Chit funds demand insurance cover to safeguard subscribers’ money…

If there is something common across most Indian things, it is our lack of appreciation of our own history. We just don’t care for most things which are so much part of our history.

Chit funds is one such thing which have been found in India ages ago. Edith Jemima Simcox in  her study pointed to chits existing in Malabar 1000 plus years ago:

The Dravidian kiiri, or lottery, is said to have been handed down from very ancient times, and it is still commonly resorted to by any one desiring to raise a sum of money for some special purpose, such as a daughter’s marriage. The organizer of the lottery induces his friends to subscribe a certain amount of money or rice, which they bring to his house. They are there entertained, and draw lots to decide which of the guests shall receive similar contributions next. On this occasion the organizer contributes as well as the rest, and a feast is always given by the recipient of the lump sum. This goes on till all have received their friends’ contributions, the only element of chance being as to the date of repayment. The feast seems an essential part of the business, and thus suggests that the origin of the institution may really be found in the common meals and common revenues of permanent societies, like the Cretan or Carthaginian clubs.

The author notes of similar chit funds in China too leading to the question who learnt from whom?

This was the oldest form of financial intermediation in India and has managed to survive all these years. But we have hardly done anything to preserve this history and try give it a more positive image. Chit funds are only known for the frauds and an industry one is always asked to avoid.

On the other hand, Joint stock banks too have been full of frauds but remain the safest bet amidst financial intermediaries despite destroying lots of wealth time and again. Quite a few Kerala based banks started as foremen for chit funds and managed to get rid of the scam tag from them. Those financial entities that continued as chit funds remain ridden with controversy.

Having said that, it is also amazing that Indians continue to love chit funds and continue to be their members. The main reason for this is they get funds on much easier terms than banks and also do not need collateral. The onus remains on foreman to run the show which has been found wanting. The banking industry manages to call few bad banks as exceptions but the same thing does not happen to chit fund industry.

Now it seems the Chit Fund Association has asked for protection to its subscribers:

The All India Association of Chit Funds has approached the finance ministry and the Insurance Regulatory Authority of India (Irdai), seeking modifications to the Chit Fund Act 1982 for bringing in insurance cover as a securitisation strategy for chit subscribers.

Chit funds are regulated entities, classified as miscellaneous non-banking financial institutions, under the Reserve Bank of India Act, 1934 and are governed by the Chit Fund Act 1982, which is administered by respective state governments.

“Chit funds continue to be an integral part of the financial networking in our society. We have submitted a memorandum to the finance ministry seeking an amendment to the Chit Fund Act 1982. As any suggestion or recommendation can be given effect only with legislative and administrative support, amendment to the act will be the logical step in this direction for meeting the insurance norms,” TS Sivaramakrishnan, general secretary, All India Association of Chit Funds, said.

Incidentally, chit funds are also seeking change of the name as most often it relates to ponzi schemes by unregistered chit fund companies.

There are more than 30,000 registered chit operators having an annual turnover exceeding R40,000 crore in India. The Association of Chit Funds said unregistered chit operators could be at least 25 times more than the registered ones.

Members of the association recently met finance minister Arun Jaitley seeking amendment to the Chit Fund Act, 1982. “This Act is obsolete and needs amendment to several provisions that are inconsistent and practically not possible to adhere,” Sivaramakrishnan said, adding that the amendment to the Act is the first requirement if chit funds have to be encouraged to play a more effective role in the financial inclusion programme.

On insurance coverage, Sivaramakrishnan explained that the Act rightly provides penal provisions for various defaults on the part of the foreman, but the main concern of subscribers is safety and security. So, extending insurance coverage to subscribers money may be a prudent initiative.The Association has also requested to be allowed to undertake fee-based activity such as selling insurance policies and other financial products. Availability of credit history is essential in the context of selling these products from the banks and other deposit-taking institutions.

 It will be interesting to read the proposal in details. Indian banking too got a thrust in confidence post Deposit Insurance in 1961.
But then as chit funds demand insurance from government, latter will impose more regulations on them. This will increase their costs and pose further issues.
All this is fascinating. Lots of history here..

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