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.[citation needed] Members of the chit will participate in this auction for the pooled money during that interval. The money will be given to the highest 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 at least one Chit Fund going under. So it has earned an infamous nickname - 'Cheat' funds.
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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. The word is Hindi and refers to a small note or piece of something. The word passed into the British colonial lexicon and is still used to refer to a small piece of paper, a child or small girl.[citation needed] 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 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.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.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 persons name slip is torn and there after he comes for meetings regularly and gives his kitty's share but his name wont be there in the slips of box as he has already collected his share.
[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 jewellery shops, kitchenware shops, etc. to promote their products.
[edit] An Example
Say a group of 20 persons agree to participate in a chit-fund for a period of 20 months, with 1000 rupees (Rupee is Indian currency (INR) ) share per head per month, hence 20000 would the maximum amount a member can draw-down. There will an organizer who has to take care of all the activities like collection of money from member's each month, disbursing the pooled money to the highest bidder and all book-keeping works.
On a specific day every month member's will gather to bid for the 20000 rupees. The organizer would start the bid with a low amount, say 500 rupees. Now the members can bid any amount above 500.Assume a bidder bids for 600 rupees and someone wants to challenge his bid he should bid above 600.
This way it goes like an auction with the organizer repeating the bid amount 3 times before closing the deal. Say someone has bidded for 1000 rupees and the deal is closed. Now the bidder would be awarded 19,000 (His bid-amount would be deducted).The 1000 rupees deducted from the bidder would be shared equally among the members. So for that month each person will pay only 950 (20,000-1000/20).This saving can be considered equivalent to the interest provided by banks.
Once a member wins a bid he can't participate in future biddings. So after the first month only 19 members would be eligible for bidding.
One particular month (typically second month) there would be no bidding, so the members should pay their share (1000 rupees) in full. That month collection amount would go the organizer as salary for organizing, coordinating and book-keeping the chit-fund.
And the bidding goes each month after this like the first month. When the 20th month comes there would be only 1 persons eligible for bidding. Hence that months money would be given in full (20,000 rupees) to that person.
