Cost And Return On Chits

By Author: Santhosh Kumar
Total Articles: 54
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Our examination of the cost and returns on Chits has revealed that the economics of Chits lie in viewing them as savings-cum-borrowing instruments. The financial return and cost of Chits depend on the prevailing rate of interest, installments at which prize money is obtained, the method of discount followed, the "sala' size and the duration of the Chit. Subject to these, it was found that, as a pure savings avenue, the rate of return on Chits is not attractive for most of the subscribers when we consider the opportunity cost of the subscription money. And if we look at Chits as a pure borrowing avenue, it is cheaper as compared to bank loans. However, if we look at the Chit subscribers as savers-cum-borrowers, as indeed they should be, it makes sense to join Chits. The actual return or gain/loss they make from Chits will depend, as mentioned earlier, on the prevailing interest rates, how early they get the prize money, the method of discount followed etc.

There is also another dimension to this question, i.e., for many subscribers Chitty is a forced saving. For such persons these funds would not have been saved otherwise ...
... and hence there is practically no opportunity cost Involved. In such cases, the gain on the Chits will be all the more higher and can be estimated as the sum of the compound interest that could be earned on prize amount and the difference between the loss on bidding and the total of discount accrued to the subscriber.