Chit funds, private money lenders feel demonetisation heat

While the Centre’s move to demonetise the Rs 500 and Rs 1,000 notes will have short-term impact on the Rs 35,000-crore chit fund sector, it will also clean up the segment. Overall, around 25 per cent of the deposits in chit funds are in cash. In rural areas, the proportion could be as high as 50 per cent. 

T S Sivaramakrishnan, director of Balussery Benefit Chit Fund, and founder general-secretary of the All India Association of Chit Funds, said: “As we always say, unregistered chit funds are the worst enemy for us, and this would help to clean up the system.” 

According to him, instances of failure on the part of such unregistered players are incorrectly attributed to legitimate chit funds. He said people have already started calling the association about the fate of their cash with such operators. 

The association is advising its members not to take bulk money since it will be a problem if detected by the income-tax (I-T) department. With defaulting chit subscribers now coming forward to clear their dues with old notes, companies are also in a dilemma. 

“I think the I-T department can be a little lenient, as long as the accounted cash is coming into the system,” said Sivaramakrishnan, adding cashflows for chit companies will certainly be affected for a month or two. 

He said bulk of the cash transactions happen in rural areas, but these wouldn’t be in big-ticket deposits. 

“Ours basically being a cash economy, even those who have no unaccounted cash were used to paying cash. It may take time for them to switch over to virtual modes of payment,” he added. 

Subhasri Sriram from Shriram Group, which does about Rs 250 crore worth of chit fund business a month, said: “It is too early to say how much benefit will happen in the future, but currently it is difficult for small businessmen, since they don’t have enough cash to do business.” 

Adding: “We’ll have a delay in payment of around 15 days. The money supply is being rationed out. It’s just a question of time to get the currency printed and taken to the branches. It is a temporary issue.” 

K P Geevarghese Babu, general-secretary of the All Kerala Association of Chit Funds and a local leader of All Kerala Private Bankers’ Association, an organisation of lenders who offer gold loans and loans on promissory notes, said the chit funds and private lenders in Kerala were badly hit by demonetisation. 

He said the chit funds, which were collecting Rs 1-1.5 crore a day, are now collecting a few lakhs now. Since Friday, a majority of the chit funds stopped collection of money since all the cash has been coming in Rs 500-1,000 denominations. 

“While the customers are bringing in legitimate money, the apprehension is whether there would be regulatory action if we collect it, considering the notes are not meant to be in transaction from midnight of November 8,” said Babu. 

Private money lenders, in a meeting of the association held on Sunday, decided to stop collection of money temporarily, he added. The sector expects the situation to stabilise in some weeks.

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