A Case Study on the Importance of Chit funds (ROSCA) among Women

Tea Plantation Workers of Kannan Devan Hills Plantation (KDHP)

Company in Munnar
Muniaraj K, M.Phil. Scholar, Department of Economics, University of Kerala
Ashna Salim, M.Phil. Scholar, Department of Economics, University of Kerala

Abstract
Chit funds play an important role in the life of plantation workers as their most favourite
financial support. Even though many formal financial institutions exist, their sole dependence
is with the chit funds. This paper examines the role played by ‘chit funds’ in the day-to-day
life of women tea plantation workers of Kannan Deven Hills Plantation Company. Empirical
evidence for the study has been taken from 30 women plantation workers from six estates of
KDHP Company in Munnar. The estates have been selected through simple random sampling
method. Along with secondary data, primary data has been used which were collected using a
pre-prepared interview schedule. Over half of roscas (rotating savings and credit associations)
participants use their rosca winning for more than one purpose, and one fifth use their
winning for more than two purposes (Gugerty, 2000). This is true with respect to plantation
workers also. Rather than depending for a special purpose chit funds ‘fund’ almost all of their
day-to-day financial needs.
Keywords
Chit funds, tea plantation, ROSCAs, Kannan Deven Hills Plantation Company, Munnar

Introduction
Chit funds are India's version of the Rotating Savings and Credit Associations (ROSCAs),
which are well-known worldwide. ROSCAs allow you to'save and borrow' at the same time.
It is regarded as one of the most effective tools for meeting the needs of the impoverished. It
allows low-income people to turn their tiny savings into lump sum payments. Chit funds have
been around for over a thousand years. It began as an informal association of traders and
households within communities, in which members paid money in exchange for an
accumulated total at the conclusion of the term. Chit fund participation was primarily for the
aim of purchasing real estate or, in other words, for 'consumption'. However, there have been
significant changes in the structure and operation of chit funds in recent years.

"Chit" means "a transaction, whether called chit, chit fund, chitty, under which a person
enters into an agreement with a specified number of persons that each of them shall subscribe

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a certain sum of money (or a certain quantity of grain instead) by way of periodical
instalments over a definite period and that each such subscriber shall, in turn, as determined
by lot, by auction, by tender, or in such other manner as may be determined by lot, by
auction. Our country's rural economy has mostly relied on the government's various small
savings initiatives. People were drawn to Ponzi schemes due to a lack of financial literacy
and investor awareness, low interest rates offered by financial institutions combined with a
multi-layered process, a lack of effective legal deterrence, and regulatory arbitrage. Ponzi
scheme firms promised substantially larger returns, easier processing, and financing options
to their investors. These programmes, often known as chit funds, began to thrive and operate
on a small scale in India.

Chitty (chit fund) is a common occurrence in Kerala, and it is practised by people from all
walks of life. Kerala State Financial Enterprise is a state-owned corporation whose primary
commercial activity is the chitty business. Kerala is without a doubt the most important
plantation state in India. This plantation ensures a higher return for producers, increased
revenue for the government, increased wages for workers, and, most importantly, the overall
development of the Kerala economy. Kerala's economy relies heavily on the plantation
sector, which contributes Rs.29.11 billion to the state's GDP. As a result, it's critical to look
into their financial actions, including their capacity to manage money.

Operation of Chit Funds

The value and duration of a chit scheme are usually fixed. Each scheme allows a given
number of participants (about equal to the scheme's lifespan) who contribute a set amount to
the 'pot' every month (or every day). Every month, the 'pot' is auctioned off. The 'pot' for that
month goes to the highest bidder (also known as the prized subscriber). The coveted
subscriber gets the sum of money equal to the chit value less the discount and the fixed
charge to the foreman, and the bid amount is also known as the 'discount.' The discount
money is subsequently paid as a 'dividend' to the remaining members (or non-prized
subscribers), and the needed payment is reduced by one month later.

