Bengaluru: After direct subsidies and welfare measures through its guarantee schemes, the Karnataka government is launching micro chit funds, that will give access to capital to sections who have limited means to borrow from formal banking systems.
On Wednesday, the Mysore Sales International Limited (MSIL) board approved the proposal to ease accessibility to micro chit funds of up to Rs 1 lakh by diversifying the collateral required to obtain these funds.
“We are now creating a network of agents, canvasing, foremen and other necessary infrastructure to promote the offering. We are roping in women from self-help groups who are trained in financial literacy to become agents and can earn up to Rs 48,000 per month,” Manoj Kumar, the Managing Director of MSIL, told ThePrint.
The new offering, according to MSIL, will promote financial inclusion by offering flexible savings mechanisms for people with limited access to formal financial services.
The financially trained SHG or Sakhis will promote the micro chits to leverage their trust to fuel interest among rural and semi-urban communities.
The scheme aims to develop a mobile app to track the fund, enable easy enrolment, streamline documentation, reduce procedural barriers and easier subscription.
Multiple schemes are being introduced aimed at demographics like government employees, milk vendors and other sections.
Karnataka has a thriving formal and informal chit fund industry that largely aims to get investments from working class women, middle-income groups and others.
But accessibility to local chit fund operators has been easier compared to the government-run funds, economists say.
According to Kumar, the Karnataka chit fund market size (formal and informal) is around Rs 16,000 crore and MSIL accounts for just Rs 500 crore.
He says there are big private players but the size of the informal market is only an estimate since it happens in a hyperlocal environment. “The informal chit fund market is at least double the size of the formal market,” he says.
The promise of access to capital or small investments has seen a rise in unregulated chit fund operators and ponzi schemes that offer high returns on investments.
Karnataka, like other states in the country, has seen a rise in ponzi and pyramid schemes that target low-income households, promising very high returns on investments. In 2019, thousands of people, mostly Muslims from low-income families, were duped into investing into IMA, a Bengaluru-based company that promised returns as high as 30-40 percent per month.
It’s either the promise of high returns or just access to capital for daily transactions that has pushed people into debt traps.
There have been other such schemes—or scams—that have affected large sections of the population. The Sanchayita Investments scam in West Bengal, which went bust in 1980 and affected an estimated 1,33,000 people, the Andhra Pradesh-based AgriGold, the Saradha Group and Rose Valley Group from West Bengal, Singapore-based SpeakAsia Online Limited and The Emu scam in Tamil Nadu are some of the prominent scams that have unfolded in recent years.
Apps promising quick cash mushroomed during the Covid-19 pandemic-induced lockdown. But many of these loan shark apps were charging exorbitant interest rates, intimidating and using violence to recover money from hapless borrowers. This heavy-handed recovery was also linked to a string of suicides reported across the country.
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Easy access to capital
Karnataka tried to contain the problem with a bill earlier this year. It issued a notification in February, bringing into force the Karnataka Micro Loan and Small Loan (Prevention of Coercive Actions) Ordinance 2025, that was aimed at controlling and restricting inhumane, abusive and illegal practices in debt recovery.
In contrast, state-owned chit funds are being promoted as a safer and more reliable alternative. But there have been cases of high-handedness from recovery agents from banks while dealing with farmers and other marginalised sections.
S. Madheswaran, economist and adviser for Jain University says that most chit funds are run on social capital and trust. The investors, he says, are working women and small or middle-income groups who have more trust in the local chit fund operator than, perhaps, a bank.
He says that there have been cases where the chit fund operator flees with the money or has been prompt in repayments, that shapes the ecosystem around such informal investments or credit systems.
“On the whole, if such chit funds are formalised by the government, many people will come forward to put money in, because it is the government and they will have faith. When they (small investors) do that, the savings rate, and the financial inclusions will happen,” he told ThePrint.
He added that if this proposal is implemented effectively, it will give poorer sections more access to capital, increase their purchasing power and lead to effective demand.
The MSIL’s chit fund division achieved a turnover of Rs 41,049.66 lakh for the year 2023-24 as against a turnover of Rs 36,367.61 lakh achieved during the previous year, registering a growth of around 13 percent. It is a tried and tested investment mechanism in Karnataka, but the challenges to access these funds often drive small investors into the domain of informal operators.
Chit funds operate with one person opening a fund, specifying an amount and asking investors to pay monthly subscriptions for a specified period. At frequent intervals, a lottery of sorts is picked and one investor gets access to the full amount before the end of their subscription period. But they have to continue paying the monthly investments.
A large section of teachers, small-time financiers and others also operate chit funds that are solely run on trust. There have been several instances where unlicensed chit fund operators have duped subscribers.
In the early 90’s, a person named Srinivas Shastry started collecting funds from small investors, promising returns as high as 150 percent. There were over 20,000 investors who put in over Rs 203 crore that was used to buy property, invest in the share market, but the investors got nothing.
More recently, there have been cases like Vikram Investments, a fraudulent wealth management firm that has been accused of embezzling at least Rs 400 crore from over 2,000 investors in Bengaluru. The Vikram Investments scheme, a ponzi scam, counted not just on blue-collared urban professionals, but it included high networth individuals along with famous sports celebrities like Rahul Dravid, Saina Nehwal and Prakash Padukone.
According to the Karnataka CID, 422 cases were filed against 10 firms between 2013 and 2016, which impacted nearly 1.8 million people, amounting to around Rs 3,300 crore.
(Edited by Viny Mishra)
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