In the absence of easy availability of loans at reasonable rates for people running small businesses, a parallel network of finance which functions in the form of multi-level “committees” has been thriving in the major markets of Delhi like Karol Bagh.
These “committees” encourage new business practices and provide much-needed finances to their patrons in expanding their existing businesses. But they are fraught with a great deal of risk. Formally referred to as chit funds and informally as committees, these schemes are conducted by organised financial institutions as also by individuals among friends, relatives and acquaintances.
As the government had sought to regulate the new chits under the provision of the Chit Funds Act 1982 and Delhi Chit Fund Rules 2007 from April 1, 2007, about 90 per cent of chit fund companies have closed shop. At an informal level though the trade continues to flourish in the form of committees.
People form a group of 15-20 individuals simply on the basis of reputation in the market, bond with each other and with some mutual understanding start a committee.
A jeweller at Beadonpura, whose father used to run a medium level committee of Rs 4 lakh till last year with a group of 10 people for 20 months, said it was stopped after his father incurred losses. “The head of the committee is at risk and incurs the maximum loss when any one member defaults,” said the jeweller, who did not wish to be named.
For the workers, the committees provide avenues of raising funds for making purchases or meeting urgent requirements related to health or social functions. “We workers usually form such committees in order to meet unforeseen needs that crop up in future like marriages or accidents and to avoid cumbersome process of borrowing formally from a bank. Committees at worker level have declined now because of a significant number of default cases,” said Ratan, a worker in Karol Bagh.
Ratan, who runs a committee, said he too had incurred a loss once. “I paid Rs.1 lakh and received only Rs.60.000 in 2003. I incurred this loss because I needed money for my son’s wedding,” he rued. At household level, women who form kitty groups have also been pooling in money in the form of committees. “It helps me save money for festivals, celebrations and emergency”, said Anusha Sharma, a housewife and member of one such group.
“Committees come up because effective micro financing is lacking”, explained Neeraj Gupta, president of Karol Bagh Traders’ Association. When asked about the ratio of default in such committees, he replied: “There are number of defaults. The incidence of defaults is perfectly correlated with the business sentiment. When business sentiment is low the rate of default is high and vice-versa.”
Surinder Dheer, national president of Federation of Indian Traders, cautioned against participation in such committees. Noting that his federation works for the welfare of traders by serving as an intermediary between banks and borrowers, he said: “People opt for committees because of illiteracy and hassles they find in the banking procedure. Even though we do not advise people to borrow from such committees we offer them help when they come to us in case of default.”
