Chapter -IV

Chit Funds
-The Evolution, Operational scenario, Role and
Regulatory Framework.

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CHPTER BRIEF

This chapter is intended to present a kaleidoscope of various facets of chit

funds. A bird’s eye view of the chapter helps to understand the origin,

history, evolution and operational scenario of the chit funds. In addition, the

global scenario of prevalence of chit funds is also thrown due light in the

chapter. The type of chit funds, the players in the operational domain of chit

funds, the chit funds Vs other institutions of finance, the importance of chits

as an informal source of credit, the mechanism of conducting chits, the

legislation for regulating chit funds etc. have been touched comprehensively

in this chapter.

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Origin and History of Chit Fund

A totally Indian concept, the chit fund system has now been globally operated and won
universal acclaim. In the villages of Kerala in India, many years ago, a small group of
farmers operated a unique scheme. Each farmer gave a fixed quantity of grains
periodically to a selected trustee. The Trustee, after keeping aside a portion for him self,
gave the rest to a member of the group to help him to meet his social commitments and
other needs. The farmer who received the lot continued to give the fixed quantity till
every member of the group received his lot. The additional benefits when receiving the
lot earlier led to competition. Some members were even willing to forgo a certain portion
(like a discount) of the lot, in order to get an earlier chance. So, an auction was held and
the lowest bidder got the lot. This was the basis of what we know today as the “chit fund
scheme”.

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. “The concept of Chit funds came into being in the 1800’s when Raja
Rama varma, ruler of erstwhile Cochin State gave a loan to a Syrian trader, keeping a
certain portion of it to himself for administrative and other expenses. Later, to manage the
increasing number 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 country and even abroad, includes Myanmar and Sri
Lanka. But real streamlining of operations was somewhere between 1830 and 1835 ,
when the Chaldean Syrian church started Kuries under its name and issued passbooks to
subscribers as evidence of enrolment.1” Another version of the origin of Chit fund is
linked with Portuguese missionaries from China, who visited Muziris (Kodungallor) for
evangelization and established a seminary at Vypeencotta village in 1577. They
reportedly encouraged promotion of chit fund in Kodungaloor.

1
All Kerala kuri foremen’s Association and All India Association of Chit Funds.

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Chit fund is a typical indigenous financial institution peculiar to South India, particularly
Andhra Pradesh, Tamil Nadu and Kerala. Chit funds grew at a time when banking and
credit facilities were inadequate and people in general had to rely to a large measure on
indigenous sources for their many productive and consumption needs. Chit funds have
been meeting a part of the genuine credit needs of the people, both in urban and rural
areas. They have served as a medium of saving for many people. The term ‘chit’ in
Tamil and the terms ‘chitty’ and ‘kuri’ in Malayalam are synonymous, meaning a written
piece of paper in Andhra Pradesh it is known as Cheety.

The progenitor of chit funds in Tamil Nadu is known as Moyy Murai. The term Moyy
means call money pooled and Murai means custom. Under this system, a group of
persons in a village or locality, known to each other joined together to pool their
resources to meet the need of an individual of the group. There were some well-defined
needs such as celebrating marriage, buying of land, building of houses and purchasing of
cattle that were prescribed under the system. It was a Sahaya-Nidhi, with a strong
element of co-operative spirit.

In course of time, the term Moyy was replaced by the term chit or olai (palm leaf), which
was the notice of demand for payment of a member’s contribution to the pool. Later the
names of the members of the group were written on chits or small pieces of paper or palm
leaf, rolled up and shuffled to pick out the person to whom the amount of fund was to be
given. That was the origin of the chit fund.

Evolution of Chit Funds

The chit fund system, as it is originated, was grain chit or Dhanya Chittu. In each village
there were different groups contributing different grains. Each group selected its own
foreman. In the initial stages the entire periodical collection was given to one member of
the group decided by lot or what was known as kudavolai. On an appointment day, the
names of members were written on olais (palm leaves) and put in a small earthen kudam
(pot), from which one name was pulled out to decide the person to whom the entire
collection was to be given.

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With the decline of barter and the emergence of money as the centre of economic
activity, the chitty grew to the position of a tiny one-man savings bank. When money
came into use, there developed Pana Chittu or money chits, in which members paid their
periodical contribution in money. The subscribers began to seek money chitties in
preference to grain chitties. The pattern of subscribers also underwent a change. Apart
from agriculturists, traders, merchants, the salaried people also turned to the chitties. This
change in the occupational pattern of the clientele was a major turning point in the
evolution of chitties. The main purpose of merchants and traders to join chitties is
borrowing. They use the prize amount for the furtherance of their business. The principle
of lot system was a major obstacle in the way of taking the prize amount in advance and
they used to borrow the necessary amount from money-lenders or others at high rates of
interest and used to repay when they got the prize amount. Sometimes they used to even
borrow the money from the foreman itself. Later on, the foreman realized that majority of
the people joining chitty for getting financial accommodation. With a view to serve this
class of people in a better way, the foreman adopted the principle of auction for
determining the prize winner.

There was also the practice among those selling vegetables in village shandies (fairs) to
make a weekly contribution to a trusted individual, getting in turn the pool to supply them
with capital to buy the vegetables they had to sell in the market. In course of time this
system spread to various trades. Women in households also started pooling their
resources and depositing their savings with an elderly woman of the locality, who was
generally trusted and respected. As more and more people started joining these groups, a
system was evolved by which the trustee fixed a particular day for deposits and
payments. As time passed, the men folk also found this system of mutual co-operation
advantageous to meet their casual financial difficulties or invest their cash earnings. The
men who joined the scheme were drawn from the locality. The persons who conducted
the chits were normally men of known integrity and the people who joined the scheme
had implicit faith and confidence in them. Default and delayed payments were very rare.

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The earliest form of chit business was based on the system of lot, which grew out of the
grain chit (Dhanya Chit). Later the auction system was developed. The lot system gave
amount to a person who might not necessarily be in need of it. In the auction system, it
becomes possible for needy members to bid for an amount depending upon their urgency.
The difference amount between the total collection and the bid amount was distributed as
dividend or kasar to all members including the successful bidder. Much later, as the
system developed, the excess collection was divided into two parts, not necessarily equal.
One part was distributed equally to all the members of the group as kasar and the other
part also equally, but only to non-prized members. The latter was an incentive to those
members who joined the group primarily to save.

Before the development of communication in India, chit funds were confined to small
villages or a particular community. The main factor responsible for the success of these
early chitties was the nature of the village economy. The village was practically self
sufficient. There was a little communication with the distant towns. Grain was the main
source for buying any other thing. There was no institution for keeping savings, and they
spent carelessly the produce in ceremonies and festivities and borrowed afterwards for
survival. To these people the chitty turned out to be a boon. With the development of
transport and communications and with the mobility of people between places, chit funds
lost to an extent their localized character. The individual foreman who was the master of
the show hitherto was pushed to the background and a new class of institutional foreman
emerged. A chit fund company was started by an individual or by a group of individuals
as partnership firm, private limited company or as public limited company in which a
large number of members were enrolled. The company had to employ people to canvass
members residing in different places, collect subscriptions, maintain accounts, etc. It also
became necessary to take proper sureties and securities from successful bidders and to
adopt a complex system of accounting.

The Banking Commission which studied the working of chit funds recommended the
starting of chit funds in the public sector. Even before the commission recommended chit
funds in the public sector, the Government of Kerala set up in 1969 a company called the
Kerala State Financial Enterprises Limited, with the object of starting, conducting,

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promoting, operating, managing and carrying on the business of chits in India or
elsewhere. The chit fund habit today is no longer confined to a village or town, but is
fairly widespread not only in south Indian states, but also to other states in the country
and other countries like Malaysia and Sri Lanka. Many chit companies have set up
branches in other States to expand their business.

A chit fund, thus, is a financial arrangement or Institution based on mutual trust and
confidence. It has a limited number of members preferably known to one another, for a
limited period and with limited liability. The membership is voluntary. People join a chit
fund either to obtain easy credit or to find an avenue for the investment of their savings.
The main attraction is the availability of a lump sum either for expenditure or for saving.
The expenditure may be mostly consumption expenditure, especially on consumer
durables or for such purposes as marriages, religious ceremonies or to pay off an old debt
and also for acquiring a house or plot of land. Thus, chit fund has become a mode of
saving and a source of credit.

Chit funds organized professionally by individuals or institutions, like a firm or company

are in the nature of financial intermediaries. Financial intermediaries gather the savings
of the people and distribute the funds to numerous borrowers, thus affecting the
allocation of real resources. An effective system of intermediation helps economic
development by competing for funds of savers, thus offering a rate of return to them
higher than would otherwise be possible and making funds available to borrowers at costs
lower than would otherwise prevail.

A chit fund is primarily a mutual benefit society in which some people join to save and
others to borrow. Unlike the other financial intermediaries, chit fund connects the
borrowing class directly with the lending class and the pooled saving is lent out to the
same group of savers. The intermediation involved in chit fund is that the promoter of
chit fund mobilizes the savings of one group of people and passes them on by turn to the
same group of people, who may utilize them either for consumption or investment
purposes. The transformation here is that of savings into consumption and/or investment.
Insofar as chit funds have n o control over the end end-use of the funds, the

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intermediation does not necessarily result in an efficient use of resources. The efficient
use here means that the amount is utilized in acquiring the income earning assets which
directly or indirectly promote capital formation. Therefore, it is better to consider chit
funds as a co-operative endeavor.

The two factors, namely, accessibility and relatively easy availability of credit, rather
than the cost of such credit seem to explain mainly, the popularity of chit funds.
Notwithstanding to the spectacular growth of banking offices since nationalization and
the increase in the flow of credit to the neglected and priority sectors, chit funds have
recorded substantial growth in number and volume of business.

Chit Funds all Over the World

Chit fund are the Indian equivalent of the Rotating Saving and Credit Associations
(ROSCA) that are famous throughout the world. ROSCAS are informal financial
institutions which are found all over the world2. They are most common in developing
countries but are also used by immigrant groups in the United States. The Marathi
vernacular for money club is known as ‘Bishi’. It is the collective name for the rotating,
as well as the non-rotating, savings and credit association. In these associations, members
make periodic contributions that are pooled in a fund from which loans are made. In the
rotating Bishi, the total fund is given to each of the members in rotation until everyone
has had a turn. Hence, only one loan is made each time the members convene. In the non-
rotating bishi several loans are made from the pool of savings. Over time, some members
may take more than one loan, others may never need to borrow from the fund and use
their society merely as a savings club. Both types of societies are common in developing

2
.ROSCAs travel under many different names; chit funds in India, susu in Ghana, tontines in Senegal,
njangis in Cameroon, cheetu in Srilanka, and pasanakus in Bolivia are just a few examples.

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countries, but it is the rotating savings and credit association which is more popular and is
popularly known as ROSCA.

The Indian ROSCA is commonly known as chit fund or chitty. Its origin antedates the
establishment of modern banking. Originally, contributions were in kind, paddy or rice.
This made chitty very popular among the women, who saved a handful of rice from each
daily meal to contribute to their rice bank. They invested the proceeds of chitty in gold
ornaments, household utensils or small livestock. This type of ROSCA became known as
grainbishi, because contributions were in grain. With the monetization of the economy,
contributions in cash gradually replaced those in rice or grain. The chitty became popular
among professionals other than agriculturists, and its nature changed from a pure savings
club to a savings and loan society. The Indian money-ROSCA knows three basic
variations of the rotation principle. The first is the lottery type, in which lots are drawn to
decide whose turn it is to receive the fund. The second is the lottery with discount, which
works the same way, except that a small sum is deducted from the fund and distributed
among members who have not yet received the find. The discount can be seen as a form
of interest on savings and is an improvement on the simple lottery system that gives
members no such dividend. The third type is the auction-ROSCA in which members bid
for the fund. Eventually, the fund goes to the bidder offering the highest discount, which
is subsequently divided among the other members.

ROSCAs in Japan: The rotating savings and credit associations (ROSCA) called the
mujin-ko or tanomoshi-ko in Japan. The mujin originated from Buddhist traditions and
came to Japan from India, China, and Korea. In Japanese historical records, the word
mujin first appeared in1255 but that time referred to pawnshop financing. Later the word
was used synonymously with tanomoshi, which is Japanese for ROSCA. In Buddhist
teachings, mujin means “inexhaustible”, something like the widow’s curse. Tanomoshi-
ko means a “trustworthy community”. The mujin or tanomoshi provided financing
without collateral and without interest payments. When commercial lenders did not
provide sufficient lending to the poor, a group of people gathered, contributed a certain
sum of money, and extended loans to the needy. Even during Japan’s premodern period,

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these ROSCAs were considered to be helpful, even ingenious, schemes of giving out
loans. The elements of the traditional system of the mijin-ko or tanomoshi-ko contract are
as follows:

(i) Initiators or originators of the mujin were called ‘parents’.

