With reference to the report, "Maligned chit funds mull a new name" (November 5), no doubt chit funds are a big business, but to say they are a Rs 30,000-crore industry is an exaggeration. Chit funds should not be clubbed with ponzi schemes; they are also not multi-level marketing schemes. However, they do not deserve to be reinvented for the following reasons.
First, regulation is totally off the mark. Second, their business model deserves to be abandoned altogether. Bidders of chits pay usurious interests during the completion of a cycle. Of course, the terminology of interest is not used in the chit fund business. Those who bid in the beginning, for example, during the first four months of a 12-month scheme, pay a huge amount as interest. Consider a Rs 60,000 chit fund scheme for 12 months. If members are in urgent need of money, the fund gets auctioned for a lesser and lesser amount. For example, the person who wins the bid for Rs 30,000 in the first month pays Rs 60,000 during the 12-month period. The Rs 30,000 that he loses is the interest he pays for getting the amount. Thus, many chit funds shut shop due to massive defaults by members.
Besides the registered chit funds - whose number dropped to 100 from 1000, as mentioned in this newspaper's report - there are millions of unregistered chit funds. Chit funds should be banned because millions of people have lost money because of them.
The Editor, Business Standard
Nehru House, 4 Bahadur Shah Zafar Marg
New Delhi 110 002
Fax: (011) 23720201
E-mail: letters@bsmail.in
All letters must have a postal address and telephone number
First, regulation is totally off the mark. Second, their business model deserves to be abandoned altogether. Bidders of chits pay usurious interests during the completion of a cycle. Of course, the terminology of interest is not used in the chit fund business. Those who bid in the beginning, for example, during the first four months of a 12-month scheme, pay a huge amount as interest. Consider a Rs 60,000 chit fund scheme for 12 months. If members are in urgent need of money, the fund gets auctioned for a lesser and lesser amount. For example, the person who wins the bid for Rs 30,000 in the first month pays Rs 60,000 during the 12-month period. The Rs 30,000 that he loses is the interest he pays for getting the amount. Thus, many chit funds shut shop due to massive defaults by members.
Besides the registered chit funds - whose number dropped to 100 from 1000, as mentioned in this newspaper's report - there are millions of unregistered chit funds. Chit funds should be banned because millions of people have lost money because of them.
K V Rao, Bengaluru
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