Chennai media was full of stories recently about a few chit fund and finance companies vanishing or collapsing and the irate depositors rushing to the police. Once a rumour starts about a small chit fund company owner absconding, there is a run on other similar sized companies, and for a few weeks, there is utter chaos. A senior finance professional is not particularly sympathetic to the depositors. ?Ask them what kind of returns they were getting. If you want to make quick money then you have to be prepared to take risks,? he says. ?Finance company failures are like road accidents. You have to only worry about the frequency.?
Non-banking finance companies no longer enjoy the kind of growth and popularity they enjoyed in the 80s and 90s. That was when just about everybody, including big names, in the industry was setting up a finance company. A lot of them like Alpic Finance, Mafatlal Finance, 20th Century Finance, Apple Credit, Gujarat Lease Finance, Nagarjuna Finance, Escort Finance, Lloyds Finance, CG Finance, Pinnacle Finance and Piramal Finance have either faded into insignificance, disappeared or reinvented themselves. When the Rs 1200 crore CRB Finance collapsed in 1996, RBI became really strict, tightened the rules and regulations. No longer can they advertise and invite public deposits as they used to.
However, anybody can collect deposits privately. If partnership companies and private companies collect funds, there is very little anyone can do. One can create several partnerships to collect money. When the economy is doing well, these informal arrangements work very well. Invariably when these funds get diverted to real estate and stock market and the crashes occur in these sectors, the depositors lose out. ?Liquidity management in finance business is very essential,? says R Thyagarajan, chairman of the Rs 5000 crore Shriram group.
The Shriram group started as a chit fund company in 1974. Although it has branched out now as a major group in financial services with other diversified interests, it still runs its chit fund operations successfully without having been affected by any of the scandals blowing in the finance industry over the years. Shriram Chits is the largest chit funds entity in India. The annual auction turnover of Shriram?s chit companies is over Rs 3,000 crore. ?Well-run chit funds cannot fail,? says Thyagarajan firmly.
Chit funds have always been popular in the South. (Peerless and Sahara are more savings aggregators than chit funds). Properly used chit funds are an effective tool to meet unplanned, unforeseen and unexpected expenses, especially for the middle class and small businessmen. Chit fund is a dual-purpose instrument for both borrowing and saving. It has no financial intermediation. Each chit group is in a way a self-help group. Members invest a fixed amount every month. This collection is available for borrowing. Auctions are conducted every month. The members who bid for the highest discount win. The dividend at every auction is distributed to the subscribers out of the discount (the difference between the chit amount and the amount bid), after deducting the group foreman?s commission. Shriram Chits has more than 22 lakh subscribers.
Chit funds are the closest thing to a bank in many parts of India. They mobilise huge amounts of small savings and offer the same as some sort of microfinance. ?But chit fund is not a highly profitable business,? says Thyagarajan. It is not possible to delay disbursements each month even if a couple of subscribers default. Shriram took a decision early not to risk subscribers? funds into areas like real estate. It put its money in truck finance which it knew how to handle. Thyagarajan points out that lending to commercial vehicles provides enough liquidity for the company to be in a comfortable position. ?We have held the view that we will not lend for automobiles and consumer goods,? he says. Earlier Shriram Chits forayed into investing in manufacturing units in a small way. ?With the high level of liquidity in truck financing it was able to set aside funds to put into industry. But the company does not do this any longer as some of the businesses have grown big enough to support themselves.
Thyagarajan raises some interesting ethical issues. The goodwill a chit funds business generates helps it build a vast network. This in turn comes in handy when it comes to mobilising public deposits. Can these be used to promote entrepreneurship? In spite of several PE funds, angel funds, mezzanine funds operating in this country, there are very few locally started funds to promote new businesses. ?India is full of people with good ideas who are willing to work hard. But there are very few avenues yet to support them. The money we have here is not patient money. We are still not in a position to wait long enough to get returns or write off failures,? he says. Chit funds, he feels is a community activity, which can provide a great service to small entrepreneurs.
Margadarsi Chit funds, promoted by Ramoji Rao in Andhra in 1962 literally pioneered the concept in that state. It was the success of
Margadarsi which inspired people like Thyagarajan to set up a chit fund company. From that beginning Ramoji Rao went on to build a huge business empire. The very fact that in spite of the attempts by the late Rajasekhar Reddy?s government to destroy it, Rao has held firm and people have been behind it all through. Obviously he has been a great help to the community he has serviced.
Shriram Chit funds is trying to build other profitable activities around it. It is providing various services to small entrepreneurs. It is also selling life insurance, help get consumer durable finance and so on. ?We do not do it with the chits money. We only make five percent on auction turnover. It is real tight rope walking?, says Thyagarajan.
Finally the chit funds business may get the recognition it feels it has been denied so far. Bill and Melinda Gates Foundation want to fund its micro finance activities through chit fund activities. The
Indian School of Business and the IFMR have done a study and are apparently quite enthusiastic about the opportunities available.