Rs 70,000 cr sitting on a powder keg

Private chit fund business in the state is on the verge of a collapse. With the defaults growing and no chit funds being launched by the around 5,000 private players, the collapse of one chit fund can have a serial impact bringing down the nearly Rs 70,000-crore business crashing and with it the hopes and aspirations of lakhs of people who have invested their small savings in these firms.

The business which has a history of more than a century, had pinned its hopes on a notification under the Kerala Chitties Act, 1975. But what came out in June after a series of discussions with the authorities could not help the private sector which has a big share in the nearly Rs 85,000 crore business.
There was a Supreme Court ruling earlier to bring all chit fund operations under a common central rule since the industry here was operating with its headquarters either in Faridabad or Srinagar. Strict conditions in the state laws, including that discount should not exceed 50 per cent of the net-owned funds, had seen the companies registering outside the state.

Against this backdrop, the state notification, in tune with the central norms, was expected to help the industry. But the notification did nothing substantial to the monthly chit fund business of around Rs 12,000 crore.

According to the district registrar’s office in Thrissur, none of the private chit companies has registered new chitties since June. Only the government-owned Kerala State Financial Enterprises was doing really well, having a steady flow of new chitties.

The notification did not free the registration of new chitties from bureaucratic interference where clearance for a chitty would have to pass through four stages often going back to the same officials.
The condition of bank guarantee for a new chitty made things difficult as banks often showed reluctance, says All-Kerala Kuri Foremen’s Association general secretary Davis K.

To make things worse, there’s been the lack of funds to overcome the default which was around 25 per cent.

Often this was made up through new chitties. Chitty business operators rolled funds from new chitties to temporarily cover the default, he admits. Efforts to collect the dues were on but that would not help much,
says Davis.

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