What is the size of Chit fund sector in India? From where do we get reliable data on Chit fund sector in India? How many players are there in Chit fund sector? What is the size of customer base in Chit fund sector in India?
Reliable data on the above is missing largely because of the absence of a central Regulator in chit sector in India. Though the Central Chit Fund Act, 1982 (CFA 1982) has been there during the past several years, the act does not provide for a central Regulator for chits and the regulatory functions have been given to respective state governments where the chit is situated/conducted.
In the absence of a centrally collated data base, we have to rely on the data available elsewhere. According to data provided by the All-India Association for Chit Funds, there are 45,000 registered chit fund companies, with an annual turnover of Rs 60,000 crore. However, this data is likely to be old ‘coz the state -run KSFE (the largest Chit fund in India) alone has an annual turnover of around Rs 40,000cr. The size of the unregulated chit fund segment being estimated @three times larger, the aggregate turn over should exceed Rs300,000 cr.
In Thrissur dist (Kerala) – known as the birthplace of chit in India – alone the registered chits are over 3000 and the whole of Kerala has over 5000 registered chit companies according to the All-Kerala Chit Fund Association. The e-records available in the MCA (Ministry of Company Affairs) portal displays a list containing 10269 registered chit companies.
Chit is a financial instrument used across the globe and is known as ROSCA (Rotating Savings and Credit Association) internationally. It is popular as ‘Jameya’ in Middle East, ‘Chita’ in South Africa, ‘Chilemba’ in Uganda, ‘Tontine’ in Singapore, ‘Kutu’ in Malaysia, ‘Pool’ in Mauritius, ‘Khatta’ in Sudan, ‘ko’ in Japan, ‘Arisan’ in Indonesia and ‘Esu’ in Bahamas to name a few.
The word ‘chit’, representing a financial instrument, may have originated from the Hindi word ‘chitty’ meaning a small piece of folded paper. Chit was a method of meeting the need of a member in a community or group. A group of like-minded people would assemble to meet the requirements of members and since all members have equal rights, the allocation to a member was decided through ‘lot’ based on the chits (each chit representing one member in the group). During the barter system days, even the need to have grains used to rely on chit. That is why the CFA,1982 (section 2 definition of chit) still talks of grain. As the currency system developed, grain was replaced by currency, but the system of allocating the pooled resources continued through chit/lot. The system got refined over the years and now we have a super microfinance instrument in the form of chit.
However, the refinements have been very slow and is still wanting a lot of improvements. Though a Central Govt regulation, the CFA 1982 gives overwhelming powers to the state governments which can even nullify the central regulation. As per section 87 of CFA,1982, “the state govt may in consultation with RBI, by notification in the official gazette, and subject to such conditions as may be specified in the notification, exempt any person or class of persons or any chit or class of chits from all or any of the provisions of this act.” As chit is an anathema to RBI, the afore said ‘consultation with the Reserve Bank’ hardly happens as RBI ignores any request pertaining to chit from state govts.
Not all chit fund companies are opaque or they run fraudulent schemes. In many states, the chit sector is the back bone of financial structure in rural areas. Nevertheless, the chit sector had to bear the brunt of criticism due to the fraudulent activities of some companies viz Saradha Group and Rose Valley Group and their ilk. These companies were not chit fund companies as they were deposit accepting companies (requires RBI license) or they were running prized chits and Money Circulation Schemes (activities banned under chit sector).
In this connection, it is pertinent to mention the investor protection measures adopted by some states in India. Apart from adopting certain regulatory measures, the govts of two southern states viz Kerala and Karnataka ventured to set up fully owned companies for the purpose of conducting chits. Credibility of the foreman being the most important factor in chits, the govt ownership helped these companies to forge ahead in building up business. Thus, the Kerala govt-owned KSFE (set up in 1969) reportedly stands as the largest chit fund company in the world in chit sector with a per annum turnover @ Rs40000 crore. However, the Karnataka govt – owned company, MSIL Chits (set up in 2005), has a meagre turn over @Rs 250 cr reportedly due to mismanagement.
The Govt ownership poses some conflict of interest as well. Both KSFE and MSIL Chits are owned by the state governments and the regulators of these companies are also the respective state governments. In other words, regulated entities and the respective Regulators are one and the same and this could lead to allegations. Reportedly, the state govts, (exercising their powers under Section 87 of CFA 1982) mete out special privileges to the companies under their ownership rendering level-playing field impossible for other players in chit sector. This could be questioned before the Competition Commission of India (CCI).
Though the financial sector across the globe has completely automated their process/operations, chit companies have hardly automated the operations completely, especially the front office. The regulators also show slackness in implementing improvements. Needless to say that accuracy, speed, compliance and transparency would take a back seat in such situations. The CFA 1982 was loosely based on the Cochin Kuries Act, 1932 and many of its sections have turned anachronistic. In view of this, in 2011 the finance ministry set up an expert panel comprising representatives from RBI, Indian Banks Association and state govts. The Panel recommendations viz tightening regulatory overview, mandatory rating for chit fund companies, creation of self-regulatory body, insurance protection for customers, development of grievance redressal mechanism, securitization by Chit sector players for addressing liquidity risks etc were relevant and progressive in nature. Nevertheless, these recommendations were never acted upon subsequently.
Why is chit considered to be a super microfinance instrument? Chit starts as a deposit but soon transforms in to a ‘loan’ for each member in the group. Thus, it is a hybrid instrument combining both investment and loan. For an investor, chit may be comparable to Recurring Deposit (RD) or SIP(MF). But chit scores over both, ‘coz chit offers ‘loan’ against even the future instalments (unlike RD) and chit does not have any market risk (unlike SIP). Secondly, getting the chit money by exercising put option is the right of a chit subscriber (unlike bank loans). Thirdly, the formalities associated with chit are easily doable and transparent when compared to bank loans. Fourthly, the cost associated with chit is much less when compared to a bank loan. On an average the cost is around 10% pa whereas the cost of bank loans varies between 12% – 15%. The RBI regulated microfinance companies charge interest @over 20% pa. Lastly, chit does not have any hidden costs viz processing fee, prepayment penalty, CERSAI charge, inspection charge, ledger folio charges etc.
Chit is an excellent instrument for consolidating financial inclusion. However, the central govt has not accorded due importance to this sector. The GST element on foreman commission has been a thorny issue because the burden is on the subscriber. When the players sincerely hoped that the GST would be annulled or reduced, the Govt, much contrary to their hope, raised the rate from 12% to 18%!!
Unfortunately, RBI not only keeps Chits at arm’s length but discourages its growth. Sadly, the credit score facility (extended by agencies like Transunion CIBIL) is not allowed for chit companies. The functioning of chit sector needs to be revamped completely by constituting a new Regulatory authority at the central govt level (on the line of PFRDA, IRDA etc), introducing compulsory functional automation (including on line submission of regulatory forms etc), amendment of age-old accounting practices/standards, standardization of procedures (including stamp duty) in all states and digitization of payment system. As liquidity risk is the single biggest risk in chits, a provision for liquidity support to Chit companies may also be thought of. There has to be a level playing field for all players in this sector. Therefore Section 87 of the CFA1982 needs to be repealed or amended.