Why Chit Fund?

In many parts of India, Chit Funds address gaps left by the traditional banking sector. They mobilize huge amounts of small savings, and in return allow members to have access in the form of loans to lump sum amount of money that they would often not be able to get from traditional banks. Easy accessibility and flexibility are important aspects of this form of financing. Compared to banks, Chit Funds require less documentation, are more flexible about collateral, and allows to determine own interest rate (within the constraints of a given chit scheme). Furthermore, there is no need to determine upfront whether funds are used for saving or borrowing. This is a salient feature of chit funds as it not only puts in place a disciplined saving mechanism, but it also allows to access cash when needed. In addition, as Chit Funds use the funds of the participants there is much less capital requirements for the institution (unlike banks).

Literature shows that the primary uses of Chit Funds are the following:-

• To address consumption needs such as marriage, education, property purchase and so on.
• To pay off costlier loans from outside sources like loan from money lenders.
• To address working capital, business expansion or start-up capital needs of small businesses.
• For emergency needs or simply as savings for future needs.