Consider the following characteristics of a chit scheme to demonstrate what we've just said.
The chit value is Rs.500,000, the length is 50 months, and the number of members is 50. In

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this situation, the monthly contribution would be Rs.10,000 per member at first. As a result,
the first month's collection would be Rs.10,000 multiplied by the number of subscribers, or
Rs.500,000. The 'pot' is the amount of Chit Funds that is auctioned off at the end of the
month. . Let's say the top bidder in the first month auction was Rs.100,000. This is referred to
as a 'discount.' The highest bidder now receives Rs.375,000 ($7,500), which is equal to the
chit value less the discount and a 5% commission to the foreman1. The discount is then
distributed equally among the 50 members (the payout for the 50 members comes to around
Rs.2,000 apiece). As a result, the members' contribution in the next month is reduced by the
dividend amount (i.e., the members' contribution in the second month is Rs.8, 000). This
technique is repeated for the remaining months of the project. Each member makes the same
contributions, however the total amount taken out or bid by each member differs. The value
and duration of a chit scheme are usually fixed. Each plan allows a specified number of
participants (usually equal to the scheme's lifespan) who contribute a set amount to the 'pot'
every month (or every day). Every month, the 'pot' is auctioned off. The 'pot' for that month
goes to the highest bidder (also known as the prized subscriber). The coveted subscriber gets
the sum of money equal to the chit value less the discount and the fixed charge to the
foreman, and the bid amount is also known as the 'discount.' The discount money is then paid
as a 'dividend' to the remaining members (or non-prized subscribers), and the needed
contribution is reduced by the amount of dividend in the next month.

Let us consider the operation of ‘elam chit’ with the help of an example:

Chit value = Rs.1, 00,000

Duration = 25 months

Members = 25

Initial Contribution = Rs.4000 (100000/25)

The highest bidder will get the ‘elam’.

The process of bidding requires the bidder to forego some part of the collected money in
order to claim it.

For instance, if a person is ready to forego Rs.30000 (discount amount), the remaining
Rs.70000 will be paid to the person (prized subscriber)

Out of which say, a commission (a fixed per cent) will be taken by the ‘leader’.

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The discount amount will then be equally shared between the total members (here, it is 25).

In the subsequent month, the required contribution is brought down by the amount of
dividend.

That is, the contribution of these members reduces by the amount of Rs.1000.

Thus, each member then need to pay only Rs.3000 in the coming month.

This process repeats.

NB: As the discount changes, the dividend changes and hence the monthly payment also
changes. This flexible working process makes the ‘elam’ more popular.

Let us consider the operation of ‘thattu chit’ with the help of an example:

Chit value =Rs.1, 00,000

Duration = 25 months

Members = 25

Each member has to pay Rs.4000 every month for a period of 25 months. There will be one
organizer who takes of care of all the meetings. In each meeting, names of total members are
written in lots. The Prized subscriber will be the randomly picked up from the lots.

In the subsequent month, remaining members will be put in the lots for selection.

Area of study

In India Kerala is one of the major teas producing state. The commercialization of agriculture
in Kerala, followed by a shift in cropping pattern, favored the spread of plantation in various
part of Kerala, especially in Munnar. Kannan Devan Hills Plantation consists of 36 estates in
Munnar alone. Each estate is divided into 3-5 divisions.

The areas of study are tea estates under the Kannan Devan Hills Plantation Ltd. Out of the
seven estates, the five estate has selected for the study due to time constraint. These include

 Chundavurrai estate,
  Guderale estate,
  Maduppatty estate,
  Nullatanni estate
  Nyamakad estate.
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  Lakshmi estate

Objectives

The understand the influence of chit fund among women tea plantation workers in study area.

Methodology

The study based on both primary and secondary data. For the purpose of analysis, three
estates were randomly selected from KDHP company through simple random sampling
method. From the women workers a sample 30 respondents were randomly selected (5 from
each estate). Data is collected using a pre-prepared interview schedule. Secondary data was
also used for this study, journals, annual reports, and literature of published sources etc.
served as sources of secondary data.

An Analysis of Chit Funds and the Women Tea Plantation Workers

(i)Usage of Chit Funds

70
59
60

50 45.45
40.9
40

30 27.27

20 18.18

10

0
Liability Marriage Health Education Investment

Source: Primary Data

Even though, larger part of the sample respondents are depending chit fund for education,
each one of them have benefited from the fund for multi-purposes. Education and marriage
seems to be the two faces of a coin for them (with respect to chit funds). Along with these
two purposes, they have been using chitty for meeting liability as well as related issues. The
only investment in which they are engaged is the construction of a house in their native place.
It is clear from the chart that plantation worker’s major life events are centred around chit
funds or chitty as the first and last resort.