(ii) The initiator gathered a few to more than 10 people who constituted the
membership of the mujin.
(iii) Members agreed on the terms of the operation.
(iv) Members regularly attended the meetings of the mujin and had to make a
contribution of a certain amount of money.
(v) The money collected was paid out as a “pot” to a person determined by
chance drawing or bidding.
(vi) If a member obtained the money in the pot by chance drawing, he or she
could not participate in any additional drawing. However, members who
won the pot were required to give contributions at each subsequent
meeting.
(vii) After every member won the pot, the mujin would dissolve.

The Tokugawa (Edo) period, which started in 1603, was followed by more than 250 years
of political stability. Temples and shrines organized the mujin so that a person who had
the pot in an earlier round did not have to contribute afterward. This arrangement made
the mujin more like a gamble than a mutual-help financial organization. A person who
won early could take the funds and leave. Even the central and the local governments
were tempted to hold mujin-type raffles for the sake of raising revenues. The mujin have
survived until the post-World War II period. The mujin have traditionally provided funds
to small and medium sized firms in the local sectors of the Japanese economy. In 1915,
the Japanese ministry of finance passed the first law to regulate the mujin. After the
World War II , the government reorganized the mujin as mutual (sogo) banks, and the
banks started to accept deposits. The mujin remained virtually the only traditional
financial institution that was carried over from the Tokugawa regime into the meiji
period. Despite the introduction of banks, savings and loans, and other modern financial
institutions from the west, most ordinary people, and particularly rural dwellers, did not

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use these modern institutions. Rather the mujin continued to be popular. Farmers formed
mujins to obtain funds to buy equipment, and craftsmen often formed mujins among
those in their trade. Also, many village dwellers formed mujins, not for financing but
simply to provide an opportunity for social gathering and friendship. However, after the
meiji restoration, there arose many informal, but commercial, groups that exploit the
mujin method, not for the sake of social activities or mutual help but for the sake of
profit.

The features of Japan’s mujin have much in common with ROSCAs in other countries.
The mujin in Japanese economy is important because of mujin plays key role in every
day finance in pre modern and post –Meiji restoration Japan. The Ministry Of Finance
assisted by the bank of Japan, took the initiative and successfully attained its bureaucratic
objective of incorporating the mujin into the formal financial sector. The policy
implications of the mujin are as follows. Initially, the mujin relied on monitoring
mechanisms enforced by kinship, religions, and local community ties. However, as they
became larger, more of their members were inevitably total strangers, and moral hazard
problems increased. Thus, over time the MOF had to increase its regulation of the mujin.
The MOF can be justified in attempting to keep the mujin institutions under its control
and in modernizing them so that common people would not suffer from dubious banking
practices. The MOF’s objectives were well achieved and from 1930 to 1990, there were
hardly any mujin bankruptcies.

The significance of mujin: a) Low- income people did not like the new western methods
of financing, but they trusted the traditional mujin; b) Low –income people did not want
to borrow from pawnshops and loan sharks because they charges prohibitive rates of
interest;

The dark side of Mujin: i)It was difficult to force those who obtained the pot at an early
draw to make further contributions; ii) On some occasions the drawing was unfair;
iii) Often there were unfair differences in the implicit interest rates; iv) a very high rate of

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interest could emerge by bidding, which would make the mujin usurious; v) The timing
of lending was inflexible and; vi) The accounting procedure was non transparent.

In 1915, the mujin finance law was passed. After the passing of the mujin finance law,
the definition of the mujin was clarified. The amount of the pot, the amount of the
premium, the duration of the operation, and the number of members came under strict
limits. The mujin finance law made withdrawing from the mujin more systematic.
According to the new law, one could only withdraw if appropriate successors were found
so that the fall of membership would not cause the scarcity of the suppliers. After passing
of the mujin finance law, the Osaka style of calculating contributions and payments from
the pot became more dominant. Before, in the traditional mujin, there were two ways of
calculating the contributions and payments from the pot, the Tokyo style and the Osaka
styles. In the Tokyo style, the contributions were unchanged before and after the period in
which the participant received the payment. In Tokyo style, an earlier pot payment meant
an economic advantage for the member and, therefore, involved an element of luck or
gambling. The Osaka style was the method that increased the amount of contributions
after the period in which the participant received the payment. In this style, an earlier pot
payment was not necessarily advantageous because the recipient had to pay higher
contributions for a longer period. Thus Osaka style was closer in spirit to the traditional
role of financial intermediaries that transferred funds between savers and borrowers.

The Ministry Of Finance provided formulas for calculating the internal rates of Interest.
The following notations are the lottery type or ‘random’ ROSCA of the Osaka style:
Payment of the pot: A; contributions before the payment: B; additional contributions
(over B) after payment: B’; total number of periods (the number of periods at which the
mujin contract ends): m; timing of the payment, n, interest rate on bank deposit; i: and
implicit rate of borrowing: r.

After the World War II many bogus mujin companies emerged. These finance companies
differed from the mujin in that a group did not need to be organized and borrowing was
possible without lotteries or auctions. These bogus mujin soon became very popular and
the government amended the Mujin Finance Law to include them. After the passing of

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this amendment the transformation of the mujin from their original form as rotating credit
associations to more general financial intermediaries.

The households with lower income tend to use mujin more extensively than households
with higher incomes. The average participant in the mujin was relatively poor and uses
these mujins for purposes other than saving for durable goods, such as insurance. Rosas
may be viewed as a substitute to insurance, especially in developing countries where
markets for insurance either do not exist or do not function well. However this is only
applicable to bidding ROSCAs, in which the allocation process responds to some
individual specific shocks, and not to random ROSCAs.

The Korean ROSCA: called the kye. Kyes gained popularity after the Korean War.
ROSCAs in Taiwan are called the “hui”. ROSCAs are locally organized groups that
meet at regular intervals. At each meeting members contribute funds that are given in
turn to on or more of the members. Once every participant has received funds, the
ROSCA can disband or begin another round. In joining the ROSCA, an individual agrees
to a schedule of periodic payments in return for which she receives a lump-sum payment
at a future date. ROSCAs often pay no interest, and participants may have little or no
control over when they receive the funds. Participants also bear the risk that other
participants may not fulfill their obligations. Rotating savings and credit Associations are
among the oldest and most prevalent savings institutions found in the world and play an
important role in savings mobilization in many developing economies.

ROSCAs in Africa: ROSCA participation is particularly very high in Africa. They often
found in African economies where formal credit markets are thin or nonexistent. They are
also found in more developed areas where individuals have access to formal banking
institutions. In urban Zimbabwe, 76 Per cent of urban market traders participate in a
ROSCA, even though most of these traders have a bank account. In countries like
Taiwan, with relatively well-functioning credit markets, as many as 80 Per cent of adults
are estimated to belong to ROSCAS. Rationales for ROSCA formation are that
individuals join ROSCAs to finance the purchase of an indivisible durable goods, taking

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advantage of the gains from inter temporal trade between individuals so that individuals
expect to enjoy the benefits of savings sooner than if they had saved on their own. The
bidding type of ROSCAs, allow participants to insure themselves against idiosyncratic
risks. Most of the Indian bidding ROSCAs contain insurance components. ROSCAs help
individuals to cope with self-control problems.

ROSCA in Kenya: Women’s ROSCA membership in urban ROSCAS in Kenya is a

forced-savings mechanism that is the result of asymmetric preferences for indivisible
household goods between husbands and wives. Since ROSCAs are informal
arrangements, there is no external enforcement mechanism. ROSCAs tend to avoid large-
scale default in practice through use of preexisting social connections between
individuals. The disciplining power of social sanctions is particularly compelling in rural
African communities where kinship relations regulate access to many resources. Thus the
social setting of many ROSCAs provides an enforcement mechanism that may allow
individuals with time-inconsistent preferences to credibly commit themselves to savings.

In Kenya ROSCAs are run by women self-help groups. In addition to run ROSCAs and
income-generation projects, these self-help groups may also provide emergency
assistance to members. ROSCAs are run separately from the other activities of the group,
and not all self-help group members participate in the ROSCA. These multi-functional
self-help groups that run ROSCAs, provide collective insurance, and develop business
and investment opportunities for members. In some countries, ROSCA participation
appears higher among women than among men. ROSCAs are a commitment mechanism
married women use because of intra household conflict resulting from different
preferences for indivisible goods between husband and wives. Women join ROSCAs to
bind themselves to a particular savings pattern that is different from their husband’s
preferences. Once the ROSCA pot is received, the husband will be willing to buy the
good preferred by the wife even if ex ante he was not willing to save at all, so long as her
bargaining power is sufficiently high.

The key reasons for joining ROSCA for many participants are that it is difficult to save at
home because money got used up in small household needs, and also it is difficult to save

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alone, it is easy to misuse money. Sitting with other members helps to save. Many people
joined ROSCA as a response to household conflict, fear of theft, or demands by kin. All
ROSCAs whether formed for commitment, insurance, or financing lumpy durables – are
able to meet simultaneous demands for safe savings and protection of funds from family
demands. Self control problems may be another motive to join ROSCAs. Self-control
problems may be appropriate at the household level as well. At any point, if the wife
loses the full control of the household’s expenditures, but she wants to keep some money
out of her husband’s control in order to buy a durable good. Ex ante she thus found it
useful to belong to a ROSCA. In the same vein, self-control problems might be caused
by social pressure from relatives or community members. People in developing countries
are involved in networks of relations with strong norms and obligations enforced by
social pressure. Social relations and peer-pressure may be at the origin of self-control
problems or exacerbate them. For instance, the desire to purchase superfluous goods may
be triggered by a specific social or economic context. It is well-known that people tend to
purchase some specific goods during social events, e.g., gifts, alcohol, food. They might
enjoy the instantaneous social gratification from doing so, or else feel guilty if they do
not.

ROSCAs in Gambia: Average-income individuals are more likely to belong to a ROSCA

compared to very poor or very rich people. Within ROSCAs, members are homogeneous
and, across ROSCAs, the contribution increases with the members’ income. In Uganda,
homogeneity in terms of income level and gender is important for the success of a
ROSCA. In Gambia, Three-fourths of the ROSCA (called osusu) members are
occupationally homogeneous in many studies, and about two-thirds of the members were
homogeneous in age and gender. About half of the sampled were simultaneously
homogeneous in gender, age and employment. In South Africa, types of occupation
explain most of the differences in the frequency of ROSCA meetings. There exist daily,
weekly and monthly ROSCAs. All people working in the formal sector prefer a monthly
basis for meetings. Monthly contributions also tend to coincide with the end-of-month
pay schedule. People who are paid on a monthly basis do not need to meet every day or
every week.

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ROSCAs in Egypt: In Egypt, ROSCAs seem to be very popular among bank employees.
In Bolivia, ROSCAs were common among employees of most formal financial
intermediaries like Commercial banks, development banks, the central banks and the
apex organization of the credit unions. This is due to they may be tempted by superfluous
goods, or due to their occupation these employees may face substantial social pressure to
share their income. Hence belonging to a ROSCA may help them to turn down requests
from peers or relatives more easily, and alleviate their temptation to buy superfluous
goods. ROSCAs also have illiquidity function. People with cash on their hands and
afraid of greedy relatives, will purposely join ROSCA to become illiquid. Contributions
to a ROSCA are recognized by society as obligatory and constitute a senior claim that
must be respected by others.

ROSCAs in Zimbabwe: In Zimbabwe, many of the women traders rely on informal

structures for their daily, weekly, monthly, and even annual saving needs, though most of
them have better access to the banking institutions. The Percentage of Zimbabwean
vendors belonging to some kind of savings group was as high as 60 per cent. They
engage in some form of ma-rounds, in which members of a group save a particular
amount over a specific time frame and give the accumulated lump-sum to each member
in turn. The vast majority of ma-rounds clubs are quite small, with only 5-10 members in
each club. Some, clubs, particularly those with the expressed purpose of buying groceries
in bulk, range from 20 to 30 people, and a few clubs boast a membership of 100 or more
participants. The women participate in these rotating credit organizations are not very
poor or very wealthy. Very poor women cannot confidently commit to even the smallest
contributions, and other traders are leery of engaging in any long-term financial dealings
with them. Very wealthy women, on the other hand, find it hard to locate other traders
who can afford to contribute at the levels that would make the rounds worthwhile for
them. For the majority of the women who operate between these two extremes, several
different structures of ma-rounds clubs operate. Frequently women belong to several
different clubs at the same time, each with a different structure. Most clubs require daily
or weekly contributions, though some clubs require a monthly contribution, usually of a

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higher amount. The average daily round has 10 members and an average weekly round
has 7 members. The annual and semiannual rounds are usually larger ranging from 30 to
300 people, and take on a more formal structure, with members electing a chairman, a
secretary, and a treasurer. The leaders of the club are charged with the tasks of collecting
the daily contributions, depositing the money into a bank account on a weekly basis, and
keeping records of how much each member has contributed. At the end of six months or
one year, each trader is given her total contribution in one lump sum.

