PERSONAL WEALTH “MANAGING A CHIT FUND IS SEEN ASA BAD PROFESSION NOW; IT’S SEEN WITH A LOT OF SUSPICION

“CHIT FUNDS ARE MORE FLEXIBLE THAN BANKS. THEY REQUIRE LESS DOCUMENTATION”

V.C. PRAVEEN

Director, Sri Gokulam Chit C Finance

necessary,” says V. C. Praveen, director at Chen­nai-based Sri Gokulam Chit & Finance.

Cheat VS Chit

Chit funds, which mostly cater to small savers and traders, are lately linked to almost every invest­ment scam in the country. The industry is seen with a lot of suspicion in the af­termath of the collapse of Saradha Group (in April 2013), which wiped out the savings of thousands of investors. The Rose Valley Scam and the KBC

 

Chit Fund scam tarnished the image of chit funds even further.

“Saradha and Rose Val­ley were collecting public deposits and investing the money in real estate. They were promising super-nor­mal returns to investors. Chit funds do not engage in such activities. The pot is always in the bank; it is not re-invested,” clarifies Sivaramakrishnan.

Chit funds are not al­lowed to do any other busi­ness without the permis­sion of the state govern­ment. Chit fund associa­
tion members, however, acknowledge that there are many unregistered chit funds, which could be di­verting funds for making dubious investments. As per industry estimates, over 12,000 registered chit funds manage Rs 35,000 crore every year. The share of unregistered funds may be 80-90 times that of reg­istered funds, association members opine.

“It is very important to differentiate between chit funds and ‘collective in­vestment schemes’ (or ‘ponzi’ schemes). The lat­
ter is not regulated by the government and hence, unsafe,” says Preethi Rao, policy and development fellow at IFMR, which has done extensive research on chit funds.

“Investors should look for chit fund companies that are registered under the Chit Fund Act, 1982 and have been around for many years. Apart from checking company regis­tration, it is also impor­tant to check whether the scheme (one is participat­ing in) is also registered,” advises Rao.

Association members say, registered chit funds take adequate precautions while admitting new members — they need to have strong referrals, sup­port of guarantors or col­lateral. And contrary to popular belief, there is le­gal recourse for those in­vested in registered chit funds. They can approach the state registrar of chit funds or the deputy regis­trar of chits (at the district level) to lodge complaints and seek relief. However, for those invested in un­registered chit funds, legal recourse is limited.

The chit foremen too have to be registered with the registrar under various state governments. They then have to get separate approvals for different chit schemes. They also have to submit the collection and auction procedure reports

periodically, and deposit security — equivalent to the chit amount as cash or bank guarantee — with authorities specified by the respective state govern­ments. The chit company ■will not be allowed to with­draw this collateral till all participants have been paid. Such regulations make chit funds safer, but also costly.

Service Tax Worries

The government has de­cided to impose service tax (at 14 per cent across ser­vices) on firms running chit funds. This is likely to have an impact on net earnings from chit funds.

“The chit promoter is not in a position to take the burden on his shoulder as this industry is subject to a cap on its income, which is a wafer thin 5 per cent for the entire period of service, which go up to 60 months,” says Sivara- makrishnan. “This will also lead to the burgeoning of unregistered chit fund schemes,” warns Praveen.

periodically, and deposit security — equivalent to the chit amount as cash or bank guarantee — with authorities specified by the respective state govern­ments. The chit company ■will not be allowed to with­draw this collateral till all participants have been paid. Such regulations make chit funds safer, but also costly.

Service Tax Worries

The government has de­cided to impose service tax (at 14 per cent across ser­vices) on firms running chit funds. This is likely to have an impact on net earnings from chit funds.

“The chit promoter is not in a position to take the burden on his shoulder as this industry is subject to a cap on its income, which is a wafer thin 5 per cent for the entire period of service, which go up to 60 months,” says Sivara- makrishnan. “This will also lead to the burgeoning of unregistered chit fund schemes,” warns Praveen.

funds address gaps left by the traditional banking sector. They mobilise indi­viduals into small groups to save among themselves. The popularity of unregis­tered chit funds in villages and towns is a standing testimony to this fact.

“Registered chit funds are quite safe for small in­vestors as there are strict guidelines for registered companies to follow. The primary problem faced by chit funds in recent times is bad press. The media has erroneously blamed the registered chit indus­try for the scam perpe­trated by collective invest­ment scheme operators,” says Rao of IFMR.

“The need of the hour is to educate the public about the safety of the registered chit funds since they play a major role in the financial inclusion agenda of the country,” she says.

The time is just right to distinguish between chit funds and cheat funds. EQ

shailesh @ businessworld. in If @alertsmenon For more on chit funds, visit www.businessworld.in

Post navigation

Leave a Reply

Your email address will not be published. Required fields are marked *