What is a Chit Fund ?

Chit Funds are classified as Miscellaneous Non Banking Financial Institutions under the RBI Act 1934, playing a major role in the National Financial Inclusion program even before the evolution of banking. This system, with numerous in built advantages, viz., easy accessibility, user friendly services; and free of latent cost, periodic interest hikes, exorbitant pre-closure charges, is the most preferred option, for those, who plan to save small amounts. Chit fund is a saving cum borrowing instrument, which is unique when compared to other financial products.

“Chit”, as defined by the act, means a transaction by way of which a foreman enters into an agreement with a number of subscribers that every one of them shall subscribe a certain sum of money in periodical installments over a definite period.

How it Works?

A chit scheme generally has a predetermined value and duration. Each scheme admits a particular number of members (generally equal to the duration of the scheme), who contribute a certain sum of money every month (or everyday) to the ‘pot’. The ‘pot’ is then auctioned out every month. The highest bidder (also known as the prized subscriber) wins the ‘pot’ for that month. The bid amount is also called the ‘discount’ and the prized subscriber wins the sum of money equal to the chit value less the discount and the fixed fee to the foreman. The discount money is then distributed among the rest of the members (or the non-prized subscribers) as ‘dividend’ and in the subsequent month, the required contribution is brought down by the amount of dividend.