Chit fund

From Wikipedia, the free encyclopedia

A Chit fund is a kind of savings scheme practiced in India. A Chit fund company means a company
managing, conducting or supervising, as foremen, agent or in any other capacity, chits as defined in
Section 2 of the Chit Funds Act, 1982. According to Section 2(b) of the Chit Fund Act, 1982, "Chit
means a transaction whether called chit, chit fund, chitty, kuri 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
installments 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". [1]

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 also played an important role in the financial development
of people of south Indian state of Kerala, by providing easier access to credit. In kerala chitty (chit
fund) is a common phenomenon practiced by all sections of the society. In Kerala, there exists a
company under the State Government, called Kerala State Financial Enterprise, the main business
activity of it being the chitty business. 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.

Contents
[hide]

• 1 History

• 2 Example

• 3 How It Works

• 4 Contribution of Thrissur

• 5 Acts

• 6 Organised chit funds

• 7 Special purpose funds

• 8 See also

• 9 References

• 10 External links
[edit]History

According to Primitive civilizations, a book written by Edith Jemima Simcox, the ‘Malabar Kuri’ system
existed from ancient Dravidian times and is somewhat similar to the systems in China. In China it
developed to what is popularly known today as the Chinese lottery. Dr NM Nampoothiri in his work
'Legacy of Nila' refers that the Village Banking system known as Kuri has its origins from the ‘Kaavu
tattakam’ social group system. ‘Kavu tattakam’ refers to the territorial jurisdiction of a ‘kaavu’ or temple
to a specific area. There were many such Thattakams and all ‘Kaavu Tattakams’ were finally linked to
Zamorin’s Tirunavaya Mamankam. There are usually four kinds of chits. The 'Simple Kuri', the 'Lelam
Kuri or Auction Chit', the 'Sahaya Chit' and the 'Prize Chit or Lottery' where a certain amount of
gambling is involved. In Travancore, the usual term used is 'Chitty' from where 'Chit' comes whereas
'Kuri' or 'Panam Payattu' is the name employed in Cochin and Malabar regions. [2] Chit fund become
very popular in the 19th century when ruler of erstwhile Cochin state, Raja Rama Varma, gave a loan
to a Syrian Christian traders, keeping a certain portion of it to himself for administrative and other
expenses. Later, to manage the increasing numbers of those seeking loans, he ordered a cast of lots
and gave the accumulated amount to those who drew the lot on the principle of equity. Gradually the
practice spread to other parts of the world including Myanmar and Sri Lanka. But the modern
operations of chit funds started between 1830 and 1835, when the Chaldean Syrian church in Thrissur
started Kuries under its name and issued passbooks to subscribers as evidence of enrolment. Another
version of the origin of Chit fund is linked with Portuguese missionaries from China, who visited Muziris
(Kodungalloor) for evangelization and established a seminary at Vypeencotta village in 1577. They
reportedly encouraged promotion of chit fund in Kodungaloor.

[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 2,500. The auction will start with this amount. Bidders will
start bidding by discounting this amount (reverse bidding). Let us consider that lowest any person bids
is Rs 2,150 (a discount of Rs 350). This amount (Rs 2,150) is given to this winning bidder. Rest of the
amount (Rs 350) 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]How It Works
Different chit funds operate in different ways; and there are also many fraudulent tactics practiced by
many private firms. The basic necessity of conducting a 'Chitty' is a group of needy people called
subscribers. The foreman - the company or person conducting the chitty - brings these people together
and conducts the chitty. Foreman is also the person responsible for collecting the money from
subscribers, presiding the auctions and keeping records of subscribers. He is compensated a fixed
amount (generally 5% of gross chitty amount) monthly for his efforts; other than that the foreman does
not have any specific privileges, he is just a subscriber of the chitty.

The general pattern of the chitty can be readily noticed by a simple formula:

Monthly Premium * Duration in Months = Gross Amount

Eg: 1000 * 50 = 50,000/-. Where 1000 is the maximum monthly contribution needed from a subscriber,
50 is the duration of the chitty in months and 50,000 is the maximum sum assured. The duration also
equals the number of subscribers, as there must be (not more or less) one subscriber to receive the
price money every month.

The chitty starts on an announced date, every subscriber come together for the auction/lot. As per
Kerala chit act, the minimum prize money of an auction is limited to 70% of the gross sum assured that
is 35,000 in the above example. When there are more than one person willing to take this minimum
sum, lot are conducted and the 'Lucky subscriber' get the price money for the month. If there is no
person is willing to take the minimum sum, then a reverse auction is conducted where subscribers
open-bid for lower amounts; that is from 50,000 >> 49,000 >> 48,000, and so on. The person bidding
lowest sum get bid amount.

In both the cases the auction discount, that is the difference between the gross sum and auction
amount, is equally distributed among subscribers or is deducted from their monthly premium. Fore
example if the auction is settled on a sum of 40,000, then the auction discount of 10,000 (50,000 -
40,000) is divided by 50 (the total number of subscribers) and every one gets a discount of 200. The
same practice is repeated every month and every subscriber get at least a chance of receiving money.

[edit]Contribution of Thrissur
According to Reserve Bank of India, Thrissur in the 1930s boasted of head offices of 58 banks and
was recognised by RBI as 'Banking town. Prior to 1975, leading Thrissur headquarted scheduled
banks like Catholic Syrian Bank Limited, South Indian Bank, Dhanalakshmi Bank and ersthile
Kodungalloor-based Lord Krishna Bank conducted chit fund for subscribers. The rapid growth in the
business saw enactment of Cochin Kuries Act, 1932 and Travancore Kuries Act, 1945, besides a
uniform law for the state—Kerala Chitties Act, 1975, being enforced since August 25, 1975. However,
the Kerala Government has exempted state-owned Kerala State Financial Enterprise, the only
government owned chit company in India, from the purview of this act. [3] According to All Kerala Kuri
Foremen's Association, Kerala has around 5,000 chit companies, with Thrissur district accounting for
the maximum of 3,000. These chit companies provide employment to about 35,000 persons directly
and an equal number indirectly. [4]

[edit]Acts

Chit funds in India are governed by various state or central laws. Organised chit fund schemes are
required to register with the Registrar or Firms, Societies and Chits.

 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

[edit]Organised chit funds

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 won't 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.