Many women seemed to be unaware that their contributions were earning interest. Only a
few women know that their contributions would be returned with the accumulated
interest. Most of the women do not know estimation of how much they had saved so far
and how to calculate the interest they were owned. These women opined that the club
leaders took no payment for their services, but it was likely that they were not
considering the interest the group organizers might be earning. Many of the women ladies
just put their money and leave it to the Chairman to sort out how much they are owned at
the end of the year. Some clubs are designed for a particular purpose, such as buying
groceries in bulk. Grocery rounds usually require a small daily contributions of about
z$20 and include, on an average 20-30 members. About every 3 to 7 days, a small group
purchases standard grocery items in bulk, which are then split equally. Oversight and
monitoring of the people in charge of purchasing and distributing the groceries seems not
to be a critical problem, as the traders recognize that their contributions could not stretch
as far if they were to spend the same money buying groceries on their own.

Ma rounds clubs have adopted informal enforcement mechanism to help ensure that
people fulfill their commitments to the club. Some clubs impose fines if a trader is late
with a payment, but all the clubs will refuse to allow a trader to participate in the future if
she is unable to make a payment after she has already received the lump sum in that
round. The expectation is that the trader would sooner borrow the money from a friend or
relative rather than miss a payment. Rounds also facilitate mutual assistance in the form
of chema, a tribute given to a bereaved trader. Typically, a small sum is collected from
each trader in a given area of the market or along the members of a ma rounds club. Such
contributions are more or less expected but are still considered voluntary. Typically,

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traders are asked to contribute Z$10 with the death of a trader’s husband or other adult
relative and Z$5 if trader’s child has died. In a few ma rounds clubs, such contributions
are solicited if one of the traders suffers from a serious illness, though this is more the
exception than the rule.

ROSCAs in Bangladesh: Like many other developing countries, in Bangladesh, informal

finance plays a positive role in savings mobilization, capital formation and investment.
ROSCAs and ASCRAs are popular sources of informal finance in areas in Bangladesh.
These are very popular even in urban areas where density of formal financial institutions
is high. The reasons for high existence of these ROSCAs and ASCRAs in Dhaka are
restricted production technology of formal credit market, high demand for credit, limited
types of formal loan products, high transaction cost of saving with formal banks, need for
consumption or lumpy expenditure contributed to existence of ROSCAs and ASCRAs in
the urban areas. The age, marital status, family monthly income level, occupation and
education level have significant effect on memberships of ROSCAs and ASCRAs.

ROSCAs in Nepal: In Nepal bidding type of ROSCAs are very popular and successful to
finance local business ventures, due to unavailable, inadequate, or unpopular due to rigid
collateral requirements of the formal sources of credit. These ROSCAs have created
effective local market for capital where credit can be accessed at a price directly
reflecting the local demand. By reducing the risk and raising the returns associated with
investing capital and by lowering the trouble of accessing credit, the use of bidding
ROSCAs has greatly facilitated the pooling of finance capital in Nepal and made credit
available to a large portion of the community, enabling widespread involvement in
entrepreneurial ventures. Nearly all Nepali savings and credit cooperatives are self-
funded using member savings and equity. Most Nepali savings and credit cooperatives
are also profitable, including those located in poor, remote areas of the hills region.

Origin of the ROSCA

ROSCA stands for Rotating Savings and Credit Association, which represents a contract.
Members of the association agree to pool certain resources that are then given, in whole

134
or in part, to each in turn. Resources in the pool can be labor, goods or money. Each
member draws out of the pool or fund as much as he puts into it. Both the contract and
the association end when each participant has had his turn from the pool. The logic of
collective action and mutual aid in a rotation of resources has made the ROSCA a
universal phenomenon, occurring all over the world.

Social security concerns the welfare of the individual and his family. It tries to help
alleviate the burdens that come with social and religious obligations and life cycle events
such as birth, marriage and death. Social security in developing countries is largely a
matter of mutual assistance on a voluntary basis. ROSCAs existed long before the
introduction of money into an economy, when the means of payment consisted of rice,
cowries, and bronze rings of strips of raffia cloth. The ancient Indian Chit fund originally
consisted of grain-contributions and only later changed into a monetary Chitty. In Japan,
the earliest records of ROSCA-with- contributions in money-date back as far as 1275. In
Korea, the “Kye” (Korean ROSCA) may even go back to the 9th century. In Africa, the
continent with most ROSCA culture, the “esusu” (African ROSCA) existing in the
economy somewhere around the mid 19th century. The use of the word, ”Susu” for
ROSCA in Trinidad would indicate that the ROSCA had been imported there by Yoruba
slaves. In West African literature, the ROSCA appears in the late-19th or early 20th
century. These ROSCAs are called “Tontine” in many countries of West Africa,
“Stokvel” in South Africa and “Bishi” in Sangli, India.

The origin of ROSCA rests in the very universality of human behavior and the logic of
collective action. Human behavior being what it is-an effort of the individual to adjust
himself to this surroundings-human beings are apt to all react somewhat alike when
facing, trying to adjust to, situations of scarcity, insecurity and risk. In rural penny-
economy such as prevailing in low-income countries, the best way to combat scarcity and
risk, and to protect oneself against insecurity and the calamities of illness, drought, flood,
harvest failure, emergency expenses, high capital outlay and loss of income, is by taking
refuge in insurance mechanisms and spreading of risk. To do so, people have no other
option but to form collective networks of mutual assistance, to which to turn in times of
need.

135
First self help groups originated in the need to share labor in producing food. Reciprocal
working parties are still common in developing countries, in which participants exchange
labor to bush-clear and weed each other’s land or for timely harvesting of crops. This is a
kind of ROSCA in which labor is rotated instead of money. The expenses of social and
religious ceremonies necessitated more elaborate techniques of self-help. Guests to the
marriages, make contributions of a bag of paddy, a chicken, and a piece of cloth or any
other useful item. Over time, it has often become more convenient to reciprocate in
money rather than in kind. The almost universal acceptance of money as the preferable
means of exchange has probably greatly stimulated the money ROSCA. The wedding
ROSCA, combining labor, kind and money contributions, is still popular in today’s
Indonesia. ROSCAs are very specific types of agreement. They stipulate a constant
contribution to be paid at regular dates and with an equal lump-sum transfer to be
received randomly in the future. Despite the high degree of specificity of these financial
agreements, ROSCAs exist on at least three continents (Africa, Asia, and Latin America).
ROSCAs very popularly operate in two different features, the random ROSCA and the
bidding ROSCA.

Random ROSCA: In a random ROSCA, members commit to putting a fixed sum of

money into a “pot” for each period of the life of the ROSCA3. Lots are drawn, and the pot
is randomly allocated to one of the members. In the next period, the process repeats itself,
except that the previous winner is excluded from the draw for the pot. The process
continues, with every past winner excluded, until each member of the ROSCA has
received the pot once. At this point, the ROSCA is either disbanded or begins over again.

Bidding ROSCA: ROSCAs may also allocate the pot using a bidding procedure. We shall
refer to this institution as a bidding ROSCA. One individual receives the pot in an earlier

3
Some forms of ROSCAs may require members to make in- kind contributions. An example of this form
which may be familiar to the reader is that of “barn raising,” which were common among 19th century
frontier farmers in the United States. Consider a group of farmers living in the same region, each of whom
wants to build a new barn. On the first Sunday in every month, the group gets together and builds a new
barn for one of the farmers selected at random. They reconvene the next month and do the same.
Continuing until each member in the group has a barn.

136
period than another by bidding more, in the form of a pledge of higher contributions to
the ROSCA, or one-time side payments to the other ROSCA members. Under a bidding
ROSCA, individual may still receive the pot only once- the bidding process merely
establishes priority4. These institutions are primarily used to save up for the purchase of
indivisible durable goods.5Random ROSCAs are not particularly effective as institutions
for buffering against risk, since the probability of obtaining the pot need not be related to
one’s immediate circumstances. Even bidding ROSCAs, which may allow a member to
obtain the pot immediately, only permit individuals to deal with situations that cannot
recur, since the pot may be obtained no more than once. ROSCAs provide a means of
making joint savings work6. They also determine a rule for rationing access to the
indivisible good: random allocation in a random ROSCA and bidding in bidding
ROSCA.

Chit Business

Chit is an indigenous financial institution involving regular periodical subscriptions by a

group of persons. The chit fund is primarily intended to operate as a scheme for
advancing loans from the common fund to the subscribers their turn for getting such
loans being determined either by auction or by drawing lots. The Chit funds companies
were originally promoted and conducted without any safeguard in respect of the monies
invested. Members of the public invested their amounts and the organizations were
playing fraud on the public money as there was no statutory control over such bodies.
They were also running prize chits which were nothing short of a lottery and an offence
under section 294 of the Indian Penal Code. In the wider context of examining in depth
the activities of the nonbanking financial intermediaries (which included conducting of

4
.While bidding and drawing lots seem to be the two most common ways of allocating the “pot”, it is also
sometimes allocated according to need or known criteria, such as age or kinship seniority. The reader is
referred to Ardener (1964) for more detailed discussion.
5
Common examples are bicycles and tin roofs. See Fritz Bouman (1977) and Geertz (1962) for more
discussion of the various uses for the pot.
6
This was clearly recognized by Ardener (1964 p.217). ‘The most obvious function of these associations
is that they assist in small – scale capital formation, or more simply, they create savings. Members could
save their contributions themselves at home and accumulate their own ‘funds’, but this would withdraw
money from circulation; in a rotating credit association capital need never be idle.

137
chits) the banking commission had recommended in 1974 inter alia that it is essential to
have a uniform chit fund legislation applicable to the whole country. A central legislation
besides enduring uniformity in the provisions applicable to chit fund institutions
throughout the country would also prevent such institution from any state to exploit the
benefit of any lacuna or relaxation in any other state law by extending their activities in
such states.

On the recommendations of the Banking Commission the Reserve Bank was

commissioned to draft model bill to regulate the conduction of chit funds to be adopted
by all the State Governments. This was studied by the study group on non banking
companies under the Chairmanship of Dr. J.S.Raj constituted by the Reserve bank in
1974. On the recommendation made by the group and the views of all the State
Governments the chit funds Act was enacted in 1982. Prize chits are banned by the Prize
Chits and Money Circulation Scheme (Banning) Act, 1978. Chit is an agreement with a
specified number of persons that everyone of them shall subscribe a certain sum of
money 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.

The promoter called the foreman enrolls a number of subscribers and draws up the terms
and conditions of the scheme in the form of an agreement. The number of subscribers in a
chit series equals the number of installments so that every member is assured of the
opportunity of getting the prize. Every subscriber has to pay his subscription in regular
installments. The foreman charges for his services a commission on which there is a
ceiling fixed by law in some states. He also reserves the right to take the entire chit
amount at the first or second installments as prize. Depending on the terms of the
agreement a fixed amount is also sometimes set aside for distribution among the non
prized members. The amount is put to auction (except at the last installment) and given as
prize to the members who are prepared to forgo the highest discount. The amount of
discount is distributed as dividend either among all the members or only among the non
prize members.

138
The dividend in each chit is distributed equally among the subscribers not by way of
actual payment but by way of reduction in the next installment subscription and
consequently the subscribers get their share of dividend every month depending upon the
amount of the bid at the monthly auction. The share of the subscriber in the discount
available for ratable distribution among the subscribers is assessable as income in the
hands of the person who receives it. The dominant motive which promotes most people
to join the chit fund schemes is to avail them of the facility of bidding at the auction when
they are in urgent need of finance so that they may receive the chit amount in lump as a
loan with this facility of repaying it in monthly installments. A chit fund incidentally
partakes of the nature of a saving scheme also. But unless the amounts are advanced to
the prize subscribers through a scheme of competitive bidding or by drawing lots there
will be no income either by way of interest or by way of amount forgone by the bidders at
the auction.

The highest bidder purchases the subject matter of the chit by offering the highest
discount and a bond for the future payment installment. These two ingredients constituted
consideration for the subject matter of the purchases. The purchaser may also execute a
promissory note on the said amount which however not loan transaction and the amount
mentioned in the promissory note does not represent any debt. The liability under the
promissory note is to pay the amount there under by way of subscription to the chit fund
and he is to pay the monthly chit less the discount earned every month during the
remaining period of the chit transaction\scheme. It is to secure the repayment of this
amount that the promissory note is taken from the prize bidder by way of collateral
security.

Genesis of Chit Funds

The genesis of chits has an ancient history. The so-called modern banking system is
borrowed from the western countries. But the Chit is an indigenous product of finance
evolved, perfected and adopted to suit the needs of our country. The nucleus of chits is
based on Co-operation. A chit is the only financial tool, which earns to the borrower.

139
The concept of chit funds originated more than 1000 years ago7. Initially it was in the
form of an informal association of traders and households within communities. Where in
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
has been tremendous alteration in the constitution and functioning of chit funds. The first
enactment of chits was made by Government of Travancore in the year 1914.
Subsequently many states in our country formulated and enacted chit acts. With the
collapse of many chit fund companies in early seventies, the Government of India
constituted a special committee to undertake study of chits, its implications, benefits or
problems to the economy of the country. On the recommendations of this committee a
special chit act was formulated and a uniform chit fund act under the name of ‘Chit Funds
Act 1982’ was introduced by the Parliament. of Union Government, in Karnataka this
central chit fund act was promulgated in 1984 along with chit fund (Karnataka) Rules
1983. This uniform chit enactment provided the necessary impetus for the legalized chit
industry to grow in leaps and bounds. The new chit fund act ensured that the chit operator
be strictly adhered to the norms set in the act and completely safeguarded the chit
subscribing public. The chit fund schemes have a long history in the southern states of
India. Rural unorganised chit funds may still be spotted in many southern villages.
However, organised chit fund companies are now prevalent all over India. The word
‘chit’ is from Hindi and refers to a small note or piece of something. The word passed in
to the British colonial lexicon and is still used to a small piece of paper, a child or small
girl.

