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MAHENDRA K PATIDAR
PGDMBIF
Institute of Public Enterprise, Hyderabad
 HISTORY
˜ Chit is a 3-millennia old financial instrument, intimately
connected with India¶s rural and urban economic life for
centuries

˜ It is a dual-purpose instrument of both borrowing and

saving

˜ Each Chit Group is a Self-Help Group

˜ Chit funds are the nearest thing to a Bank in many parts of

India. They mobilize huge amounts of small savings and
offer the same as some sort of microfinance
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˜ |ccording to Chit Fund |ct, 1982, "Chit" means a transaction by

which the foreman (promoter) enters into an agreement with a
number of subscribers that everyone of them shall subscribe a
certain sum for a certain period and each subscriber in his turn as
determined by lot or by auction, shall be entitled to a prized
amount

˜ | conventional chit is a financial institution involving periodical

subscription by a group of people

˜ Chit funds provide an opportunity for members to save their

excess cash on a daily or monthly basis and, at the same time, to
have access to easy finance in case of emergency or other
requirement

˜ They are a means of easy and profitable access to finance for the
Small and Medium Enterprises (SMEs)
 jORKING OF CHIT FUNDS
˜ | chit scheme generally has a predetermined value and
duration
˜ Members of the chit group invest a fixed amount every
month, this collection (Prize Money) is available for
borrowing
˜ The price for availing it is known as Discount, which is
distributed among all the members including the
beneficiary. Selection of the beneficiary is done through
auction
˜ Company is compensated a fixed amount (generally 5%
of gross chitty amount) monthly for its efforts
 FUNCTIONING USING |N EX|MPLE
˜ Chit Value = Rs.400000, Duration = 40 months and
Members = 40
˜ Each member contributes Rs. 10000 per month

˜ If highest bid is for Rs.100000 then the successful bidder

gets Rs. 300000
˜ The prized subscriber has to continue to pay the monthly
installments till the termination of the chit
˜ The discount amount of Rs.100000 is then divided among
the other 39 members equally after deducting company¶s
commission
˜ The dividend for the 39 members would be Rs.2435 each,
assuming 5% commission to the company
CONTD..
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˜ Some chit funds may be conducted as a savings scheme

for specific purpose

˜ Deepavali sweets fund

˜ Jewellery shops, kitchenware shops, etc. to promote their

products

˜ Schemes may be structured for duration's varying

between 10 months to 100 months
 REGISTERED VS. UNREGISTERED CHIT FUNDS
˜ Registered Chit funds are organized by Chit Fund
firms/companies and regulated by the Chit Fund |ct and
are governed by various state or central laws

˜ Organized chit fund schemes are required to register with

the Registrar or Firms, Societies and Chits

˜ Unregistered Chit Funds are unorganized and run by

friends, relatives or personal groups

˜ Unregistered Chit Funds which exceed Rs. 100 in chit

value are illegal in India, although it is widely known
that the unregistered Chit Funds industry is still very
popular in rural areas and among the poor population in
urban and semi-urban areas
 CHIT FUND DEP|RTMENT
˜ The Chit Fund Department was set up by the Government
with the main objective of controlling the activities of chit
fund companies
˜ The Chit Fund Department is responsible for performing
the following activities
˜ Registration of new Chit Fund Companies

˜ Issuance of previous sanction in respect of new Chit

Groups
˜ Endorsement of chit agreements

˜ Grant of commencement certificates to new Chit Groups

˜ Redressal of grievances of subscribers

 ST|TISTICS OF CHIT FUNDS
˜ |round Rs 11,088 crore are being circulated via chit fund schemes in
the southern states of Tamil Nadu, |ndhra Pradesh and Kerala
˜ |round 58 million households are participating in chit fund schemes
˜ |ndhra Pradesh tops the list of States with 14 lakhs household
participation in chit funds and Rs 7200 crore money circulated through
chit schemes
˜ Tamil Nadu had eight lakhs households participation with Rs 3700
crore money in circulation
˜ The interest charged per annum ranged from 8% to 28%, though
higher than bank loans, is lower compared to 24 to 36% charged by
other private financiers
˜ Besides, the funds are available at better rates compared to other
financial vehicles such as MFI and demanding less paperwork and
collateral\guarantee
 BENEFITS
˜ Chit fund can be seen as emergency saving, which can be
withdrawn at any time interval

˜ There are no complex procedures for applying for loans

from chit funds as the loans are provided on the basis of
trust

˜ There is good returns for any scheme

˜ The amount is given on personal sureties too unlike in

banks which demand a tangible security

˜ Chit funds can be relied upon to satisfy personal needs

unlike other financial institutions

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