Hundi/Chitti - A flash back into Financial Instruments of the Baniya Community- Part 1 of 2

Let us take a quicktrip down memory lane to an age-old financial instrument called Hundi/Chitti that has been prevalent as an informal lending system in the Baniya community.This is the instrument which can be broadly equated to the 21stCentury Bill of Exchange that is negotiable by delivery.
Hundi/Chitti denotes an unconditional contract for payment transfer, negotiable by delivery. It is essentially anunorganized and unsecured format of short-termlending that was used for carrying out trade and commercial transactions. It evolved from the pre-medieval era when metals were used as currency and continued to be in vogue until the banking system began to develop.

The Modus -Operandi!

• What it involvesis a simple peer to peer lending to a borrower directly or through a broker.The instrument denotes an unconditional contract for payment transfer
• Depending on the terms, perceived risk, type of business, interest rates could range from 0.90% - 2% a month for duration of 3 months to one year.
• This willbe renewed at the end of the term based on the agreement between borrower and the lender.
• The interest is duly deducted from the principal before the money given for the term hence increasing the return percentage for the lender.
• The lending is based on perceived assets and trust placed on the reputation of the borrower.
• At the end of the term if certain loan is not renewed, the borrower usually would arrange the funds from pool of other short-term lenders / brokers to repay the outstanding loan. This was done as the original sum borrowed would be invested in some kind of business and if withdrawn the business would suffer and growth of business would be reversed.

Who are the lenders:

Most of this kind of lending is done peer to peer and by individuals who have excess capital. These individuals can range from High Net-Worth Individuals (HNI's), retirees’ older people who would like a higher monthly return then what a bank fixed deposit can give. The amount that would get lent could be as small as Rs. 25,000 and as high as 5 CR by a single individual, the market catered to a diverse group to generate returns.

The purpose:

This form of lending was an option for someone who wants a fixed monthly return and does not want to put the excess capital into stock markets, real estate or commodities as none of these options had a guaranteed monthly returns and Fixed deposit returns are very low.

Role of the brokers

Role of the broker is limited due diligenceand payment collection but they never took the responsibility of defaults.From a borrower’s perspective brokers would be a single point of contact and a consolidator of debt under a bigger umbrella. Brokers also provided a vail of anonymity to the lenders.

Sadly however, this informal traditional currency has taken a massive hit post demonetisation in 2016. Many lenders have lost out heavily as the borrowers could not make good either the interest or the principal due on these instruments. This informal lending practice has today faded away into memory and has been encroached by unique systems of money lending that are a poor substitute to informal lending and so, not being widely used. Stay tuned for Part 2 of this Article to find out the how and why of the evolution.