Concept and Operation of Chit Funds

“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

7
Simcox (1894).

140
that each such subscriber shall, in his turn, as determined by lot or by auction or by tender
or in such other manner as many be specified in the chit agreement, be entitled to the
prize amount.

Section 2(b) of the Chit Fund Act, 1982 defines a chit as; “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 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.

Explanation: - A transaction is not a chit within the meaning of this clause, 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.

Types of Chit Funds

There are three kinds of chit funds. (1)Simple Chit (2) Business Chit (3) Prize Chit.
(1) Simple chit: It is also known as chit by lots. It is the earliest form of all chitties. It is
also the easier and less complicated version of the all popular forms of chitties. In a
simple chit, the entire collection, called chit amount, is given to every member by
rotation without any deduction. There will be as many members as there are installments.
Every member agrees to subscribe a specified amount of money called chit or share
periodically as decided by the organizer. The prize winner will be decided by way of
lottery. The prize amount at any installment is the capital or the chitty amount, less the
foreman’s commission. If there are 20 members and the monthly subscription per
subscriber is ì.50, and if the foreman’s commission is 5 per cent of the capital, the prize
amount given to the subscriber less the foreman’s commission at any installment is ì.950,
while for the foreman it is ì. 1000. The winner’s name will be removed in the subsequent
draws, and continue to subscribe the money till the end of the scheme. Thus every

141
member gets the whole of the chit amount by turn. This is actually an interest free loan of
the common fund by turn. The main purpose of this kind of chit is not to earn interest but
to be mutually helpful to the subscribers. Generally the first winner is the most
beneficiary and when it goes towards last the benefit will also depleted.

142
 Table – 4.1

Illustration on financial Aspects of Lot Chitty

Chit Amount : Rs 2000 Monthly Subscription: ì.100
No. of Members: 20 No. of Months: 20

(Amount in ì.)
Installments Monthly subscriptions Commission Prize Amount
1 100 …. 2000
2 100 100 1900
3 100 100 1900
4 100 100 1900
5 100 100 1900
6 100 100 1900
7 100 100 1900
8 100 100 1900
9 100 100 1900
10 100 100 1900
11 100 100 1900
12 100 100 1900
13 100 100 1900
14 100 100 1900
15 100 100 1900
16 100 100 1900
17 100 100 1900
18 100 100 1900
19 100 100 1900
20 100 100 1900

143
Illustration for Simple Chit: Figure- 4.1 presents the operation of simple chit with chit
amount of ì. 2000 and monthly subscription of ì.100 and with duration of 20 months and
20 subscribers.

(2) Business Chits: The business chit is also known as auction chit. Chits run by
registered chit companies and firms are mostly business or auction type of chits. A chit
fund scheme generally has a predetermined value and duration. Each scheme admits a
particular number of members, generally equal to the duration of the scheme. The
foreman generally gives a name to each and every group by alphabets or numbers. For
example,
Figure 4.1
Illustration of list of chit schemes
(Amount in ì.)
Group No. of months No. of members Monthly subscriptions Total chit amount

A 25 25 1000 25000
B 30 30 2000 60000
C 40 40 4000 160000
D 50 50 5000 250000

In some cases, there can be smaller members than the number of installments. For
instance, a member may subscribe to more than one chit in which case he will have an
opportunity of bidding more than once in the series. He will be treated as a separate
member for each share held by him. Sometimes, with a view to serving as many
subscribers as possible, a chit may be sub-divided in to fractions of full share. For
instance, a thousand rupee chit may be dividing into four fractions of ì. 250 each, held by
four subscribers, but are treated as one subscriber. These subscribers contribute a certain
sum of money every month or every day to the “pot”, the pot 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 prized subscriber wins the sum of
money equal to the chit value less the discount. The discount money is then distributed

144
among the rest of the members (or non – prized subscribers) as dividend and in the
subsequent month, the required contribution is brought down by the amount of dividend.

To illustrate the above, let us take the example of a chit scheme with the following
characteristics. Say a group of 20 people agree to participate in a chit fund for a period of
20 months, with 1000 rupees share per head per month, hence 20000 would be the
maximum amount a member can draw – down, (20×1000=20000). There will be an
organizer who has to take care of all the activities like collection of money from members
each month, disbursing the pooled money to the highest bidder and all book-keeping
works. On a specific day every month member’s will gather to bid for the 200000 rupees.
The organizer would start the bid with a low amount, say 500 rupees. Now the members
can bid any amount above 500. Assume a bidder bids for 600 rupees and someone wants
to challenge his bid he should bid above 600. This way it goes like an auction with the
organizer repeating the bid amount 3 times before closing the deal. Suppose someone bid
1000 rupees (also called the discount) and the deal is closed. Now the bidder would be
awarded 19,000 (his bid-amount would be deducted).The 1000 rupees deducted from the
bidder would be shared equally among the members. So for that month each person will
pay only 950 (20000-1000/20). This saving can be equivalent to the interest provided by
the banks. Once a member wins a bid he can’t participate in future biddings. So after the
first month only 19 members would be eligible for bidding. One particular month
(typically second month) there would be no bidding, so the members should pay their
share (1000 rupees) in full. That month collection amount would go the organizer as
salary for organizing, coordinating and book-keeping the chit fund, and the bidding goes
each month after this like the first month. When the 20th month comes there would be
only 1 person eligible for bidding. Hence that month’s money would be given in full
(20000 rupees) to that person. This process is shown in the Table 4.2 and 4.3

145
 Table 4.2
Model of a Chit Fund Operation

Chit Amount 10000 No'of Months 20

Monthly Subscription 500 No'of Members 20
(Amount in ì.)

Percentage Fixed Commission Dividend

Monthly Bid Discount of (5 Per cent of the Total per
Installments Subscriptions Amount Amount Discount chit amount) Dividend member
(i) (ii) (iii) (iv) (v) (vi) (vii) (viii)
1 500 9500 5 500 0 0
2 500 8000 2000 20 500 1500 75
3 425 7500 2500 25 500 2000 100
4 400 7000 3000 30 500 2500 125
5 375 8300 1700 17 500 1200 60
6 440 8750 1250 12.5 500 750 37.5
7 462.5 8100 1900 19 500 1400 70
8 430 8400 1600 16 500 1100 55
9 445 9000 1000 10 500 500 25
10 475 9450 550 5.5 500 50 2.5
11 497.5 9100 900 9 500 400 20
12 480 9050 950 9.5 500 450 22.5
13 477.5 9300 700 7 500 200 10
14 490 9050 950 9.5 500 450 22.5
15 477.5 9400 600 6 500 100 5
16 495 9400 600 6 500 100 5
17 495 9300 700 7 500 200 10
18 490 9400 600 6 500 100 5
19 495 9500 500 5 500 0 0
20 500 9500 500 5 500 0 0
Total 9350 10000 650
Source: Office Records of Margadarsi chit funds (p) Ltd., Hyderabad, A.P

146
 Table 4.3
Chit Subscription and Dividend Realisation Mechanism
(Amount in ì.)
Net Receipt
as Per cent
Net of prize Total
Total Net Prize Receipt Amount(4) Dividend Total Dividend
Subscription Amount (3)-(2) as Per cent of each as Per cent of
Installments paid Received (+) or (-) of (3) member Chit Amount
(ì.) (ì.) (ì.) (ì.) (ì.) (ì.)
(1) (2) (3) (4) (5) (6) (7)
1 9350.00 9500 150.00 1.58 650.00 6.5
2 9350.00 8000 -1350.00 -16.88 650.00 6.5
3 9350.00 7500 -1850.00 -24.67 650.00 6.5
4 9350.00 7000 -2350.00 -33.57 650.00 6.5
5 9350.00 8300 -1050.00 -12.65 650.00 6.5
6 9350.00 8750 -600.00 -6.86 650.00 6.5
7 9350.00 8100 -1250.00 -15.43 650.00 6.5
8 9350.00 8400 -950.00 -11.31 650.00 6.5
9 9350.00 9000 -350.00 -3.89 650.00 6.5
10 9350.00 9450 100.00 1.06 650.00 6.5
11 9350.00 9100 -250.00 -2.75 650.00 6.5
12 9350.00 9050 -300.00 -3.31 650.00 6.5
13 9350.00 9300 -50.00 -0.54 650.00 6.5
14 9350.00 9050 -300.00 -3.31 650.00 6.5
15 9350.00 9400 50.00 0.53 650.00 6.5
16 9350.00 9400 50.00 0.53 650.00 6.5
17 9350.00 9300 -50.00 -0.54 650.00 6.5
18 9350.00 9400 50.00 0.53 650.00 6.5
19 9350.00 9500 150.00 1.58 650.00 6.5
20 9350.00 9500 150.00 1.58 650.00 6.5
Source: Office Records of Margadarsi chit funds (p) Ltd., Hyderabad, A.P

147
In the Table 4.3 the bid amounts varying between ì. 7000 and ì. 9500. The discount in the
auctions depends on the urgency of the person’s need. In the above illustration, the
discount amount increased gradually from first installment to fourth installment and
decreased in the fifth installment and sixth installment and again increased and
continuously decreased. The members in the last two installments receive ì. 9500 at a
minimum discount of 5 per cent which is foreman’s commission.

The dividend declared to the subscribers depends on the discount at which prize amounts
have been bid. In the last two installments no dividends are declared. Taking the entire
scheme, each subscriber receives a dividend of ì. 650. All the members in the group pay
the same total net subscription of ì. 9350 (Rs 10000- Rs 650) , but receive different prize
amounts. The subscribers from first to fourteen installments are borrower members
because the net subscription amount is higher than the prize amounts of these members,
and the remaining are investor members as the net subscriptions are less than the prize
amounts.

(3) Prize Chits: The prize chit is also known as the lottery chit. The promoter (the
foreman) enrolls more members than the number of installments. The number of
members enrolled is a multiple of the number of installments. At regular intervals, a lot
or draw is held to pick out the name of a lucky number. The names of only those
members who have paid their periodical subscriptions are included in the draw. The
lucky member whose name is pulled out at the draw gets a prize amount which is excess
of his own subscription, in cash or in the form of an utility article. The prize winner
ceases to be a member and is not obliged to pay further installments. The non-prized
members are to get back their subscription plus a nominal interest when the last
installment is paid. The lucky person in the first draw gets the maximum benefit. The
promoter organizes such prize chits because he is able to collect a large amount of
subscription which remains in his possession after he disburses the prize amount
profitably, he is able not only to pay the prize amounts to the prize-winners at every
installment, but also repay, without difficulty, the subscription paid by members with
interest at the end of the last installment, besides making a handsome profit for himself.

148
Conducting of prize chit is punishable under Sec. 294-A of the Indian Penal Code. For
this reason, some states have excluded prize chits from their purview.

Weaknesses of prize chit companies: close relatives. A study conducted by Reserve

Bank of 71 prize chit companies revealed that the companies had absolutely no stake of
their own in the business and were solely dependent on public funds. This was mainly
due to the high expenditure incurred by the companies on advertisements and
commission paid to the agents. The inspection of a few companies conducting prize
chit/benefit schemes, carried out by the Reserve Bank revealed, inter alia, the following
features:

(a) The companies had advanced sizeable amounts to the directors or their relatives
or firms in which they were interested as partners, directors or as commission agents and
there were practically no repayments of the loans.

(b) The books of account had not been maintained satisfactorily.

(c) Close relatives of the directors had been employed in the companies as members
of the staff or as agents on high salaries.

(d) In one case, it was observed that a scheme announced by a company in which
collections had been made was withdrawn subsequently without notice to the subscribers
and no refunds of the subscriptions already received had been made to the subscribers.
Prize moneys had not been paid to all the subscribers who had won the prizes and,

(e) Subscriptions were shown to have been refunded in the books of account of a
company but doubts have been expressed by the inspecting officer about the genuineness
of the payments in view of certain attendant circumstances. There have been allegations
that some companies had resorted to certain malpractices in drawing the names of prize
winners.

149
Subscriptions accepted in the various types of prize chit schemes are deposits under the
Miscellaneous Non-Banking Companies (Reserve Bank) Directions, 1973 and are
consequently subject to the ceiling restrictions prescribed in paragraph 4 of the directions.
Since most of the companies have exceeded the ceiling on account of carried forward
balances of accumulated loss, they are not in a position to accept further subscriptions.
Some of the companies are stated to have contended that subscriptions received in their
schemes are not deposits as defined in the directions. Apart from the question whether or
not this contention is tenable, it may be pointed out that a new definition of the term
deposit has been inserted as clause (bb) in section 45I of Reserve Bank of India Act, 1934
by the Reserve Bank of India (Amendment) Act, 1974. The term deposit as now defined
includes “and shall be deemed always to have included, any money received by a non-
banking institution by way of deposit, or loan or in any other form, but shall not include
amounts raised by way of share capital or contributed as capital by partners of a firm”.

