Critical observation of chit funds in India

Critical observation of chit funds in India

Critical observation of chit funds in India

Chit funds in India are popular avenues of savings, especially in the unorganized sector.
Though there are chit funds run by state governments, public sector undertakings, and registered private companies, major mobilization is in the unorganized or unregistered segment. The reason for predominance of unorganized segment is perhaps due to the fundamental nature of this savings method.

The attractions

Saving is easy as it does not require any documentary proof of identity. The entire operation is restricted within a group of known members, and monetary transactions are based on trust. It is the fastest way of borrowing, and the amount could be more than your saved amount. By these facts it might appear that there could be no better alternative to chit funds for farmers, artisans, small businessmen, and small scale industry owners.

Going by these advantages chit funds appear tempting and convenient. However, immense precautions are needed for saving in chit funds. Chit funds controlled by government undertakings or registered private companies though are safe; the same is not true for unorganized associations. As the entire operations of a chit fund is based on trust, the presence of fraudulent and manipulative members could upset an association in totality. As human nature is difficult to judge from outside, the risks of saving in chit funds is always very high.

The risks

This risk is significantly increased if the foreman is unreliable and dishonest. Foreman being the central character in any chit fund, his or her integrity is of prime concern. Risk is less if a foreman is known to be of clean and honest nature. Reliability of members is also important for smooth functioning of chit funds. There is high possibility of members eloping from a chit fund group after winning his bid. Instances of members disappearing after winning their bid are very common.

Solvency of members is another aspect one needs to examine before becoming a part or subscribing to a chit fund. The success of such a fund depends on members contributing periodically without fail. Subscribers might fail to contribute on one or more occasions. In such instances the regular operations of a chit fund could get adversely affected.

Taking all such considerations chit fund is always a risky option with little protection. Such risks are eliminated to a considerable extent in state agencies and registered bodies. Though returns from an organized sector might not be as high as from unorganized sector, it is always wise to save in the former.

Final considerations

In spite of all these drawbacks the popularity of unregistered chit fund companies in India could appear baffling. The only reason for this is their convenience. These exist in micro levels in neighbourhoods and towns and are more easily accessible than any government undertakings or private registered companies. In addition, the formalities associated with an organized setup are more as compared to unorganized sectors. All said and done, saving in chit funds should always be done with caution and after making thorough enquiries about promoters, and foreman.