A Chit fund is a kind of savings scheme practiced in India. A Chit fund company means a company managing, conducting or supervising, as foremen, agent or in any other capacity, chits as defined in Section 2 of the Chit Funds Act, 1982. According to Section 2(b) of the Chit Fund Act, 1982, "Chit means a transaction whether called chit, chit fund, chitty, kuri 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 (or a certain quantity of grain instead) by way of periodical installments 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".
Such chit fund schemes may be conducted by organised financial institutions or may be unorganised schemes conducted between friends or relatives. There are also variations of chits where the savings are done for a specific purpose. Chit funds also played an important role in the financial development of people of south Indian state of Kerala, by providing easier access to credit. In kerala chitty (chit fund) is a common phenomenon practiced by all sections of the society. In Kerala, there exists a company under the State Government, called Kerala State Financial Enterprise, the main business activity of it being the chitty business.
Chit Funds are also misused by its promoters and there are many instances of the founders running what is basically a Ponzi scheme and absconding with their money.
History
A collection of members called a chit group makes their contribution in the form of money to collect a chit amount and they bid in an auction to be awarded with the prized money which is equal to the chit amount minus the discount and the foreman's commission.
The chit is registered with the Deputy Registrar of Chits and a registered number is obtained. The Foreman promotes and conducts the Chits as per the regulations of the Chit Funds Act and Rules.
Example
Functioning of Chit funds are better explained using an example. Take a typical chit fund with 25 members contributing Rs 100 per week. This fund will run for 25 weeks. On the first week all members will contribute Rs 100. An auction meeting will be conducted, and the foreman of the chit fund will preside over it. The total amount will be Rs 2,500. The auction will start with this amount. Bidders will start bidding by discounting this amount (reverse bidding). Let us consider that lowest any person bids is Rs 2,150 (a discount of Rs 350). This amount (Rs 2,150) is given to this winning bidder. Rest of the amount (Rs 350) is divided by 25, bringing the discount per person to Rs 14. This discount amount is returned back to each member. Sometimes a part of this may be kept by the foreman as service charges, usually in organised chit funds.
Different chit funds operate in different ways; and there are also many fraudulent tactics practiced by many private firms. The basic necessity of conducting a 'Chitty' is a group of needy people called subscribers. The foreman - the company or person conducting the chitty - brings these people together and conducts the chitty. Foreman is also the person responsible for collecting the money from subscribers, presiding the auctions and keeping records of subscribers. He is compensated a fixed amount (generally 5% of gross chitty amount) monthly for his efforts; other than that the foreman does not have any specific privileges, he is just a subscriber of the chitty.
The general pattern of the chitty can be readily noticed by a simple formula:
Monthly Premium * Duration in Months = Gross Amount
E.g.: 1000 * 50 = 50,000/-. Where 1000 is the maximum monthly contribution needed from a subscriber, 50 is the duration of the chitty in months and 50,000 is the maximum sum assured. The duration also equals the number of subscribers, as there must be (not more or less) one subscriber to receive the price money every month.
The chitty starts on an announced date, every subscriber come together for the auction/lot. As per Kerala chit act, the minimum prize money of an auction is limited to 70% of the gross sum assured that is 35,000 in the above example. When there are more than one person willing to take this minimum sum, lot are conducted and the 'Lucky subscriber' get the price money for the month. If there is no person is willing to take the minimum sum, then a reverse auction is conducted where subscribers open-bid for lower amounts; that is from 50,000 >> 49,000 >> 48,000, and so on. The person bidding lowest sum get bid amount.
In both the cases the auction discount, that is the difference between the gross sum and auction amount, is equally distributed among subscribers or is deducted from their monthly premium. Fore example if the auction is settled on a sum of 40,000, then the auction discount of 10,000 (50,000 - 40,000) is divided by 50 (the total number of subscribers) and every one gets a discount of 200. The same practice is repeated every month and every subscriber get at least a chance of receiving money.
Contribution of Thrissur
According to All Kerala Kuri Foremen's Association, Kerala has around 5,000 chit companies, with Thrissur district accounting for the maximum of 3,000. These chit companies provide employment to about 35,000 persons directly and an equal number indirectly.
Acts
Chit funds in India are governed by various state or central laws. Organised chit fund schemes are required to register with the Registrar or Firms, Societies and Chits.
§ Union Government - Chit Funds Act 1982 (Except the State of Jammu and Kashmir)
§ Kerala - Kerala Chitties Act 1975
§ Tamil Nadu - Tamil Nadu Chit Funds Act, 1961
§ Karnataka: The Chit Funds (Karnataka) Rules, 1983
§ Andhra Pradesh - The Andhra Pradesh Chit Funds Act, 1971
§ New Delhi- The Chit Funds Act,1982 and Delhi Chit Funds Rules, 2007
§ Maharashtra - Maharashtra Chit Fund Act 1975
Organised chit funds
In north India common type of chit fund is where small slips with each members name are written and gathered in a box. When all members gather for a monthly or weekly meeting then concern incharge in front of all members will pick up one slip from the box and who so ever's name comes that person will be entitled to get the collection of that day. Afterwords that person’s name slip is torn and there after he comes for meetings regularly and gives his kitty's share but his name won't be there in the slips of box as he has already collected his share.
Special purpose funds
Some chit funds may be conducted as a savings scheme for specific purpose. An example is the Deepavali sweets fund, which has a specific end date - about a week before Deepavali. Neighbourhood ladies will get together to pool their savings each week. This fund will be used to prepare sweets in bulk just before the Deepavali festival, and the sweets will be distributed to all members. Preparation of Deepavali sweets may be a time consuming and costly activity for individuals. Such a chit will reduce the cost, and relieve the members from excess work from an already tense festival season. Nowadays, such special purpose chits are conducted by jewellery shops, kitchenware shops, etc. to promote their products. See also
Rotating Savings and Credit Association
References
1. "Chit Funds Act, 1982". Financial Intelligence Unit – India. Retrieved 2010-02-15.
2. "Chit fund cos on the rise in Kerala". The Indian Express. Retrieved 2010-02-15.
