Chit Funds and Informal Credit in India
Trade Credit and Supplier Finance
Businesses lend to each other by allowing customers to pay later, a huge form of informal finance.
A large share of business finance is simply credit between firms.
What it is
A supplier delivers goods now and is paid weeks later, effectively lending to the buyer.
Why it exists
Suppliers know their customers and can judge trust better than a bank.
Cost
Late payment penalties or lost discounts for early payment can be hidden costs.
Old systems
Traditional instruments like hundis, which are informal bills of exchange, were widely used in trade.
A shop buys stock and pays the wholesaler a month later, using the wait as free financing.
A missed early-payment discount is an implicit interest rate.
- Trade credit is credit between firms.
- Suppliers know their customers.
- It has hidden costs.
- Hundis were traditional instruments.
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