CHIT FUND

Recently, Chit Fund was in centre of news after the Kolkata-based Saradha Chit Fund scam came to light. Most of the media people were themselves not very clear about the ‘finer’ points related to the idea of ‘chits’ in India, but they kept on highlighting chits as they needed to report on the scam. Let us try understand what ‘chits’ are and some other similar concepts in India:

Chit funds (also known by their other names, such as, Chitty, Kuri, Miscellaneous Non-Banking Company) are essentially saving institutions. They are of various forms and lack any standardised form. Chit funds have regular members who make periodical subscriptions to the fund. The periodic collection is given to some member of the chit funds selected on the basis of previously agreed criterion. The beneficiary is selected usually on the basis of bids or by draw of lots or in some cases by auction or by tender. In any case,

each member of the chit fund is assured of his turn before the second round starts and any member becomes entitled to get periodic collection again. Chit funds are the Indian versions of ‘Rotating Savings and Credit Associations’ found across the globe.

Chit fund business is regulated under the Central Chit Funds Act, 1982 and the rules framed under this Act by the various state governments for this purpose. The Central Government has not framed any rules of operation for them. Thus, registration and regulation of chit funds are carried out by state governments under the rules framed by them. Functionally, chit funds are included in the definition of NBFCs by the RBI under the sub-head miscellaneous non-banking company(MNBC). But RBI has not laid out any separate regulatory framework for them.

Official Definition: As per the Chit Funds 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”. A transaction is not a chit, if in such transaction :

(i) Some alone, but not all, of the subscribers get the prize amount without any liability to pay future subscriptions; or

(ii) All the subscribers get the chit amount by turns with a liability to pay future subscriptions.