Why chit funds are popular in spite of their drawbacks in India

Why chit funds are popular in spite of their drawbacks in India

Chit fund as means of savings is quite popular in India. This is mostly because a large section of its earning class finds it easy to understand and approach. A common misconception among people is that chit funds are meant to bluff investors and must not be encouraged. It is true that chit funds in India have a tainted history as many of them were promoted by unscrupulous promoters and foreman.

There are chit funds that are safe and could be relied on. These are predominantly registered and under the control of state governments or private limited companies. Though there is some amount of scepticism regarding privately owned chit fund companies, they are safe as they need to be registered with registrar of chit funds of concerning state. Surety in these companies comes in the form of collateral security kept by promoters and foreman. According to Chit Funds Act of 1982, this collateral security might be liquidated for recovery of savings when they are not paid to subscribers.

Limited access to organized sector

The problem with most Indians is that they do not have access to organized chit fund companies. Also the majority of members to chit funds in India are small earners and are apprehensive about approaching government set-ups or registered private companies. They still rely more on known faces rather than investing in a somewhat alien environment such as government enterprises or a registered company.

For most Indians this is a tricky situation. They are caught between choosing between unsafe but known place and an unknown but safe organization. Rationally, a subscriber should save in a safe place considering the risk associated with an unknown environment. But, practically most members tilt towards an unsafe source. The only rationale behind this behaviour could be easy acquaintance. Subscribers feel more comfortable in a known surrounding.

Confidence in foreman

Saving in these unorganized chit funds could be lucrative provided you are completely confident about the concerned foreman. If foreman is dependable then members are at least confident that their savings are protected. In case savings fail to get mobilized then foreman could recover the cost by selling off his assets kept as security.

Manageable contribution

Another aspect that guides people in saving in unorganised chit funds is the sum of contribution involved. Normally in large organizations this sum could be high. But in unorganised sector the amount involved is considerably less. Members are usually small earners and the sum of contribution could be even rupees five hundred per month. This being affordable for small traders and farmers, the prominence of unregistered chit funds is understandable. Usually within a village or a community, members are well known to each other and the possibility of them cheating is less.

Further within a close community, the chances of meeting are high which increases the faith among members. Chit funds are quite popular among communities, in villages, and in small towns. The only word of caution is that saving in these chit funds should only be done if you have complete faith in the foreman and other group members.