The banking commission has pointed out that the running of prize chits amounts to
commission of an offence of running a lottery under section 294 A of the Indian Penal
Code; however, the police regard this as a civil transaction and the offence remains a
non-cognizable one. The commission has further observed that as the law prohibits
running of prize chits, what could be considered is only the adequacy of the machinery
for effective enforcement of the legal bar against prize chits and that this is necessary in
the public interest and in the interest of those who participate in the prize chit schemes.
As prize chits are conducted on a fairly large scale, the Commission has recommended
that appropriate legislative measures should be taken in respect of them and also that the
offence under section 294 A ibid should be made a cognizable one. Besides section 294
A of the Indian Penal Code, some states have enacted or are contemplating to enact
legislations of their own for dealing with lotteries and schemes of the type under
consideration.

It has been reported that the resources of prize chits are used for wasteful spending and
hoarding commodities and that these schemes enable certain persons to convert tax-
evaded income into accounted money. The persons concerned pay a premium to the
promoters in return for the facility. It has also been stated that there are a number of

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agents who go about contacting persons who are likely to face the problem of saving their
income from the tax authorities. The prize chit pass books issued to them under different
names become their passports for travelling from black money territory to the white
money area- the easiest and surest way of using ill gotten wealth. Besides, by their
misleading names and campaigns the prize chit companies divert private savings into
their personal drains, thus disrupting the national economy.

The prize chits or benefit schemes benefit primarily the promoters and do not serve any
social purpose. On the contrary, they are prejudicial to the public interest and also
adversely affect the efficacy of fiscal and monetary policy. There has also been a public
clamor for banning of such schemes; this stems largely from the malpractices indulged in
by the promoters and also the possible exploitation of such schemes by unscrupulous
elements to their own advantage. We are, therefore, of the view that the conduct of prize
chits or benefit schemes by whatever name called should be totally banned in the larger
interests of the public and that suitable legislative measures should be taken for the
purpose if the provisions of the existing enactments are considered inadequate.
Companies conducting prize chits, benefit schemes, etc., may be allowed a period of
three years which may be extended by one more year to wind up their business in respect
of such schemes and/ or switch over to any other type of business in respect of such
schemes and/ or switch over to any other type of business permissible under the law.

In exercise of the powers conferred by sub-section (1) of Section 13 of the Prize Chits
and Money Circulation Schemes (Banning) Act, 1978 (Central Act 43 of 1978), the
Governor of Andhra Pradesh in consultation with the Reserve Bank of India hereby
making ‘The Andhra Pradesh State Prize chits and Money circulation schemes (Banning)
Rules, 1979’. They come into force on the 1st day of August, 1979.

General Characteristics of Chit Funds

The chit fund is a mutual benefit organization. The main function of chitty organization is
acceptance of savings and disbursement of credit, to the members of the chit. In a pure

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chitty transaction there will not be a surplus fund to be loaned out to outsiders except for
a very short period, i.e. between the receipt of subscriptions and the disbursement of prize
amount. If the foreman renders these services to the non- members and mixing chitty
business with money- lending operations, it cannot be called a pure chitty transaction.

Chit funds have the advantage both for serving a need and as an investment .Money can
be readily drawn in an emergency or could be continued as an investment. Interest is
determined by the subscribers themselves, based on mutual decisions and varies from
auction to auction .The money that you borrow is against your own future contributions.
The amount is given on personal sureties too; unlike in banks and other financial
institutions which demand a tangible security. Chit funds can be relied upon to satisfy
personal needs. Unlike other financial institutions, one can draw upon his chit fund for
any purpose – marriage, religious functions, and medical expenses, just anything. Cost of
intermediation is the lowest. Every subscriber of a chit is allotted a unique “Ticket8-
Number”. A Ticket-Number is never repeated and is a complete reference in itself. If a
subscriber has subscribed to several chits, then for every subscription there will be a
separate Ticket-Number.

The funds generally allow multiple- membership in each scheme, which means that a
member can contribute double or more number of times the amount and participate in
that many auctions during the tenure of the scheme. For instance, in a 20 month scheme
where the contribution is ì.1000 per month per member, a member who pays a
contribution of ì.3000 per month can participate in 3 out of the 20 auctions. However,
the members can bid again only after 50 Per cent of the duration is completed (for
instance, in case of a 20 month scheme, the member who has won the pot in the first 10
months can bid again only after the completion of 10 months ). Usually only members
with high credit worthiness will be allowed such a privilege. Chit funds have another

8
Ticket means the share of a subscriber in a chit.

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special feature that, they have great adoptability to the local conditions, life styles and
earning capability of the customers.

Unlike in other Non-banking financial intermediaries, the investors of chit funds, get the
return (i.e. the dividend) which is the discount amount foregone by the prized subscribers
whereas, in any other financial institutions, the returns are earned by the companies by
investing on other financial securities. Unlike in other financial intermediaries, in the
case of a chit fund, the collective saving of one group of people are made available to the
same group of people by turn, as agreed upon among the members.

The nature of periodical subscriptions is that of a recurring deposit of a commercial bank

with the difference that the deposits at every period or installment are not uniform. The
periodical contributions have very little liquidity. The subscription of an individual
subscriber is only available if he wins the bid.

In a chit fund a subscriber can take the future subscriptions in advance by successfully
bidding at the auction and will continue to pay the subscriptions till the last installment.
Thus the chit fund is regarded as more than a saving bank to the saver and more than a
lender to the debtor. Another important feature of a chit fund is that members who
borrow are liable to varying rate of interest. The interest cost to a member borrower
depends on the stage at which he bids the money. Generally the member who bids in the
earlier stage has to pay higher rate of interest than a member who bids in the later stage.

Auctions: The chit manager auctions out the ‘pot’ every month on a particular date. The
members who wish to participate in the auction assemble at a particular place (generally
the chit manager’s office) and call out their bids. “The subscriber who is to get the prize
amount at any installment shall be determined by lot or by auction at the time and place
specified. The time allowed for auction shall be five minutes from the commencement of
the proceedings. Only full tickets have been subscribed and there is no fraction of the
ticket. The proceedings will be regulated and conducted by the foreman or his authorized
employee. The auction shall start from the foreman’s commission of 5 Per cent of chit
value and bidders may, in auction, raise discount to the maximum of 40 per cent of the

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chit value. The subscriber, who bids at the highest discount not exceeding the maximum
of forty per cent, will be declared as the prized subscriber. In case there is more than one
bidder for the maximum discount, the auction will be decided by lot among such bidders.
Where two members are equally in urgent need of the loan in any particular month, the
chit manager may allow them to make compromises among themselves wherein they
may divide the ‘pot’ equally between them. However, in such cases, one of them will be
held liable directly to the group for the entire amount and the other would be liable to the
former for his/her share of the loan.

The number of subscribers and contribution amount is set by the organizer of the fund,
also known as the foreman. The organizer will also determine how often the auction will
be held and the procedure for the auction. The foreman will also inform subscribers of
the amount of the discount that will go toward service fees. One can bid multiple
auctions until he/she has the winning bid. Each fund member receives an equal portion
of the discount, minus any operating costs or service fees.

Foreman, his duties and commission: Foreman means a person who under the chit
agreement is responsible for the conduct of the chit and includes any other person
discharging the duties of the Foreman. It is the personality and conduct of the Foreman,
whether individual or Institutional, that lends strength to a Chit Fund company. A
Foreman credited with qualities like promptness, straightforwardness and honesty
attracts subscribers easily for the chit fund company. The Foreman assumes a dual role.
Besides being an organizer, he also is a subscriber in every chit group. He is also entitled
to obtain one chit amount into the chit group without deduction of the amount. It is a
good practice if the Foreman ploughs back the entire prize amount into the chit business
to meet his future obligations promptly. This ensures prompt payment to subscribers
even in the eventuality of some members defaulting on the payment of their installments
or discontinuing their membership. Thus ensuring that failure on the part of some
members does not become an excuse for the Foreman to delay the Bid Payable amount
to the subscribers. The Foreman is entitled to a certain percentage of the chitty amount
(not more than 5 Per cent of the chitty amount) as his commission from each member.

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The fore man in accepting the subscriptions from members of a group is accepting a debt
claim or liability, which he sets off at every installment by substituting his own liability
to that of one of the members. At every installment, his liability gets reduced and limited
only to the non-prized winners.

Chitty Loan: It is a bridge between your actual financial need and the delay in chitty
getting prized in your favour. If a non-prized subscriber in a chitty remitted 10 Per cent
of the total number of installments promptly, he/she is eligible for an advance up to
50 Per cent of the total chitty amount or sala (gross subscription to be remitted per month
multiplied by the number of installments in the chitty). In case of 100 months chitty, the
maximum loan amount will be 30 Per cent of the sala. The principal of the advance is
settled by adjustment from the chitty prize money and the interest has to be remitted
every month. The interest rate of the advance is 13 Per cent (simple) and for defaulted
accounts 15 Per cent. The mode of payment is through a cheque crossed ‘A/C Payee
only’ or by cash.

Advantages of Chit Funds

Financial planning is mandatory for everyone. It is sensible to earmark a small amount

from your business/income every month as a reserve to face any contingencies in
business like price fluctuations, change in Government policy, vehicle purchase, new
competition, or capitalization in plant and machinery. Similarly social events need to be
financially planned. Housing, education, marriage and travel have all become finance
intensive. Subscribing to chit schemes is akin to creating a generalized contingency
reserve, which may be liquidated in case of any business or social contingency. Target
money is not bound by end-use considerations. The biggest advantage that the
institution of chit funds has to offer is that you can plan in advance for any forthcoming
capital outflow even if you are not aware as regards the exact timing of such out flow.
For example, a marriage may materialize in 5 months, or 15 months, or 25 months. That
event is certain, timing is not. Planning must be done accordingly.

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The second advantage is when the capital outflow is large, chit offer flexibility of
breaking this large requirement into fragments. Membership of small chit may be taken
after convenient time gaps so that installment outflows are easily managed. The sum
total of this entire small chit may, at a specified time, solve the need for a larger, one-
time requirement. Chit schemes are organized on a personal basis and have lesser
stringencies involved. Decision making is comparatively faster. The income from chit
schemes compares favorably with the incomes from bank schemes in many cases. In
chits, the prize amount is always more than the amount of deposit made in the chit. Chit-
funds are mainly popular due to the number of middle class and poor people that are
there in the country and some innovative way to access finance, and many of these
people are not under the banking sector and it is said that people find the chits more
advantageous as they require less collateral and documentation. The chit amount is
collected from the participants at their doorstep on a flexible when the participants are
able to pay. The businessmen also find it more useful for easy money rotation than banks
loans. And this makes chit-funds click than anything else for them. Chit funds prove to
be successful and provide innovative access to finance for low- income households, as
they find chit funds close to their hearts because of the easy accessibility, good returns
on savings and availability of money.

Role of Chit Funds

Chit fund institution is indigenous, simple easy and readily understood and widely
accepted by the rural and urban middle class people. It is a user friendly savings cum
borrowing instrument. Its aim is to pool small savings for being managed by a foreman
who will act as a trustee-cum-supervisors for the process of collection and allotment for
the pool amount to catch member by rotation. Chit funds represent a traditional form of
saving-cum-credit institution evolved before the bank system was introduced in rural
India. Chit funds cater to the need of the rural as well as urban middle-class people. They
meet their specific needs for large family functions, festivals, educational, housing,
agriculture, occasional (cottage industries etc.) and medical expenses. There are many
who avail themselves of this avenue for saving for a reasonable return.

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Chit is a humble home grown handy artifact, which caters to the location-specific time –
specific credit needs of the humble and the needy. State intervention into the day to day
running of this immensely popular and useful credit institution has, by a large, proved to
be counter-productive and delay generating process with no commensurate benefits. Chit
is a dual purpose institution of saving and borrowing. It is a unique body of borrowers
and investors who have a common goal of mutual help. Chit has no pre-determined
interest or return-rate. The rate of return or cost of funds as determined by supply and
demand which is, thrown up at the monthly auctions. Since chit is a subscriber’s main
source of perennial credit and savings, irresponsible behaviour or conduct of the
subscriber is relatively rare. Prudence and sincerity inform all its internal processes,
because of the enlightened self interest of the subscriber members.

The most significant aspect of the chit fund business is the element of mutuality and
participation by every subscriber. In chit business, the interest rate if determined by the
supply and demand situation is not imposed on the user by any external agency. It
provides a right to the subscribers to access credit on providing necessary security,
without any pressure on his self- respect. The field is fully self – financing and
completely independent of external support unlike rural self help credit groups which
lean on Government financial needs. The significance of chit business can be realized
from the fact that in Karnataka there were about 500 foremen who organized about 12500
(min) groups involving about 5,00,000 subscribers and about rupees 500 crore annual
turnover as of 1993. In 2001 the volume of chit may be estimated at rupees multiple of
1000 crore. The chits’ popularity is due to its simple and easy procedures.

