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TRADITIONAL TECHNOLOGY' IN THE NEW FINANCIAL ORDER CHIT FUND = DEPOSIT + LOAN + INSURANCE
· Origin
· Background
· Cost Of Intermediation
· Deposit
· Loan
· Insurance Against Uncertainty
ORIGIN OF CHIT FUNDS
The chit fund also known as chitty, or kuri in India and ROSCA (Rotating Savings and Credit Association) internationally, occupy a unique position in the financial system of India. This is an indigenous system, which has its origin in India; particularly in the southern region. This some century old system can be traced as the brain child of agriculturists of those times, who formed into small groups and pooled their harvest of grains half yearly or so and appropriated it by turn. Later, money substituted grain, when this system attracted the imagination of the public at large, who identified it as an ideal mode to meet their financial needs. Thereafter, the scheme underwent yet another growth to be adopted at commercial level. This stage brought about the involvement of large sums of money in the system and came very handy to trade, commerce and industrial activities
BACKGROUND
The Indian market is getting to be consumer-led.This is the reason behind the unprecedented boom in consumer financing based on more sophisticated consumer research. Multinationals are pouring in precisely because of this new chapter in indian consumerism. The scene has moved beyond the global presence;inward and outward.
India has taken the irrevocable step forward in becoming a part of the global family. And in the process of growth, there is already, and will be in the future, quantum jump in services governed by consumer preferences. In the maize of hyper activity in the financial arena, there is one indigenous institution that has survived the test of time. The traditional technology of chit funds occupy our mind set and continues to enjoy a country wide customer support. Quietly and consistently, chit funds have continued to provide the solution to all consumer needs like financing of automobiles, houses, all aspects related to business and social festival needs, marriages and education, much like an insurance against event uncertainty. Even though the terminology used is "traditional technology" the cost of funds in chits is dictated by market forces of demand and supply of funds. Even though the chit system has used it since centuries, market mechanism is the new buzz word in the liberalisation glossary.
COST OF INTERMEDIATION
Chit funds are good for savings or finance. Few realise that the cost of intermediation is the lowest in chit fund schemes and is strictly governed by legislative and RBI guidelines. The service charges are fixed at 5% for each individual subscriber for the entire duration of the series, which may be 2 to 3 years. Effectively the cost of intermediation works out 1.5% to 2.5% per annum. In the case of banks, deposits are taken at 5% to 12% .a p.a. and loans are given at 15% to 20% p.a. The cost of intermediation for banks is a high 8 is a high 8% to 10% p.a.. For non banking financial companies too, the cost of intermediation works out to more than 6% p.a and is not governed by any legislative or RBI guideline.
DEPOSIT
The scheme of chits has an inbuilt mechanism to provide for market related returns to all its subscribers. At every auction meeting a bidding takes place and this process is known as the Auction of the Fund. The members of the chit come together to determine the "Loss" or rate of interest at which one of the members will utilise the pooled fund. This "Loss" translates as a profit to each subscriber in the chit for that auction (the amount is equally divided amongst all the subscribers in the relevAnt chit group). The process is repeated at every auction and the subscribers stand to get a profit in such auction meetings. For every deposited installment in the chit the subscriber earns a profit.
LOAN
The auctioning of pooled funds is a continuous process and auctions are conducted at definite intervals for the entire duration of the working of every chit scheme. These auctions provide a system for pooled funds to be alloted to the subscribers of the chit. The subscribers to a chit may plan their requirements ahead of time or meet an ad hoc demand for funds by getting the funds at auction meets. Loan implies that the subscriber of a chit gets more than what he has paid in a chit. The amount of loan varies with the face value of the chit and the duration after which the pooled funds are taken.
INSURANCE AGAINST EVENT UNCERTAINTY
There are times when a subscriber may suddenly require money. He may face seasonal or unexpected demand in his business, to fight a new competitor in business, for unplanned sales promotion or vendor credit or expansion or travel or to retain key employees. In his personal life there may be sudden need for funds for housing, education, marriage or illness. These unplanned or unbudgeted or contingency requirements can be met by taking a chit subscription and drawing the pool at the time of need. Since chit money is not product based and does not correlate with the way funds are finally used, the pool may be drawn for any of the needs noted above. The fact the auction meets are held at regular intervals of a week, a fortnight or a month, the scope to get the pool is fairly liquid. The chit subscriber can opt for the fund at the time any contingency arises.
CHIT FUND = DEPOSIT + LOAN + INSURANCE
By taking just one chit policy the subscriber satisfies all his needs for a deposit, a loan or a contingency insurance. As soon as a subscriber takes up membership in a series (say Rs 2,50,000/- = Rs 6250/- x 40 months) and subscribes his first installment, he gets the psychological support that he can draw the fund at any time when required. If he happens to draw the pool money after having paid a few installments, then the chit becomes a loan which the subscriber continues to repay during the balance duration of the chit. All the while that the subscriber does not the draw the pool funds, the amount of pool keeps increasing with the passage of time. The subscriber gains by not drawing and gets rewarded for his wait. These features make the chit a composite financial instrument that offers convenience and flexibility at the same time.
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