Chit Fund
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A Chit Fund is a kind of savings scheme practiced in India. In a chit scheme, a specific number of individuals come together to pool a specific amount of money at periodic intervals. Usually the number of individuals and the number of periods will be the same. At the end of each period, there will be an auction of the money. Members of the chit will participate in this auction for the pooled money during that interval. The money will be given to the lowest bidder. The bid amount will be divided by number of members, and thus determining per head contribution during that period. Usually the discount will continue to decrease over periods. The person getting money in the last period will receive the full scheme 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 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. This is especially rampant in South India where Chit Fund fraud is witnessed almost on a yearly basis with atleast one Chit Fund going under.
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[edit] History
The chit fund schemes have a long history in the southern states of India. Rural unorganised chit funds may still be spotted in many southern villages. However, organised chit fund companies are now prevalent all over India. TBD
[edit] 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 contibute 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.2500. The auction will start with this amount. Bidders will start bidding by discounting this amount. Let us consider that lowest any person bids is Rs.2150 (a discount of Rs.350). This amount (Rs.2150) is given to this winning bidder. Rest of the amount 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.
[edit] Organised chit funds
Chit funds in India are governed by various state or central laws, like Travancore Chit Act of 1945, Chit Funds Act, 1982 and Madras Chit Fund Act, 1961. Organised chit fund schemes are required to register with the Registrar or Firms, Societies and Chits.
[edit] 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 jewelery shops, kitchenware shops, etc. to promote their products.