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(ii) Institution of Savings

80
70
60
50
40
30
20
10
0
bank post office chitty other

Source: Primary Data

Out of 30 respondents, those who have any kind of savings is with the chit funds. That is,
around 73 per cent have savings with the chit funds and the remaining 27 per have no savings
at all. This shows the importance of chit fund among tea plantation workers. The chart also
throws light into the fact that the other formal and informal institutions have negligible role in
the life of the plantation workers.

(iii) Savings Attitude

Age
50

20-30
23.33333
16.66667

31-40

41-50
10

51-60

Monthly Income
70 66.6

60
50
40
30
6 20 20
10
10 3.3
0
Below 5000 5000-10000 10000-15000 15000-20000
Source: Primary Data

Of the total respondents took part in the survey, around 67 per cent are within the income
range of Rs.5000 to Rs.10000. That means, as income increases tendency to save decreases.
Moreover, those belonging to the age group 41 to 50 are most likely to save as they
contribute to half of the respondents. The workers retire at the age of 60. Hence, retired ones
are not included in the survey.

(iv) Types of Chit Fund

Types of Chit Fund

9.09; 9%

27.27; 27% Ealam Thattu

63.63; 64%
Ealem & Thattu

Source: Primary Data

Around 63 per cent of the plantation workers have their savings with the elam chit and 27 per
cent have their savings with thattu chit. It is also clear from the chart that around 9 per cent
have savings with both the thattu and elam chit. This clearly shows that their favourite type of
chit fund is the elam chit.

(v) Years Engaged in Savings with the Chit Fund

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 60
54
50

40

30

20 18.18
13.6
9.9
10 4.5
0
below 5 years 5 years-10years 10years-15 15years- above 25 years
years 20years
Sour
ce: Primary Data

Around 46 per cent of the respondents are saving with the chit funds for more than five years.
It is interesting to note that around 18 per cent of the respondents are engaged in chit funds
for more than 25 years. This is a clear indication of their confidence in chit funds operating in
their area.

Findings

“Aasara Avasarathuku Ethavathu Uthavikidum” says Mariamma

This means that if any emergency occurs, chit funds will help. The KDHP Company consists
of 36 estates in Munnar alone. Each estate is divided into 3-5 divisions. Here, the women
plantation workers are earning minimum wages compared to other informal sector workers.
Though their income is very low, almost every one of the women plantation workers is
keeping aside an amount to be saved.

Even though many formal and informal institutions of credit and savings exist, their only
possibility (hope) of saving is the chit funds.

Most of the workers are within the income range of 5000-10,000. But, around 53 per cent are
paying an amount of more than Rs.1000 with the chit fund (that is, more than 20 percent).

There are two types of chit fund prevail namely thattu chit and elam chit. The popular being
the elam chit. The main reason for it being popular is its flexibility. That is, with a minimum
wage they can manage their savings efficiently as the amount is not fixed (working of elam
chit).

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From their (women plantation workers) past experience, they have much confidence with the
chit funds. It is in the sense that without aiming a special purpose for which they are saving,
they are saving with the chit fund (mostly, elam chit) expecting an emergency as most of the
life events are uncertain.

But it is clear from the analysis that most of the respondents are depending chit funds for two
purposes. They are education and marriage. In addition to these two, they are using chit funds
for meeting liabilities, addressing health issues and for some investments (construction).

It is also examined that 46 per cent of the workers surveyed are saving with the chit fund for
more than five years. And it is also interesting that around 18 percent of the workers have
savings with the chit fund for more than 25 years.

As the leader as well as the members are all doing the same work and from the same area of
work increase their confidence with the chit funds.

This is clearly a manifestation of their satisfaction with the chit funds.

Suggestions

Formal financial institutions are usually not accessible to low-income earners. Most of them
are depending on one or the other informal institutions that requires less paper works and
readily accessible. Thus, the need of the day is proper monitoring of such institutions as well
as strengthening them. This will help to encourage those earning meagre income to save and
at the same time preventing them from entering into some fraudulent practices. This seems
more efficient as low-income earners are concerned compared to forcing them to engage with
formal financial institutions.

Conclusion

The concept of chit funds existed in India even before the existence of a formal banking
system. In India, the unregistered chit fund industry is considered to be 100 times larger than
the registered one. Unregistered chit funds are popular among women who work on tea
plantations. A chit fund gathering has a highly cohesive and relaxed atmosphere. What does a
person require in the event of an emergency? It is nothing but ease of availability of funds,
less paper formalities, less re-payment pressure and easy and happy life afterwards. Hence,
people are engaged in chit funds and will remain forever.

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