The premises are also situated at places within easy reach. There is mutually and
transparency in the proceedings. The foremen are easily approachable and are,
responsible to the needs of the subscribers according to, the financial status and capacity
of the subscriber. Chit fund is very valuable to those sections of business community
which find it difficult to get their credit needs met by commercial banks that are reluctant
to lend to this segment, mainly due to the administrative burden and cost involved in
them. In Karnataka, the chit fund has provided direct employment opportunities to over
35,000 people and indirect but full time employment opportunities to another one lakh

157
people working as agents. If a proper legislative environment could be created that would
encourage the entry of large and medium sized industrial houses into the business of chit
funds, job creation in the next 10 yrs could be in the region of 10 lakh new jobs, without
the Government having to make any capital investment.

Chit funds offer easier access to finance: Chit funds prove to be successful and provide
innovative access to finance for low income households. Organized chit fund companies
were functioning profitably and people find chit funds close to their heart because of their
easy accessibility, good returns on savings and availability of money. The Indian chit
fund industry generates an estimated 3.39 per cent of house hold savings (or ì.5.88 crore),
compared to 4.92 per cent invested in shares and debentures. Over 95 per cent of chit
fund companies are small and medium enterprises (SMEs) and they are important sources
of finance for SMEs operating in other sectors. Despite scores of scandals sand bad
publicity, chit funds continue to be well accepted by society and there is again arising
interests in them. They attract thousands of investors every year and crore of rupees,
despite the expansion of banking into the remotest parts of the country. Large companies
have managed to attract investors. The $ 1.3 billion ì.6,110 crore ) Chennai based
Shriram Group, for example, which runs the largest chit fund business in the country,
manages a corpus of 3,200 crore annually.

In fact chit funds offer as strong a parallel banking services as the money lender or
pawnbroker, servicing just as wide a network of small businessmen, housewives and
salaried individuals. Chit funds popularity continues despite rising awareness of Mutual
funds and the equity market. However regulatory hurdles in the form of increasing
stringent rules enforced by the Government have been a setback to the growth of the
industry. Around ì.11,088 crore is being circulated via chit fund schemes in the southern
states of TamilNadu, Andhra Pradesh and Kerala. Around 58 million households have
participated in chit fund schemes. Small traders and businessmen participate extensively
in chit funds. Chit funds provide an opportunity for small business houses to save their
excess cash on a daily or monthly basis and, at the same time, to have access to easy

158
finance. Generally, the funds are used as either working capital, for expansion of business
or as emergency funds.

Small enterprises have been historically wedged between money lenders (with their
exorbitant cost of loans) and banks (with their stringent procedures).Chit funds have
helped these enterprises to overcome their financial constraints and it is also profitable to
invest in chit funds, since they earn good returns. Properly used chit funds are an
effective tool to meet unplanned, unforeseen and unexpected expenses, especially for the
middle class and small businessmen. Chit fund is a dual-purpose instrument for both
borrowing and saving. It has no financial intermediation. Each chit group is in a way a
self-help group. Members invest a fixed amount every month. This collection is
available for borrowing. Auctions are conducted every month. The members who bid
for the highest discount will win. The dividend at every auction is distributed to the
subscribers out of the discount (the difference between the chit amount and the amount
bid), after deducting the group foreman’s commission.

Chit Funds and other Financial Institutions

Chit funds are the closest thing to a bank in many parts of India. They mobilize huge
amounts of small savings and offer the same as some sort of microfinance. “But chit
fund is not a highly profitable business,” It is not possible to delay disbursements each
month even if a couple of subscribers default. The goodwill a chit funds business
generates helps it build a vast network. This in turn comes in handy when it comes to
mobilizing public deposits. “India is full of people with good ideas who are willing to
work hard. But there are very few avenues yet to support them. The money we have
here is not patient money. We are still not in a position to wait long enough to get return
or write off failures”. Chit-fund is a community activity, which can provide a great
service to small entrepreneurs. Finally the chit funds business may get the recognition it
feels it has been denied so far. Financial planning for capital goods purchase may be
tailored through chits in a manner that is flexible and convenient. Chits are more a
product of advanced planning and financial discipline.

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Chit Funds and Banks: Chit fund business was originated in the villages on a small scale
to meet local demands. The chit fund money was mostly utilized for consumption
purposes and at times, for meeting production, trade and agriculture. As time passed, the
demand for money and credit for productive activities became more pronounced and new
forms of finance emerged, notably banking. Most of the banks have grown out of the
womb of chit and kuri funds that have been operating in many states in the country since
ancient times. In the beginning days, the business of kuries or chitties formed a
substantial portion of the banking business. As time passed, banks and other joint stock
companies began controlling chitties. Following the recommendations of the Travancore
Banking Enquiry Committee, the banks incorporated in the state which were conducting
chitty business for a long time were prohibited by the Travancore Companies Act, 1938
from transacting kuri or chitty business.

There is a similarity in the two major functions of a bank and a chit fund, viz., the
acceptance of deposit and disbursement of credit. Subscriptions made by the members of
a chit fund are analogous to the deposits made in the bank, and the prize amounts
distributed by the former are comparable to the advances made by the latter. While
periodicity of deposit in a bank, except in the case of recurring deposit, is optional, it is
obligatory in a chit fund. Once a member of a chit fund, he has to subscribe regularly the
due amount at all installments during the period of the chitty. Failure to contribute the
amount in time entails penalty and default of payments for two consecutive installments
is a sufficient reason for the cancellation of membership. Secondly, the bank deposit
carries interest whereas the subscriptions in chitties fetch dividends at varying rates, if the
chitty is one with dividend facility. Thirdly, the deposit in a bank can be withdrawn,
partly or fully, at any time, but the subscriptions in a chitty cannot be withdrawn before
the termination of the chitty period; if a subscriber wants to discontinue his membership
in the chitty and to stop his remittances, he can do so but he will not get the amount
already subscribed before the end of the chitty.

From the point of view of mobilization of savings, however, the deposit in chitties carries
more weight than the deposit in banks. In a country where the will to save is negligible,
voluntary saving schemes will be of little avail. Whatever amount saved in one time due

160
to some caprice or otherwise will be taken away and spent at the stroke of another
whimsical moment. In this situation, a sort of compulsion or obligation is necessary both
for saving and in keeping aloof from the amount saved. Once the subscriber is attracted
to the chitty, the periodic contribution is compulsorily made. And once the periodic
contribution is made, sufficient inducements are offered for not taking the prize amount.

In respect of the resemblance of prize amounts from chitties, which are personal loans,
have some advantages over the personal advances or overdrafts from banks. The bank
advances are confined to a limited number of comparatively big customers, that too, in
varying amounts in different seasons for credit, and depend upon the lending policy of
the bank concerned in particular and the general credit policy of the banking system as a
whole. But the loans from chit funds are available to all the subscribers and the quantum
of fund set apart for distribution in any once chitty is always the same, that is to say, it is
independent of busy or slack season for credit. Further, these loans can be repaid in small
installments extending over a fairly long period. In spite of these differences, for all
practical purposes, the subscriptions in chitties can be compared to the deposits in banks
and the loans from chitties can be compared to the advances from banks.

The entry of commercial banks in the field of chit business will have a restraining
influence on the mushroom growth of small chit funds contributed by a large number of
small investors. The entry would help safeguard better the interests of small savers and
curb the unscrupulous persons to start the business and misuse and mismanage the funds
collected from small savers by diverting them in to other risky investments. These chit
funds are not able to survive even minor financial difficulties and are forced to close
down causing heavy losses to the members. Banks generally sanction loans for
productive activities and they do not give any loans for social obligations. This will not
benefit the people who are in emergent need of money, and banks only sanction loans
basing on certain repayable ability and that to up to some limit only. But certain types of
expenditure though not generating additional income, is nevertheless a must, either for
personal reasons or for socio-economic considerations. In this regard chit funds are of
great help. If banks could take up this activity it would be a friend in need of the small
man.

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Even after the enormous expansion of bank branches all over the country, still many rural
people are away from banks. The reasons are the number of commercial bank branches
are opened mostly in urban and metropolitan cities. Rural farmers are facing difficulty to
obtain loans from these formal institutions with the cumbersome procedures. The report
on trend and progress of banking in India by Reserve Bank of India, 2007-08 revealed
that even after the four decades of bank’s nationalization, 41 Per cent of the country’s
adult population are out of the banking system. 59 Per cent of the rural households in
India do not have a deposit account. Most of the rural populations still do not have access
to formal source of credit. For these people chit funds are boon to meet their urgent
financial requirements. If banks could take up this business banks can attract many
clients. The prize winners of the chitty are likely to keep their prize amounts with the
bank and become permanent customers of the bank. So Banks can expand into rural
regions and can tap the untapped segment.

The points against the banks conducting chit funds are, it would be time consuming for
the commercial banks to conduct the chit business and court proceedings in case of
default of the payments. This may deviate the main banking activity and is risky for the
banks. But local banks and regional rural banks and cooperative banks can take up this
business for better serving the rural people.

Chit Funds and Co-operative Societies: Chit funds resemble co-operative credit societies
in some respects. Both co-operative credit societies and chit funds work on the same
principles of self-help and mutual help. The membership is voluntary and members pool
their resources for mutual benefit in both the organizations. In many respects both the
organizations are different. Co-operatives have been sponsored by the Government and
are given financial assistance, directly as well as through Reserve Bank. Co-operatives
also enjoy tax benefits and concessions in the matter of stamp duty. Chit funds do not
receive any special assistance from the Government, but are tending to be regulated in an
increasing measure.

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A member in a co-operative society can borrow a clearly-defined multiple of a nominal
share to which he subscribes, subject to the rules and regulations of the Co-operative
Societies Act. The borrowing is based on need and there is no auction principle. In a chit
fund, however, a member can borrow against his future installment subscriptions of the
chit amount, depending on his need and his being a successful bidder at the satisfaction of
the foreman for the future installment payments. The interest rates for borrowing
members in a co-operative credit society are relatively low and fixed, unlike in a chit
fund where members pay generally high and varying rates of interest. The facility of co-
operative societies for speedy recovery of dues from the borrower-members through
summary trial is not available to chit fund, which had led many chit units to come to
grief.

Chit Funds and Nidhis: Chit funds are loose associations wherein people make monthly
contributions to accumulate a lump sum which is paid to one of the members by rotation
or by auction or by some other arrangement. Nidhi also, like chit funds and co-operatives
works on the principle of mutuality. In a Nidhi a group of people united to help one
another by common contribution of funds which are to be lent out to the members only
for their benefit. The funds proceed from the subscriptions of members chiefly and to a
small extent from deposits. Generally they do not borrow except by deposits. All profits
derived from its operations are to return to the members. Nidhis are terminable
organizations. Nidhis generally lend money to the members to relieve them from the old
debts, for domestic ceremonies, for expenditure on house building, on jewellery for
purchase of land, etc. In a chit fund, however, a member can borrow against his future
installment subscriptions of the chit amount, depending on his need and his being a
successful bidder at the satisfaction of the foreman for the future installment payments.
The Nidhis are more systematized in their working and their affairs are given greater
publicity than those of chit-funds. Any 10 or more members can join together and
organize a Nidhi provided they satisfy Section 4(no company, association or partnership
consisting of more than 10 persons shall be formed for the purpose of carrying on the
business of banking unless it is registered as a company under the Companies Act) of the
Joint-Stock Companies Act of 1913. In a Nidhi the Fund is divided in to shares(

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subscription units) and the advances are made to the members out of the funds so
acquired upon the mortgage of land or house property etc., Some types of Nidhis like
chit funds, organized for helping the members to celebrate religious ceremonies such as
marriages, birthday ceremonies, consummation ceremonies etc. Some Nidhis are
designed to help the members to secure some lump sum amount gathered from the small
contributions of all the members and is given to the needy to celebrate some religious
ceremony or for daughter’s marriage etc. So like chit funds Nidhis are also work on the
principle of mutual help and insurance against some unforeseen event.

Chit Funds and Moneylenders: In Third World Countries, majority of rural households
is dependent on informal intermediaries for their daily financial needs. The informal
sector in these countries is more heterogeneous and comprise of professional and non
professional money lenders, pawnshops, merchants and petty traders, land lords, shop
keepers, indigenous bankers and finance corporations. Money lenders come in all shapes
and sizes, from the evil local scrooge to the shopkeepers, land lord, miller, and secretary
of the co-operative, village headman, fertilizer dealer or the produce buyer. Many of
these people act as pawn brokers and lend money on pledging of valuables like jewellery
and gold or silver ornaments. If the borrower does not pay the lent money back, the
broker may sell or keep the item for himself. These people are with different names in
different regions of the country. They are Nattukottai Chettiars in Tamil Nadu, the
Marwaris of Rajasthan and Banias of Gujarat. The sudden swelling of the importance of
money lenders and pawn broking is due to the increased demand for small agricultural
loans. The increasing demand for loans comes mostly from poorer formers. The interest
rates for the poor are generally very high as they have very little financial security.
Basing on the urgency of need, the interest rates even increases.

