending the prize money won.

These advantages have contributed to the success of unregistered chit finds in India. Similar advantages are enjoyed by subscribers to state government, PSU (public sector undertaking), or private registered funds. As these represent the organized sector members are bound by certain regulations. There are restrictions on borrowings and savings. Documentation is also mandatory in these chit funds. These documentations and restrictions offer some form of protection to the fund collected and disbursed periodically as prized money.