By Preethi Rao
After the successful completion of the first phase of our Chit Fund Research, Small Enterprise Finance Centre (SEFC) is entering into the second phase that involves 3 year long, rigorous, on-the-ground experiments. Our findings from the study titled “Chit Funds as an innovative access to finance for low income households” point to the fact that though Chit Funds are an important source of finance for small businesses and low-income households in India, there has been a general exodus of low value chit schemes from the registered Chit Fund market. This is mainly because registered Chit Funds find it less lucrative to serve the poor due to the increased cost of operating such schemes imposed by the regulators.
We find that the Chit Fund industry addresses the savings needs of people, is considered very safe and also offers loans at lower interest rates than moneylenders. In order that these benefits reach the poor, we propose to test different schemes for the poor in collaboration with Chit Fund companies across India and understand how Chit Funds can be developed as an innovative access to finance for low-income households. In particular we propose to test the following:-
1. Impact of setting up registered Chit Funds in rural areas – Majority of the poor people in India live in the rural areas. Under this pilot project, we propose to collaborate with volunteering chit companies to start a registered chit scheme in one village in each of the four states – Tamil Nadu, Andhra Pradesh, Karnataka and Delhi. We will document the costs of registration and implementation of the schemes as well as the defaults and repayment behavior of the rural chit members. We will compare the costs and member behavior to that of an urban scheme with similar characteristics to understand what are the costs and benefits to chit companies to do business in rural areas and thus serve the poor in these areas.
2. Impact of altering collateral/guarantee requirements – Most of the poor people in India are unable to provide collateral or guarantee for the loans they require as they do not have access to any property of significant value nor are they able to provide guarantees from trusted people (like government employees). Under this pilot project, we propose to work with volunteering chit companies to start low value chit schemes where the members are asked to provide nil or lower collateral or guarantee than in a usual scheme. We will study the defaults and repayment behavior in the schemes to understand the impact of lowering collateral and guarantee requirements.
3. Developing a credit scoring model for Chit Funds – Given the long history of chit funds in India, the information that each chit company will have on its members will be humongous. Under this pilot project, we propose to look at the data available with the chit companies, put the data in an analyzable format and finally build prediction models using the data that would help Chit Funds to foresee the repayment behavior of the members.
In order to explain the nuances of the research projects and to gain cooperation from the participants we have conducted in-depth meetings and discussions with chit fund companies in Tamil Nadu and Karnataka and we propose to conduct similar meetings in the other two states i.e. Andhra Pradesh and Delhi. So far, the participating chit fund companies have expressed interest in the proposed projects and are very enthusiastic to take it forward.
To learn more about how chit fund is an innovative access to finance for low-income households, write to preethi.rao [at] ifmr.ac.in or sharon.buteau [at] ifmr.ac.in or leave a comment below. We would love to hear what you have to say.
Preethi Rao is a senior research associate with the Small Enterprise Finance Centre at IFMR Research.