Chit Fund

A chit fund is a type of rotating savings and credit association system practiced in India, Bangladesh, Sri Lanka, Pakistan other Asian countries. Chit fund schemes may be organized by financial institutions, or informally among friends, relatives, or neighbours. In some variations of chit funds, the savings are for a specific purpose. Chit funds are often microfinance organizations.

In simple terms, a chit fund is an arrangement that a group of people arrive at to contribute money in a defined manner at periodic intervals into a pool or a kitty. During the process of collection, any member can draw a lump sum through various ways like a lucky draw, an auction or a member can even fix a payout date based on a known expenditure.

The number of members equals the number of times a contribution is made to ensure everyone gets a turn. For example, if a group of say 15 people pay 2,000 each a month, the total monthly pool becomes 30,000. Now, in case of an auction, if three members need money at the same time, one is chosen through a process of bidding and the lowest bidder gets the deal. So if three people put in their bids (the bid amount is usually slightly lower than the total pool amount) and the lowest bid is 25,000, then the bidder will get 25000 immediately; the remaining amount gets divided among the remaining members at the end of the tenor.

These schemes are very popular in tier II and III towns in India and even in rural India, thanks to under-penetration of banking services, as they are a way of raising quick money or catering for sudden liquidity needs or even a planned expenditure. Banks haven’t recognised the fact that the common man with a small income finds it very difficult to undergo the entire procedure of getting a loan, adjusting to bank working hours and other demands.”

There are many organised companies incorporated to do this as a business and these are governed by state or central laws. There is a central Chit Funds Act of 1982, apart from a number of state chit fund Acts. There is an office of “registrar of chit funds” in every state that monitors operations which are quite stringent. Utilisation and appropriation of subscribers money is strictly prohibited.

While there are many companies, too, that have defrauded people, Parekh says that there are genuine companies as well that cater to the cash requirements of members locally. The first step of regulation, therefore, comes at the state level; hence it’s the state government which is responsible for any fraudulent activities by chit fund companies. The issue arises because there is no entry barrier to start operations.

While a simple form of chit fund operates to fund the needs of members, it can get complicated when it enters the realm of things like getting members to fund real estate projects and so on.

Editorial Desk