In contrast, Chit funds are mutual benefit organizations. The interest on borrowing can be
decided by the borrower himself by better managing the group members and making the
auction in his favor. Unlike the money lenders, Chit fund organizations require very little
financial security to sanction the loans. Sometimes the collateral security required will be
equal or less than the chit value. Chit funds arrange money to the needy when ever

164
required with fewer formalities. The borrower can borrow upon his future subscriptions,
and there is no need of pledging his property or jewellery. These organizations are not
exploitive in nature and are successfully meeting the requirements of the poor people
better than money lenders and banks. Unlike Money lenders, who charge very high
interest rates for the poor and favorable rates for the middle and upper middle class
people, chit funds treat everyone equal.

Chit Funds and Finance Corporations: Finance Corporations are a type of non-banking
financial intermediaries, which are unincorporated institutions engaged in the business of
unregulated banking. The birth place of these organizations is said to be Madanapalle,
Andhra Pradesh. These organizations are under the Money lender’s Act, and are
regulated by the State Governments. These are generally Partnership firms with number
of partners 10 or less and with paid-up capital of less than ì. 1 lakh. These organizations
were basically into money lending business and gradually started accepting deposits from
the public. Finance Corporations also conduct Chit fund business on large scale and
accept deposits from the public under the chit business. The number of Finance
Corporations and Chit fund Companies have been increasing rapidly in the States of
Andhra Pradesh, Karnataka, TamilNadu, Kerala, Maharashtra and Gujarat. Finance
Corporations attract people through advertisement in news papers and through brokers
and agents. These organizations attract huge amounts of public deposits by offering high
interest rates than commercial banks. They advance these deposits to petty traders, whole
salers and retailers, merchants, small scale industries and agriculturists. These institutions
also perform certain other functions like collections of dividends for their customers,
financing the purchase of vehicles financing the salaried people to purchase durable
consumer goods, negotiate lorry receipts, discount of hundies, discount post dated
cheques and discount of usance bills. These organizations are called para-banking
institutions and should be regulated by the State Governments and RBI. Finance
Corporations and Chit Funds are not incorporated under Companies Act, and they should
not be allowed to accept public deposits. The regulation of Finance Corporations and Chit
Funds does not come under the purview of RBI. So State Governments should take active
part in regulating these corporations and Chit Funds under special legislation and

165
implement the strict rules and regulations on public deposits and interest rates. If properly
regulated by the State Governments, These institutions can better serve the poor and the
middle class people.

Chit Funds and Microfinance Institutions: In Chit funds, the interest on borrowing can
be decided by the borrower himself by better managing the group members and making
the auction in his favor. Unlike the micro finance institutions, Chit fund organizations
require very little financial security to sanction the loans. Sometimes the collateral
security required will be equal or less than the chit value. Chit funds arrange money to
the needy when ever required with fewer formalities. The borrower can borrow upon his
future subscriptions, and there is no need of pledging his property or jewellery. These
organizations are not exploitive in nature and are successfully meeting the requirements
of the poor people better than any other source of finance.

In contrast microfinance institutions especially in Andhra Pradesh have been charging

high interest rates using coercive methods of loan recovery. There are 10 lakh self help
groups and 62.5 lakh micro finance borrowers and 300 microfinance institutions in the
State. Though banking experts have pointed out that MFI’s have provided finance to 20
million poor people, all over India, where nationalized banks could not reach; many of
these companies are collecting as much as 36 per cent interest. As all the collections are
on a weekly basis, rural women fail to understand the interest rate and end up paying. In
the last three to four years, the MFI’s have expanded to new urban areas, ignoring their
original mandate to facilitate financial inclusion in rural areas.

Cost of Chit Finance

Most of the individuals who join chit funds are people with fixed incomes belonging to
the middle and lower middle classes who have little other resources to fall back upon in
times of emergency. Chit fund operates as a compulsory form of saving, offering at the
same time a higher rate of return (by way of discount), sometimes much higher than the
rates of interest on deposits offered by banks. These people cannot use banks or life

166
insurance or other financial institutions for keeping their savings. The reasons are: there
is no institutional arrangement which provide a depositor an automatic facility for
borrowing in times of emergency. This combination of saving facility yielding higher
return and borrowing facility in times of need, both built into one is not available with
banks or other financial institutions. In the case of banks, the two functions, they are
acceptance of deposits and giving loans-are separated into water-tight compartments.
While deposits are accepted by banks in the normal course, advances are given on the
basis of the creditworthiness of the party, his repaying capacity and the type of security
offered. On the contrary, in a chit fund every subscriber is a depositor as well as a
borrower in his own right. And besides, the procedures for borrowing are so simple as
well as direct that a subscriber has not to depend upon the favor or discretion of the
promoter.

The uniqueness of chit funds is that the depositor in an ordinary savings institution gets
back his total savings at any time; the subscriber in a chit fund can take the future savings
as well in advance. More than anything else, it is this facility for immediate realization of
future savings in a lump sum that induces many people to subscribe to chit funds. The
borrower tied to the fund till its end. He has to continue to subscribe the stipulated
amount so that his loan is liquidated at the termination of the chitty. Chitty is an
indigenous financial institution. Its operation is in the unorganized market for credit.
Therefore its working is to be evaluated against the performance of other agencies,
notably the money lender, in such market. Various studies shows that the rate of interest
or discount offered for loan in chit funds varies from as low as 6 Per cent to 48 Per cent
per annum, depending upon the method of dividend distribution, ceiling on the offer of
discount, duration of the chitty, etc.

The rate of interest in chit funds depends upon the demand for funds. The supply of funds
is always fixed. Therefore the rate of interest varies according to the demand for funds.
When the demand is more, the rate of interest will be more. When there is no ceiling on
the offer of discount, i.e., when the subscriber is allowed a free hand in the auctioning of
prize amount, he may indulge in riskless bidding due to extraneous factors. Thus, some
foremen fix a ceiling on the offer of discount. If more than one member offers the

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maximum discount permissible under the ceiling, a lot is taken to determine the prize
winner. In such cases, even though the immediate availability of loan for needy person is
not possible, he who gets it obtains at a low rate of interest.

The ceiling on the offer of discount has another aspect. It limits the quantum of dividend.
Thus, the reward for waiting which is given in the form of dividend at each installment
becomes unattractive. As a remedial measure, those foremen who fix a ceiling on
discount also introduce a scheme of fixed dividend. A certain fixed amount or a certain
Percentage of the capital, say, 5 Per cent, is deducted from the capital at each installment
and distributed equally, but proportionate to the share value, among all the members.
Thus, the non-prize winners get two types of dividends. This facility not only helps to
protect the interest borne by the borrower-subscribers. The differences in the cost of
borrowing of different borrowers can be further reduced or practically wiped out by
making adjustments in fixed dividend.

The subscriber in chit fund can take the future savings as well in advance. It is this
facility for immediate realization of future savings in a lump sum that induces many
people to subscribe to chit funds. They fell confident of commanding within a short
period a good amount. Similarly, the borrower is tied to the fund till its end. He has to
continue to subscribe the stipulated amount so that his loan is liquidated at the
termination of the chitty. There is a common belief that chit fund is an easy and
attractive medium of saving compared to several media offered by commercial banks and
other agencies. People generally join chit funds either to meet their urgent needs or to
save money. The people who need money urgently and wish to bid at the auctions early
to get the prize money and are become borrowers and those who wish to earn a return on
their savings are become investors. The peculiarity of the chit fund is that the borrower
groups do not pay a uniform rate of interest for their borrowings and the investor do not
receive uniform rate of return on their investments. Consequently subscribers of chit
funds pay different rates of interest for their borrowings and receive different rates of
return on their savings. It is what the Banking commission calls is “an irrational
distribution of gains and losses”.

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Financial Implications of Chit Funds

Many of the subscribers in the survey opined that chit funds are cheaper source of finance
compared to money lenders, Banks, post office schemes and any other modes of finance.
Many of the people told that they do not even know how to calculate the interest they pay
or interest they receive. They prefer chit funds because it is easy accessible and
convenient mode of finance and the borrower members told that they never bothered
about the cost of funds. They told it is easy mode of finance for them. Most of the people
seem that they are only bothering about the timely arrangement of the money without
much strains and pains and are not considering of the cost of the chit funds. With a view
to ascertaining the cost of funds to borrowing members and the rate of return to investing
members, an actual case from a terminated chit of a chit company is taken and presented
in Table 4.4.

169
 Table 4.4
Real time chit operation: An illustration

Chit Amount : ì.100000 Monthly Subscription: ì.4000

No. of Members: 25 No. of Months: 25

(Amount in ì.)
Installments Monthly Prize Discount Commission Dividend Dividend
subscriptions Amount @ 5 Per Per cent
cent
1 4000.00 70000 30000(30) 5000 1000.00 25
2 3000.00 -- -- 5000 0.00 0
3 4000.00 70000 30000(30) 5000 1000.00 25
4 3000.00 70000 30000(30) 5000 1000.00 33.33
5 3000.00 70000 30000(30) 5000 1000.00 33.33
6 3000.00 70000 30000(30) 5000 1000.00 33.33
7 3000.00 70000 30000(30) 5000 880.00 29.33
8 3120.00 70000 27000(27) 5000 720.00 23.08
9 3280.00 70000 23000(23) 5000 480.00 14.63
10 3520.00 83000 17000(17) 5000 402.00 11.42
11 3598.00 84950 15050(15.05) 5000 412.00 11.45
12 3588.00 84700 15300(15.3) 5000 392.00 10.93
13 3608.00 85200 14800(14.8) 5000 384.00 10.64
14 3616.00 85400 14600(14.6) 5000 260.00 7.19
15 3740.00 88500 11500(11.5) 5000 192.00 5.13
16 3808.00 90200 9800(9.8) 5000 156.00 4.1
17 3844.00 91100 8900(8.9) 5000 120.00 3.12
18 3880.00 92000 8000(8.0) 5000 136.40 3.52
19 3863.60 91590 8410(8.41) 5000 132.00 3.42
20 3868.00 91700 8300(8.3) 5000 144.40 3.73
21 3855.60 91390 8610(8.61) 5000 160.00 4.15
22 3840.00 91000 9000(9.0) 5000 88.00 2.29
23 3912.00 92800 7200(7.2) 5000 12.00 0.31
24 3988.00 94700 5300(5.3) 5000 4.00 0.1
25 3996.00 94900 5100(5.1) 5000 0
Total 89925.20 10074.80
(Figures in parenthesis indicate Percentages)
Source: Office Records of Margadarsi chit funds (p) Ltd., Hyderabad, A.P

170
 Table 4.5
The annual interest as Percentage of prize amount
Annual Interest as Percentage of prize
Installments Prize Amount
amount
1 70000 -13.66
2 95000 2.56
3 70000 -13.66
4 70000 -13.66
5 70000 -13.66
6 70000 -13.66
7 70000 -13.66
8 70000 -13.66
9 70000 -13.66
10 83000 -4.00
11 84950 -2.81
12 84700 -2.96
13 85200 -2.66
14 85400 -2.54
15 88500 -0.77
16 90200 0.15
17 91100 0.62
18 92000 1.08
19 91590 0.87
20 91700 0.93
21 91390 0.77
22 91000 0.57
23 92800 1.49
24 94700 2.42
25 94900 2.52
Source: Office Records of Margadarsi chit funds (p) Ltd., Hyderabad, A.P

171
Methods of Interest Calculation

Cost /Return to members in an Auction Chit on a Simple Interest Basis: Table 4.5
shows that, in a chit fund, the prize money received by each member varies in amount
and in point of time, depending upon the amount bid by each member and the installment
at which he bids. If the prize money received by the member exceeds his total net
subscriptions, the member is considered as a saver and the excess of money he receives
over his net subscription constitutes interest received by him. If the prize money received
by the member is less than the total net subscriptions by the member, then he is deemed
as borrower-member and the excess of money he pays over his prize money represents
the interest paid by him. In the case under consideration, the bidders of first installment
and from installments 2 to 15 are borrower members, incurring interest charges ranging
from 0.5 to 14 per cent. From installments 16 to 25, the bidders are investor members
(savers), earning interest ranging from 0.5 to 3 per cent approximately. The interest
received or paid is divided by the total number of installments to get the monthly interest
and then the monthly interest is multiplied by 12 to obtain the annual interest. The annual
interest is then expressed as percentage of prize amount in the table.

Unregistered Chit Fund Industry

An unregistered chit fund means unauthorized way of running chit schemes. These are
not legalized and have no registration with the concerned authorities. These are
informally run by the people who have very good social contacts. Generally the manager
or organizer of unregistered chit fund is a member in the religious group or a reputed
person in an area or village, reliable to everyone in that community. These people are
running the chit schemes in the business community, friend’s community, relative groups
and social groups etc. These people generally run the schemes according to the feasibility
of the members in payment, with or without collateral and are sanctioning the loans to the
needed persons without much formalities and time delay. Unregistered chit fund business
is not only popular in rural areas and uneducated people as many of us think, these are
very extensively conducted by urban and metropolitan cities in large number by business
and corporate people. It is running with the secured feeling by faith and interrelationships

172
among the members of the fund. There are nearly 6,000 unregistered companies across
Andhra Pradesh with an annual turnover of ì.40,000 crore. There are only 1200
companies are registered companies, with an annual turnover of only ì.15,000 crore. That
means the unregistered chit fund companies in the state are 6 times greater than registered
companies9. There are so many reasons why people invest in unregistered companies
some of them are (a) Easy access to money; (b) No processing delays, whenever the
money is required the foreman will arrange the money; (c) There are no much procedural
formalities; (d) It is very accessible to low income people; (e) No collateral or nominal
collateral is enough.

