Dear Subscriber,

The Reserve Bank of India recently announced the busy season credit and monetary policy. The dictates of the policy for the FORMAL segments of the financial market clearly point towards lowering of interest rates for both savings and borrowings and at the same time liberalising the scope and extent of financing for the productive sectors of the economy. The policy is undoubtedly welcome in most of its facets. It works towards generating faith and goodwill between the financial and the productive sectors and it is hoped that this policy will definitely contribute towards an economic revival.

The effect of any policy framework gradually percolates down to people like us who are the constituent units of the economic set- up; the ultimate subjects. So, what does this policy have in store for us?

The most immediate effect is that the incentive to save, the interest earned on savings, stands highly reduced. The Nationalised Banks are offering interest on deposits of upto one year at a rate of 5 to 8 % p.a., which is a far cry from what was available just about a year back. With this the propensity, the willingness, to save with the formal financial markets will also move downwards. It must be realised that India is actually a capital deficit nation and savings from the household sector contributes towards the major bulk of capital investment in this country.

The formal sector is seemingly flush with funds. But financial institutions (FIs) being flush with funds does not make India a capital rich Nation. It only means that the Financial Institutions are not making sufficient quantum of disbursements or conversely the productive sectors are not capable of taking funds from the FIs because of strict norms for disbursement.

Its a complex situation for RBI with other concerns like appropriate Inflation Rate and balanced amount of Money Supply to be monitored. The formal financial sector, conconsequently, works under various constraints. What is important is that as a result of any such policy, there should be sufficient motivation or incentive to those who wish to save and those who require funds for investment must get these funds in the desired quantity and time frame.

CHITFUNDS are on the fringe between the formal and the informal financial sectors. The process of chits is such that the demand and supply of money is matched and a market driven rate of interest is arrived. The rate of saving is therefore always arrived at through a system of auctions. The borrowings from chit schemes are also flexible and cost effective. The freedom of chits to work as a system of saving and then switch to become a loans option, this flexibility makes the utility of chit far superior than other available financial instruments. With the new policy from RBI the utility and scope of chits has been further enhanced.

Kamal Bhambhani