Chit Fund or ROSCA

Chit fund business is also called as ROSCA, which stands for Rotating Savings and Credit Associations. A group of people pays a monthly sum to a “pot” and at the end of each month, using the bidding system, the highest bidder will get the “pot”. The rest of the balance money will be distributed among each person in equal shares. Sounds very fascinating, since it is you can save and borrow money without interest.

Myths running around the chit business

Although being a favorite model of a saving scheme in India, rumors running around chit business guarantees a high risk-factor involvement.

• Chit factor doesn’t offer any significant advantage as a financial tool
• Chit funds are not a government recognized and are unregulated and unsecured
• Chit funds return are taxable
• Chit funds are just a local informal tool
• Chit funds are only used by lower-income people from villages and small towns
  

These are all not true when inspected. It is a myth framed by people who are not aware of the chit fund savings system. Read more about the myths and facts of the chit business, before you jump into any conclusion.

Growth seems very promising

Saving in a chit business is helpful over any other microfinance model for business people, entrepreneurs and also for common people. But the industry’s real jackpot is for the financial institutions who run this business.

Government has regulated certain acts by hardening the chain which serves as a beneficiary tool for the people who run the chit fund business and also the customers of the chit funds. Earlier there were 2.5 million customers with Rs 14,646 crore in annual business, but now the estimate goes to 35,000 crores. The nation’s top chit fund company Shriram chits turnover is close to Rs 4,200 crore.

There are so many MFI, and investors like to explore all the ways to get capital at lower interest rates with minimal risk inherent factors.

“Chit funds will be the best option to achieve the mid-term and short-term goals”

When this statement is said aloud, and looking at Indian business market’s population, which is filled with many small-scale industries, entrepreneurship business models, chit funds will be the promising investments.

For example, Lok Capital, a VC firm founded by IDFC’s Rajiv Lall and PE veteran and former Actis head in India, Donald Peck, was focusing on the microfinance sector, is now actively exploring options to invest in chit fund companies.

“We are looking at investment opportunities that will expand financial inclusion, and chit funds is one. The chit fund model is unique, and it has a lot of advantages, with elements of savings. They operate on the same model as MFIs, and it also caps their commission,” said Venky Natarajan, managing director of Lok Advisory Services.

Here is a window of opportunity that proves chit fund companies will arise along the scale in no matter of time

• Rs 35,000 crore is the estimated size of the chit fund industry
• 1/3rd of the industry is ruled by Kerala, Andhra Pradesh, and Tamil Nadu
• 30,000 registered companies exist
• 100 times bigger is the unregistered sector than the registered one
• 20% growth seen by the sector last year
• 10–15% growth is considered being usual every year
• 5% of chit value can be taken by funds as commission
  

Well, we have been discussing around some private sector group of companies are under pressure of breaking even at the minimal time period. The major of them invest in chit funds which come with both saving and borrowing money without interest.

The numbers don’t lie and it is remarkable growth for the chit fund companies who have been running this as a legacy family business. Opportunity for investment in this industry seems very promising.

If you are looking to run financial services business, chit fund seems a reliable one and looking for investment, the chit fund investment seems more reliable.