Dance Hall Girls

Is this the way it always is here in Mumbai?

Maharashtra, India, is working to close down the widespread dance-bar business. Apart from the direct effect of flooding local job markets with women and former business-owners, more traditional businesses that rely on an informal financing institution are likely to suffer badly:

Hoteliers say that if a few restaurants going out of business could have this impact, the fallout of 750 bars closing down would be significantly higher. Most bar and restaurants are funded through the unofficial Chit Fund (BC) route.

It's fascinating how a BC operates: a fund organiser invites around 19 businessmen to create a monthly fund pool, for say Rs 20 lakh, with each member contributing an equal amount. The organiser is the pivot of the BC, and has the last word.

The pool of money created every month is auctioned to the highest bidder. So, if a borrower (who is also a member and contributor to the pool) bids Rs 5 lakh for the Rs 20-lakh pool, the bid amount will be reduced from the pool and he will get Rs 15 lakh.

Each member, therefore, contributes only Rs 75,000, instead of Rs 1 lakh. The amount the borrower repays would depend on the demand and supply of funds.

In the next month, the pool is created afresh by new contributions from the members. The per-member contribution will depend on the demand. The higher the demand, the steeper the discount. The member who has already borrowed cannot bid again.

A new bidder (from the remaining members) steps in. If he quotes a higher discount, the contribution required will be less. It is through the monthly contribution that the first borrower repays the money. If the discount is high, it benefits the persons who have already borrowed in the previous months, and those who would borrow subsequently. The process is repeated every month, with fewer members bidding, but everybody contributing.

Clearly, the formal financial markets are lacking some depth that the informal ones have long been providing. Perhaps the dance bar scene is a front for prostitution or worse, human trafficking -- I don't know enough to have a view on the policy. But, to go along with my theme from the previous post, such things can't be view in a static setting. Without the funding from the dance bars, numerous other small businesses may crumble, and new ones may have no funding to rise in the place of those that closed.

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This page contains a single entry by published on April 15, 2005 10:17 AM.

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