Chit as a Loan
Small and Medium Enterprises (SME's)
Cash flows are the lifeline of business - big or small. Usually big businesses manage to meet their capital requirements with the help of banks and other formal financial channels. Banks extend timely support to big enterprises and it is a win-win situation for both parties. Small businesses are traditionally avoided by banks and formal ?nancial institutions because of their accounting procedures, lack of proper recordkeeping and are unable to provide satisfactory security. They have been historically wedged between the money lenders, with their exorbitant cost of loans, and banks, with their stringent procedures. Chit funds are a more suitable ?nancing model for small businesses mainly because they do not require rigorous documentation. Chit funds have been helping small businesses overcome their ?nancial constraints. As and when the need arises, SME's bid in the auction and receive the loan out of their own funds. Once they receive the loan, they continue to pay the monthly contributions, and this accounts for payment towards both the interest and principal which makes the repayment easier and less arduous. Also, in chit funds, small traders can decide their own interest rates depending on their need. Chit fund interest rates are in effect the market determined interest rates. Thus a small enterprise, with prudent planning can meet their capital requirements with the help of a Chit Fund.
Individual / Family
All of us would like to own a Car, a Home, Land, a Personal Computer an LCD TV and myriad other possessions to make our life worth living. It is possible to own every conceivable luxury with proper financial planning. In short you can fulfill every dream with proper financial discipline. Investing a portion of your income in chits would help you own any gadget or vehicle land and other assets etc you have been keen on possessing. An equated monthly installment (EMI) offered by a retail outlet would include hidden charges and interest costs. Most importantly, the asset itself is mortgaged/hypothecated to the finance company or retail outlet offering such EMI. Planning via a chit fund would not entail any such hypothecation and the interest cost would be equal or less than what is offered by the retail outlet or finance company.
Education and Marriage
For a majority of Indians, Education and Marriage of their children are of prime importance. Increasing education costs all the way from primary schooling to higher education and beyond puts the onus on parents to plan for such expenses from the very beginning. Taking an education loan is expensive in India. Interest rates charged by banks on an education loans are much higher than home loans since there is no tangible collateral for the bank when the loan is approved. Investing consistently in chits would help a parent meet the education expenses of their children.
Marriages in India are an expensive affair. They may be made in heaven but have to be paid for on earth. Since marriage is inevitable, it must be planned for, more so in the case of a girl child. Chit Funds can provide the liquidity that is required to fund a wedding at a much lower interest cost in comparison with bank loan.