A thousand people have joined Kerala’s Pravasi Chitty scheme since registration opened on 25 October, investing some INR12m (£128,000, $165,000, €146,000) as a first instalment.
The state of Kerala in south-west India has launched the unique savings and investment initiative in order to help finance its infrastructure projects.
The state was hit by catastrophic floods in August, which claimed over 480 lives.
Kerala intends to raise INR100bn through the chitty, a financial product that blends the advantages of investment and borrowing, over the next five years, with a target of signing up one million subscribers in the next two to three years.
In return for their investment – a commitment of regular monthly instalments over a specified time period – investors, known as subscribers, are offered the chance to bid for a lump-sum amount upfront, plus interest and insurance protection.
Launched by Kerala State Financial Enterprises (KSFE), a non-banking company fully owned by the government of Kerala, the Pravasi Chitty is designed for non-resident Indians (NRIs).
Initially, the scheme was opened to NRIs living in the United Arab Emirates, but there are plans to extend the offer to NRIs in other countries.
How does a chitty work?
Governed by the Central Chit Fund Act 1982, KFSE calls the Pravasi Chitty “a risk-free safe haven for the public”.
The act defines a ‘chit’ as “a transaction whether called chit, chit fund, chitty or by any other name by or under which a person enters into an agreement with a specified number of persons that every one of them shall subscribe a certain sum of money by way of periodic instalments over a definite period and that each such subscriber shall, in his turn, as determined by lot or by auction or by tender or in such other manner as may be specified in the chit agreement, be entitled to the prize amount”.
Or in simple terms, a chitty is a contract whereby each subscriber agrees to remit a fixed amount of money every month for a period of time.
Monthly instalments range from INR1,000 to INR500,000, with the usual duration of payments being over 30, 40, 50, 60 or 100 months.
The so-called ‘chitty amount’ is then given out as ‘prize money’ to the person who bids the least for it (up to a maximum of a 25% discount).
For example, if 50 people each pay a monthly instalment of INR10,000, the monthly prize money is INR500,000. This amount is then put up for auction among the subscribers.
The subscriber who agrees to take the lowest amount will get the prize. For example, if they bid up to the 25% discount and win they will receive INR375,000 up front. They will continue to pay their INR10,000 instalment for the duration of the scheme.
The remaining amount INR125,000 will be distributed among the other subscribers. In this example, they each receive INR3,000. So, effective contribution for the first month would be INR7,000 for every subscriber.
The auction process continues each month.
Development options
KSFE has opened around 25 chitties, of various tenure and amount, with auctions to be held by 25 November.
The company will invest the monies raised in bonds of the Kerala Infrastructure Investment Fund Board (KIIFB), a government institution that mobilises funds for the state government’s long-term developmental projects.
Customers who join the Pravasi Chitty can choose which development projects they want their funds to go towards.
They have 10 options: renovation of schools, hospitals, roads and bridges, coastal roads, high-range roads, IT parks, stadia, cultural complexes, inland waterways and drinking water projects.
In a statement, Peelipose Thomas, chairman, KSFE, said: “This scheme is formed by the government of Kerala with the objective of providing an alternative to the public from the private chit promoters, in order to bring in social control over the chit fund business, so as to save the public from the clutches of unscrupulous fly-by-night chit fund operators.”
The scheme is operated entirely online or via a specially designed app.
Insurance cover
Additional benefits of the scheme include insurance cover. In cases where an instalment cannot be made due to accident, death or permanent disability, KSFE will cover the subscriber’s remaining payments.
In the event of death, it also covers repatriation costs of the deceased’s body and the airfare of a relative.
The insurance cover is provided in partnership with Life Insurance Corporation (LIC).
There is also a provision for the subscriber to link the chitty with a pension scheme.
KV Shamsudheen, director of Dubai-based financial intermediary Barjeel Geojit Securities, said: “This is a good opportunity for NRIs to invest in a scheme that gives the facility to claim your entire subscription amount upfront through bidding.
“NRIs have been so far investing in private, unregulated chit funds. They also have an opportunity to support the government in developmental activities.”
