What is Chit Fund?

Chit funds are rather popular among the artisans, shopkeepers and many such businessmen running small businesses. It’s also popular among other individuals as well, who would like to receive a lump sum for a special occasion like marriage, anniversary etc.

A Chit fund is a kind of savings scheme practiced in India. A chit fund company is a company that manages, conducts, or supervises such a chit fund, as defined in Section of the Chit Funds Act, 1982. According to Section 2(b) of the Chit Fund Act, 1982:

Displaying chit-fund.jpg“Chit means a transaction whether called chit, chit fund, chitty, kuree 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 instalments 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”

How do they work?

A few individuals and members may come together and decide on making a monthly contribution each month and would then be entitled to take a lump sum on a pre-determined auction date. Now, let’s say there are 10 members, then the chit fund period would have to be for 10 months. Now let’s assume that each of the 10 members contributes Rs 1000. If a person is in dire need of money he will bid for the auction amount at a lesser rate. For example, the auction amount would have to be Rs 10,000 in the above case (10 members contributing Rs 1000). Since there may be a need of urgent money the bidder may in the very first month decide to pick the money in the auction at Rs 9000, instead of Rs 10,000. In such a case each member has to only pay Rs 900 and not Rs 1000, since the amount bid was for a lower rate, since the member needed the money urgently. The benefit for not bidding early is the discount one gets in the monthly contribution. 

Why people invest in Chit Funds?

  • Easy to join as there is no formalities needed
  • High Promised Return
  • Option of small deposit
  • High Liquidity
  • Door to door collection by agents

Acts Governing the Chit Funds in India are:

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

Regulations Imposed by RBI on chit fund businessDisplaying Chit-funds.jpg

  1. No chit fund business can be conducted except by a registered company. Chit business run by family concerns, partnership firms are restricted.
  2. In every state, there will be a Registrar of Chit companies with whom all the chit companies must register, giving full particulars about the chit company.
  3. The maximum discount that can be taken in a bid was restricted to 30% of the total chit amount. However, in 2001, the same has been enhanced to 40% (in the case of a chit for Rs. 1 lac, not more than Rs. 40,000/- can be the bid amount).
  4. The details of every chit have to be furnished to the Reserve Bank of India along with the names and addresses of members.
  5. One month chit amount of all the members has to be kept with the Reserve Bank of India till the particular chit comes to an end. 

What are different kinds of Chit Funds in India?

  1. hit funds run by State governments like Kerala State Financial Enterprises and Mysore Sales International Ltd and PSU run Chit funds
  2. There are registered Chit funds like Shriram chits etc which are run by big business houses and are registered
  3. Unregistered Chit funds, which are run on the basis of friendship and close proximity of the members.

Chit funds run by PSUs are the safest. The second safest is the one run by registered ones. The least secured is the unregistered ones.

Returns from chit funds?

 It is difficult to say what would be the returns from chit funds. Many a times it could be more than the returns from bank deposits. If somebody is in urgent need of money, he could bid at a lower rate for the chit fund, which could push the rate of returns higher. It is therefore very difficult to pinpoint the exact rate of returns that one would get from a chit fund.

Should you invest in chit fund?

There are a number of chit funds in India. In the past there have been instances of people investing and losing money, as many organizers have fleeced investors. However, many have also benefited from chit funds as well. There are many reputed chit fund organizers, especially the bigger companies that bring some safety into play.

Are chit funds really profitable?

It is always very difficult to ascertain, if an individual would make more returns from chit funds, than say for example bank deposits. It all depends on how low the bidding for the particular chit fund happens. Lower the bidding more profitable would the returns be.

I think the objective of a chit fund is more important. Sometimes poor artisans do not like to visit the bank and prefer chit funds instead. It is very easy for them to understand and in some cases the chit fund company sends executives to collect the money. It becomes more convenient for them. 

Popular chit funds in India

Chit funds are typical to India. In the sense we do not find them operating elsewhere. Some of the popular chit funds in India include the Mysore Sales International, which is backed by the government of Karnataka. On the other hand we have the Kerala State Financial Enterprise (KSFE), Chit Funds or Chitties are backed by government of Kerala. It has been in existence since 1969 and has lacs of subscribers. There is also Shriram Chits backed by the Shriram Group and also Margadarsi Chits by the Ramoji Rao group.

Conclusion

Displaying what-is-a-chit-fund-and-how-does-it-work.jpgThe concept of chit funds existed in India even before the existence of a formal banking system. Every registered chit fund company and their successful schemes are not only governed by Chit Funds Act 1982 and Section 45(I) of the Reserve Bank of India but also administered by the individual state governments. Inadvertently the size of unregistered chit funds group is estimated to be 100 times larger than that of the registered ones in India. People now need to be more open, aware and conscious before choosing the right chit fund scheme for them. They have to become more alert instead of becoming the victim. There is also a need of more stringent law, regularized and easy procedure and transparency by the government in registration process and controlling the fraudulent cases.

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