Chit Fund |
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". 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. |
Chit Fund - 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. 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. |
Chit Fund – the Acts |
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Chit Fund - Example |
Functioning of Chit funds are better explained using an example. Take a typical chit fund with 25 members contributing Rs 2000 per month. This fund will run for 25 months. In the first month all members will contribute Rs 2000. An auction meeting will be conducted, and the foreman of the chit fund will preside over it. The total amount will be Rs 50,000. 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 35,000 (a discount of Rs 15,000). This amount (Rs 35,000) is given to this winning bidder. Rest of the amount (Rs 15,000) is divided by 25, bringing the discount per person to Rs 600. This discount amount is returned back to each member for that month. In Registered (organized chit funds where there is a foreman) a part of this discount amount is kept by the foreman as service charges. |
History of Chit Fund
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