Chit Funds – Innovating the lower strata of society..!!

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:

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.


By Abhimanyu Singh on March 15, 2011 · Posted in Law and Economics

10 Comments | Post Comment

sajana says:

more details about chit funds in kerala & tamilnadu

Posted on June 26th, 2011

Abhimanyu says:

hello sajna, watever more details u need about chit funds, do let me know at my id, i’ll try my best to help u..


Posted on June 27th, 2011

Baluchandran says:

Dear abimanyu,

why chit funds are registering under Jammu & Kashmir act
is there any benifit ?
please let me know



Posted on July 4th, 2011

Kunal Kishore says:

An A-to-Z of Chit Funds (except the taxation issue, of course).
I remember going to my Maternal uncle’s place in Bangalore, when it had taken almost 45 minutes for me to understand what Chit Funds are. My Aunt used to invest in Chit Funds. And, there in Bangalore, the customer base of Chit Funds is even extended to include Middle Class Families, and surprisingly, ladies were more interested therein. May be this was the case in their locality only, because the Statistics shown above apparently says otherwise (i.e. In Karnataka, only 12% participants are female). Needless to say, Chits Funds are not in common prevalence in Bihar, which is why, then to me it was an altogether new way of making money.
And, any further information on Chit Funds I’ve got, after returning from B’lore in 2003/4, is from your Article only.

If you allow me to ask, I shall have following questions for you :-

1) The Limit of 100 Rs. in case of Unregistered Chit Funds is for what ?? – Is it that (a) No Chit Funds can have Chit scheme worth more than 100 Rs., or (b) No person can invest more than 100 Rs. in any chit fund scheme, or (c) No individual participant to a Chit Fund scheme will get prize worth more than 100 Rs.

2) Who does the term Foreman refer to ?? Does not it refer to the Chit manager ? –

3) What are those limits (50%/100% of Chit Funds) meant for ? – Is it that Before a Chit Fund scheme is floated, its value has to be specified, and a certain % of the value has to be deposited in advance with the Respective Registrar of Chit Funds, so as to provide safety to the investors in case of default by the Chit Fund Managers ??

4) This is a suggestion rather. You have beautifully articulated the status of Chit Funds in the eye of Law. The Procedural issues associated with Central legislation at least, should have been discussed too. At least the issues related to floatation of schemes. Like – What can be the maximum and minimum “period of chit fund”/”amount of scheme”/”individual investment”/”eventual winning” ? , What are the statutory compliance pertaining to floating an scheme ? .. etc..

Posted on July 6th, 2011

B.BABU RAO says:

I want to ask inforamtion under RTIact on sri Ram chit and finanace in TENALI ( Guntur district AP).whom have to ask approach or send report through ? can I ask directly information to Sri Ram chits&finanace

Posted on July 15th, 2011

Kiran says:

Dear Abhimanyu,

I want to incorporate a private limited chit fund company in maharahtra. do i have get any permission before getting the name approval from ROC ( Registrar of companies).
my email address is

Posted on January 17th, 2012

Ashish Khandelwal says:


I am starting new business of chit fund (Khandelwal fine chit funds Pvt. Ltd.)at Paratwada dist Amrawati (Maharashtra, India). Please let me know the jurisdication where should i registered my chit fund company & before which chit fund registrar

Posted on February 16th, 2012

Thesli M Reni says:

hi abhimanyu
first up of all let me congratulate you, for your article. now, why most of chit companies in kerala are located around thrissur district especially in irinjalakkuda region. is there any relationship with religion? because majority of the population there is Christian.

Posted on April 3rd, 2012

Geeta Datar says:

Dear Abhimanyu,

Can you please explain the procedure for opening saving account of chit fund in any Bank ? What documents are requird to be submitted as KYC for opening an account ?

Posted on May 31st, 2012

sulbha joshi says:

Halo Abhimanyu,
can you explain me that if a company registered under chit fund act at channi, did it’s business in Maharashtra without registration in Maharashtra. and where did the company have to registered or inform about its business in Maharashtra.
Than you. my e mail address is

Posted on August 21st, 2012