Chit Fund
Encyclopedia
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 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. A company named Kerala State Financial Enterprise
exists under the Kerala State Government, whose main business activity is the chitty.
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.
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.
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. For 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.
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.
are governed by various state or central laws. Organised chit fund schemes are required to register with the Registrar or Firms, Societies and Chits.
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. Afterwards that persons name slip is torn and thereafter 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.
India
India , officially the Republic of India , is a country in South Asia. It is the seventh-largest country by geographical area, the second-most populous country with over 1.2 billion people, and the most populous democracy in the world...
. 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 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
Kerala
or Keralam is an Indian state located on the Malabar coast of south-west India. It was created on 1 November 1956 by the States Reorganisation Act by combining various Malayalam speaking regions....
, by providing easier access to credit. In Kerala, chitty (chit fund) is a common phenomenon practiced by all sections of the society. A company named Kerala State Financial Enterprise
Kerala State Financial Enterprise
Kerala State Financial Enterprises Limited is a public sector non-banking financial company based in Kerala, India. It started functioning on November 6, 1969, with Thrissur as its headquarters. It started with a capital of Rs 2,00,000, 45 employees and 10 branches...
exists under the Kerala State Government, whose main business activity is the chitty.
Chit Funds are also misused by its promoters and there are many instances of the founders running what is basically a Ponzi scheme
Ponzi scheme
A Ponzi scheme is a fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors, rather than from any actual profit earned by the individual or organization running the operation...
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 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.
How it works
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. For 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 KeralaKerala
or Keralam is an Indian state located on the Malabar coast of south-west India. It was created on 1 November 1956 by the States Reorganisation Act by combining various Malayalam speaking regions....
Kuri Foremen's Association, Kerala
Kerala
or Keralam is an Indian state located on the Malabar coast of south-west India. It was created on 1 November 1956 by the States Reorganisation Act by combining various Malayalam speaking regions....
has around 5,000 chit companies, with Thrissur district
Thrissur district
Thrissur is a revenue district of Kerala situated in the central part of that state. Spanning an area of about 3,032 km2, Thrissur district is home to over 10% of Kerala’s population. Thrissur district was formed on July 1, 1949, with the headquarters at Thrissur City. Thrissur is known as...
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 IndiaIndia
India , officially the Republic of India , is a country in South Asia. It is the seventh-largest country by geographical area, the second-most populous country with over 1.2 billion people, and the most populous democracy in the world...
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 KashmirJammu and KashmirJammu and Kashmir is the northernmost state of India. It is situated mostly in the Himalayan mountains. Jammu and Kashmir shares a border with the states of Himachal Pradesh and Punjab to the south and internationally with the People's Republic of China to the north and east and the...
) - KeralaKeralaor Keralam is an Indian state located on the Malabar coast of south-west India. It was created on 1 November 1956 by the States Reorganisation Act by combining various Malayalam speaking regions....
: KeralaKeralaor Keralam is an Indian state located on the Malabar coast of south-west India. It was created on 1 November 1956 by the States Reorganisation Act by combining various Malayalam speaking regions....
Chitties Act 1975 - Tamil NaduTamil NaduTamil Nadu is one of the 28 states of India. Its capital and largest city is Chennai. Tamil Nadu lies in the southernmost part of the Indian Peninsula and is bordered by the union territory of Pondicherry, and the states of Kerala, Karnataka, and Andhra Pradesh...
: Tamil NaduTamil NaduTamil Nadu is one of the 28 states of India. Its capital and largest city is Chennai. Tamil Nadu lies in the southernmost part of the Indian Peninsula and is bordered by the union territory of Pondicherry, and the states of Kerala, Karnataka, and Andhra Pradesh...
Chit Funds Act, 1961 - KarnatakaKarnatakaKarnataka , the land of the Kannadigas, is a state in South West India. It was created on 1 November 1956, with the passing of the States Reorganisation Act and this day is annually celebrated as Karnataka Rajyotsava...
: The Chit Funds (Karnataka) Rules, 1983 - Andhra PradeshAndhra PradeshAndhra Pradesh , is one of the 28 states of India, situated on the southeastern coast of India. It is India's fourth largest state by area and fifth largest by population. Its capital and largest city by population is Hyderabad.The total GDP of Andhra Pradesh is $100 billion and is ranked third...
: The Andhra PradeshAndhra PradeshAndhra Pradesh , is one of the 28 states of India, situated on the southeastern coast of India. It is India's fourth largest state by area and fifth largest by population. Its capital and largest city by population is Hyderabad.The total GDP of Andhra Pradesh is $100 billion and is ranked third...
Chit Funds Act, 1971 - New DelhiNew DelhiNew Delhi is the capital city of India. It serves as the centre of the Government of India and the Government of the National Capital Territory of Delhi. New Delhi is situated within the metropolis of Delhi. It is one of the nine districts of Delhi Union Territory. The total area of the city is...
: The Chit Funds Act,1982 and Delhi Chit Funds Rules, 2007 - MaharashtraMaharashtraMaharashtra is a state located in India. It is the second most populous after Uttar Pradesh and third largest state by area in India...
: MaharashtraMaharashtraMaharashtra is a state located in India. It is the second most populous after Uttar Pradesh and third largest state by area in India...
Chit Fund Act 1975
Organised chit funds
In North IndiaNorth India
North India, known natively as Uttar Bhārat or Shumālī Hindustān , is a loosely defined region in the northern part of India. The exact meaning of the term varies by usage...
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. Afterwards that persons name slip is torn and thereafter 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.External links
- Kerala State Financial Enterprise LTD
- Strength in numbers: how chit funds help the impoverished
- IFMR Study: Chit funds as an innovation access to finance for low-income households
- Understanding Chit Funds
- The Chits Funds Act,1982
- Chit Pools- Online Chit operations
- Frequently Asked Questions about Chit Funds