'Act amendment will hit chit fund firms'

The state government's recent amendments to the Andhra Pradesh Chit Fund Act 1971 will hit about 3,500 registered chit fund companies, including 800 in Hyderabad, their 40 lakh customers, according to V Venkateswara Rao, chairman of the AP Federation of Chit Funds.

He told Business Standard that two of the amendments ('B' and 'H') would do more harm to the chit industry, which receives no incentive or help from either the state or the Centre.

Chit fund firms, despite crash of their net margins to 0.5-0.75 per cent, assure a reasonable yield of 20-24 per cent interest for borrowers and 15-18 per cent interest for those who save.

The security deposit for a chit fund had now been hiked from 50 per cent to 100 per cent. "Chit firms cannot bear this massive hike. The amendment blocks funds even before a chit company forms a group and delays payment discouraging subscribers."

The move would also affect liquidity of a chit firm (foreman), particularly when there are defaulters in a chit group every month, he said and added that this in turn would abnormally delay payment to subscribers.

He said the 100 per cent security clause would wipe out small and middle-class registered chit funds. Thousands of chit employees, who work as agents, collectors, and cashiers in semi-urban and rural areas, would lose their jobs. The chit firms might switch over to illegal methods exposing subscribers to exploitation.

He sought restoration of the 50 per cent security deposit as was being done by the Centre and a number of other states after enforcing 100 per cent security deposit. Over 50 per cent of chit firms closed in Tamil Nadu and Maharashtra after implementation of 100 per cent security deposit while several firm in Karnataka and Delhi are in a dilemma.

Rao said before the amendment of the Act, abnormal delays took place in settlement of chit disputes through courts. The amendment would only aggravate the problem as the settlement mechanism was vested with the registrar's office.

"Most of the registrars in our state are not well versed in chit laws. Moreover, no recovery power has been vested with them. Even if the registrar of chits gives an award, enforcement petition (EP) should be filed through courts only. This dual procedure will lead to further confusion and inordinate delay in settlements."

He appealed to the government to set up fast-track courts for settling chit disputes in the shortest possible time. The court should also impose high rate of interest by way of penalty of up to 18 to 24 per cent on willful defaulters.