A chit fund is a type of savings scheme practised in India, besides other forms of savings scheme offered by various public and private sector banks, post offices, insurance corporations etc. Chit Funds are indigenous financial institutions in India that cater to the financial needs of the low-income households, which have been excluded from the formal financial system. “Chit”, in the legal purview, 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 in the case of villages) by way of periodical instalments 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.
Chit funds are the Indian equivalent of the Rotating Savings and Credit Associations (ROSCA) that are famous throughout the world. ROSCAs are a means to “save and borrow” simultaneously. It is considered one of the best instruments to cater to the needs of the poor. It enables poor people to convert their small savings into lump sums. The concept of chit funds originated more than 1000 years ago. Initially it was in the form of an informal association of traders and households within communities, wherein the members contributed some money in return for an accumulated sum at the end of the tenure. Participation in Chit funds was mainly for the purpose of purchasing some property or, in other words, for “consumption” purposes. However, in recent times, there have been tremendous alterations in the constitution and functioning of Chit funds.
While in most places ROSCAs are user-owned and organized informally, in India, chit funds have been formally institutionalized as well. Legally recognized firms provide a variety of chit schemes. A Chit Fund can either be legally registered or unregistered. Registered Chit Funds, as the name suggests are being regulated under the various Chit Fund acts. While unregistered Chit Funds are unorganised and mostly run by the close friends, relatives or family members of the investor. Unregistered Chit Funds which exceed 100 ($2) in value are illegal in India, although it is very well known that unregistered Chit Fund industry is very popular in India, mainly in the rural and semi-urban area, where people have very little access to the banking services and where financial illiteracy is more.
The regulation of the Chit Fund industry was put in place by the Government of India to address the problem of misuse of informal Chit Funds by unscrupulous promoters and founders running away with the participant’s funds, leaving the members with little recourse to retrieve their money back.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. Various Chit Fund Acts governing the industry in India are as under:
- 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
- Uttar Pradesh: Uttar Pradesh Chit Funds Act, 1975
- Goa, Daman & Diu: The Goa, Daman and Diu Chit Funds Act, 1973
- Pudducherry: The Pondicherry Chit Funds Act, 1966
With the collapse of big chit companies in the early seventies, the Government of India constituted a special committee to undertake the study of chits, its implications and benefits or problems to the Indian economy. On the recommendation of this committee a special chit act was formulated under the name of ‘The Chit Funds Act 1982 by the Parliament of Union Government. In Karnataka this Central Chit Funds Act was promulgated in 1984 along with the Chit Fund (Karnataka) Rules 1983.Under the Chit Fund Act, this industry has been highly regulated and is governed by stringent rules. This institutionalization of the chit funds:
(a) Makes it easier for poor or illiterate people to know exactly what different chit schemes the chit companies offer,
(b) Provides an option to people to participate in schemes where members need not know each other; hence there is a larger diversification of the idiosyncratic risks. This makes it easier to provide chit schemes in urban settings where social linkage among members might be weak,
(c) To some extent ensures transparency in the operations,
(d) Given that the law determines the size of the bidding and the commission the company can charge, it encourages competition among chit fund firms to improve services to clients, and
(e) Legal recognition also helps the chit fund operators to scale their operations.
Most of the provisions of the Central Act apply to the Chit funds run in different parts of India. However, the State Acts may override certain provisions as deemed necessary. For instance, the Andhra Pradesh Chit Funds Act 1971 had previously required the chit managers in that state to deposit only 50% of the chit value with the Registrar of Chits prior to the commencement of the chit scheme. This provision has been amended recently with the adoption of the provision from the Central Act that requires 100% deposit from chit managers. Similarly, the Kerala Chitties Act was amended recently to include a provision which stipulates that companies can float chit schemes only amounting to 50% of the foreman’s asset, whereas in other states that adopt the Central Act, companies are allowed to float chit schemes up to ten times the foreman’s assets. The Kerala Act also imposes other stringent rules that have resulted in many companies registering themselves outside the state (primarily in Jammu and Kashmir where the Central Act does not apply). One should also note that in states which do not enact a State Chit Fund Act, the Central Act will automatically prevail.
Comparison with scheduled bank financing:
Scheduled Bank Deposit and Credit and Chit Fund Money Circulated 2006:
Note: Amount per capita is calculated on all state household population for scheduled banks and on all chit fund household participant for the chit industry.
Chit fund model is an innovative method of access to finance in low income households, which could turn their fates other way if they manage to utilize it correctly. This has been proved by the state of Kerala, where chit funds are the most popular. People not only contribute for their own benefits, but also they do it for the society’s welfare. Due to the immense popularity from the pre-independence era, the state government of Kerala constituted a public sector non-banking financial company, Kerala State Financial Enterprises Ltd. in 1969 mainly to regulate and cater the needs of the residents investing or interested in investing in chit funds. It’s head office is in 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 headquartered scheduled banks like Catholic Syrian Bank Limited, South Indian Bank, Dhanalakshmi Bank and erstwhile Kodungalloor-based Lord Krishna Bank conducted chit fund for subscribers. Most of these banks have now a national presence and are much more financially stable than earlier. 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 its state-owned Kerala State Financial Enterprise, the only government owned chit company in India, from the purview of this act. 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. Besides providing relief to that class of public, these chit companies also provide employment to about 35,000 persons directly and an equal number indirectly.