Importance of Informal Source of Credit in India:

The informal finance has been occupying significant role in Indian financial system right
from the beginning. This informal way of finance or credit has very important role in
rural India. India is a country where majority of the population living in villages and is
dependent on agriculture for livelihood. The sources of rural credit are broadly two types.
One it is non-institutional source of credit, other, institutional source of credit.
Non-10institutional source include, Money lenders, Traders, Relatives, friends, Land lords
and others. Institutional source include, Government, Co-operatives and Commercial
banks.

From the very beginning, the traditional source of credit for rural Indians was money
lenders. After independence the Government of India adopted institutional credit
approach involving various agencies like cooperatives, commercial banks, regional rural
banks, etc for extending agricultural credit to formers at cheaper rates. Despite
phenomenal growth of banking sector, about one-third of the rural credit requirements are
still met by non-institutional sources. In order to provide the formers with increasing and
easy access to finance, commercial banks in India were nationalized. Their branch

9
According to Andhra Pradesh Federation of Chit Funds, Hyderabad..
10
Rural indebtedness, causes and cures, The Indian banker volume V, No.2, February
2010.

173
network was extended into rural areas with opening up of a number of branches. Though
even today majority of the working capital requirements of the farmers are financed by
informal way of financing. Rural people are compelled to borrow from informal sources
at very high rates of interests due to:

⇒ The total number of branches of commercial banks in India rose from 65,919 in
2001 to 71,839 in 2007, an increase of 11 per cent. However the share of rural branches
was continuously declining and reached 42.5 per cent in 2007 as against 49.4 per cent in
2001.

⇒ Banks were opening more and more branches in urban and metropolitan areas in
order to compete with private and foreign banks.

⇒ Rural poor and farmers find it too cumbersome to obtain loans from formal credit
delivery system. These people want prompt credit delivery and feel that approaching
banks means cumbersome paperwork and wastage of time.

⇒ Banks provide loans for only productive sources. Whereas other informal sources
provide loans for both productive and consumption purpose also.

⇒ If these people default to repay for one or the other reason, they are hardly eligible
for further assistance from banks.

⇒ The report on trend and progress of banking in India, 2007-08 released by the
Reserve bank of India revealed that even after four decades of bank’s nationalisation,
country’s 41 Per cent adult population remained outside the banking system.

⇒ According to RBI, 256 districts in 17 states and one union territory manifested
credit gap of 95 per cent and above.

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⇒ According to the All India Debt and Investment Survey, Andhra Pradesh, the state
with the highest concentration of self-help groups, microfinance and banks, reported 73
per cent of rural non-institutional debt and 57 per cent of rural moneylenders’ debt, the
highest among all states in India.

⇒ The cumbersome procedure of submitting various documents with loan

applications and subsequent complex documentation process led to an average of 33
weeks taken by commercial banks to approve loans.

⇒ 59 per cent of rural households in India do not have a deposit account, 79 per cent
have no access to credit from formal source. While 70 per cent marginal farmers do not
have a bank account and 87 per cent have no access to formal source of credit.

⇒ According to the National sample survey organization, 45.9 million farm

households out of a total of 89.3 million in the country did not access credit; only 27 per
cent of total farm households are indebted to formal source of which one-third also
borrow from informal sources.

⇒ The Invest India Incomes and Savings Survey (2007) reveals that household loans
for meeting financial emergency, medical emergency and social obligations accounted
for 53 per cent of the total loans. More than 60 per cent households indebted to non
institutional sources took loan for the above three purposes.

Need For Regulatory Framework

Chit funds are open to abuse by the foreman who may resort to unfair methods for
securing illegal gains. Such unfair methods include enrolment of fictitious members to
complete the required number of members in a chit series. Similarly, a needy non-prized
member may be exploited so that he gets the prize only at the maximum discount.
Delaying tactics may be adopted by the foreman in disbursing the prize amount to prized
subscriber on the ground that the security offered by him is not acceptable or adequate.
Meanwhile, the foreman may use the prize money interest-free. If he succeeds in

175
delaying payment till the succeeding draw, the earlier prize winner can be given the prize
out of the collections of the succeeding draw. Thus, one installment can always remain in
the hands of the foreman to be utilized in any way he likes. The above malpractices are
only of an illustrative nature and while framing the regulatory measures, such
malpractices will have to be kept in view so as to minimize their occurrence.

Regulation of chit funds is generally considered as a State subject and pursuant to this
position; States like Tamil Nadu and Andhra Pradesh have enacted the necessary
legislation. The Tamil Nadu Chit Funds Act, 1961 has been adopted in the Union
Territory of Delhi with certain modifications with effect from July 5, 1964. In Kerala, the
Travancore chittis Act, 1945 and the Cochin Kuris Regulations, 1932 are in force in the
erstwhile Travancore and Cochin States areas respectively, but the Malabar area has no
chit legislation. The Kerala Chittis Bill, 1972, a consolidating measure, which will extend
to the whole of Kerala, has been passed by the State Legislature. Chit Fund legislation
has also been enacted by the Union Territory of Goa, Daman and Diu. In Maharashra, a
Bill to regulate chit funds has been passed by the State Legislature and certain States like
Karnataka, Gujarat, Punjab and Uttar Pradesh have drafted the necessary bills.

Chit Legislation

It will be seen from the foregoing that chit fund legislation has been enacted only in a few
States/ Union Territories. There is also a diversity of the regulatory provisions made in
the various enactments. It is not, therefore, unlikely that unscrupulous promoters or chit
companies might exploit the situation by conducting chits in such of the States as have no
chit legislation or in States where the provisions of such legislation are less rigorous. In
fact, it was brought to the notice of the Group during the course of its discussions in New
Delhi that a number of chit fund companies had shifted their registered offices from the
Delhi area to the nearby places in Haryana (where there is no legislation) with a view to
avoiding compliance with the provisions of the Tamil Nadu Chit Funds Act, 1961 as
extended to the Union Territory of Delhi. In the circumstances stated, the need for
enactment of a uniform legislation applicable to Chit Fund institutions throughout the
country cannot be underestimated.

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In this context of the recommendations of the Banking Commission in regard to
regulating the activities of non-banking financial intermediaries, the Central Government
has, inter alia, decided that a model law to regulate chit business may be formulated for
adoption by all the States which have no such legislation. It has also decided that the
question of making it a requirement of law that only public limited companies should run
chit funds should be examined. Pursuant to the above decisions, the Reserve Bank has, at
the instance of the Central Government, drafted a Model Bill which was referred to the
group for its comments in October 1974. The draft Bill is generally on the lines of the
Andhra Pradesh Chit Funds Act, 1971 (which itself follows the pattern of the Tamil Nadu
Chit Funds Act, 1961) and the Kerala Chittis Bill, 1972 as reported by the Select
Committee. Besides the usual provisions found in the existing State Enactments, certain
additional provisions have been made therein.

The main recommendations of the study group are:

(a) Since the legal opinion is that Parliament is competent to enact the chit legislation
in view of the provision contained in Entry 7 of List III (Concurrent List) of Schedule VII
to the Constitution of India, the proposed Bill should be enacted as a Central legislation.
Such a step would, besides ensuring uniformity in the provisions applicable to chit fund
institutions throughout the country, also prevent such institutions from taking undue
advantage either of the absence of any law governing chit funds in any State or exploit
benefits of any lacuna or relaxation in any State law by extending their activities to such
States.

(b) While the Bill should be enacted as a Central Act, its administration should be
left to the State Governments concerned which, in turn, make seek the advice of the
Reserve Bank on policy matters. (For the purpose of tendering advice to the Central or
State Governments, the Reserve Bank may have to inspect chit fund institutions on a
selective basis to have an idea of their working including their methods of operation. Chit
funds are financial institutions as defined in clause (c) of section 45I of the Reserve Bank
of India Act, 1934. Hence, it would be open to the Reserve Bank to undertake inspections

177
of chit fund institutions whenever deemed necessary in exercise of the powers vested in it
under section 45 N ibid.)

(c) As regards to the question whether only public limited companies should be
allowed to conduct chit funds, the group of the view that there should be no objection, in
principle, to chits being conducted by private limited companies also, and on a limited
scale, even by unincorporated bodies such as individuals/sole proprietorships/ partnership
firms. It might be of relevance to note in this connection that enactments regulating chit
funds in force in certain States do not prohibit chit funds being conducted by
unincorporated bodies.

(d) Having regard to the nature of their business, there is no necessity for chit fund
institutions to borrow from the public by way of deposits and as such they may be
prohibited from accepting deposits except as advance payment of subscriptions or
deposits from prized subscribers by way of security towards payment of their future
installments.

The views of the Group on certain other issues are,

(i) Conduct of other business by chit fund institutions: Chit fund institutions may be
prohibited from conducting any other type of business except chit business or granting of
loans to subscribers against their paid up subscriptions.

(ii) Utilization of funds: Chit fund institutions should utilize their surplus funds only
for giving loans or advances to non-prized subscribers against the security of the
subscriptions paid by them or investing in trustee securities or in deposits with the
approved banks.

(iii) Restriction on the opening of new places of business: Chit fund companies should
obtain the prior approval of the Director of Chits within whose jurisdiction their
registered offices are situated. The Director of Chits should take certain criteria into
account before granting permission for the opening of offices. Unincorporated bodies
should not be allowed to conduct business at more than one place.

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(iv) Maximum duration of chits: The duration of chits should not ordinarily exceed
five years; but chits of a longer duration up to ten years may be started in very special
cases only by chit fund companies/banks with the prior approval of the State Government
concerned which should take into account factors such as the financial position and
methods of operation of the company in question, interests of the prospective subscribers,
requirements, as to security, etc. ( The security deposit to be kept by the foreman
company in the case of chits of longer duration may be proportionately higher).

(v) Mode of settlement of disputes: The machinery for settlement of disputes arising
between the foreman and the subscribers in case of default, etc; should be self-contained,
cheap and expeditious on the lines of the machinery prescribed under the State co-
operative laws for settlement of disputes by arbitration.

(vi) Ceiling in respect of the aggregate amount of chits that may be conducted at any
point of time: The aggregate amount of chits conducted by a chit fund company at any
point of time may not exceed 50 per cent of the net worth of company, i.e.; the paid up
capital plus free reserves less the balance of accumulated loss and other intangible assets
such as deferred revenue expenditure and goodwill, if any. In the case of commercial
banks conducting chit funds, no ceiling on the aggregate amount of chits that may be
conducted at any point of time need be prescribed since these chits are subject to the
close scrutiny of the Reserve Bank. As regards chit funds conducted by unincorporated
bodies such as individuals, sole proprietorships and partnerships, the aggregate amount of
chits should not, at any point of time, exceed ì.10,000.

(vii) Minimum capital requirements and the creation of a reserve fund: The minimum
paid-up capital of chit fund companies incorporated under the Companies Act, 1956,
whether private or public should be ì. 1 lakh may be allowed time up to three years to
increase their paid-up capital to the minimum referred to above. The State Government
concerned may be authorized to grant extension of time for a period not exceeding two
years in appropriate cases. These companies should also be required to credit 20 per cent
of their annual net profits to a reserve fund.

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With the enactment of suitable legislation incorporating the necessary provisions in the
light of the views expressed by the group, it may be expected that the malpractices
indulged in by foreman would, by and large, be obviated. The comprehensive Bill of
regulating chit funds was enacted by Government of India as the Chit Fund Act 1982
warranting amendment of the Andhra Pradesh State Chit Fund Act,1971 and later
superseding the State Act (See Annexure-I).

Implementation of The Central Chit Fund Act In the State and Suggestions by
Andhrapradesh Federation of Chit Funds:

a. The Central Chit fund Act, has some stringent norms, which would come in the
way of the functioning of chit fund companies. According to the central act, a person who
desires to set up a chit fund company needs to deposit 100 per cent security at the time of
registration of the chit group with the registrar of chits, whereas under the state chit act
one requires to deposit only 50 per cent. According to the central act, a person can file a
case with the registrar of the chit funds, but then even after an order is passed, the person
has to go to the civil court to get his dues back.

b. If the Government was to implement the central act, about 75 per cent of chit fund
companies would be out of business as it would be difficult for them to collect dues from
defaulters. This would in turn lead to default in payments to subscribers.

c. This was implemented in Karnataka and Tamil Nadu, which was not successful,
and customers were having difficulty in getting back their dues.

d. The Andhra Pradesh Federation of Chit Funds is opposed to the Central Act as it
believes that 75 per cent of the registered chit fund companies would and have to shut
their business.

e. The Federation also suggested to the Government that if the Central Act is to be
enforced the companies would not be able to realize money in time from the defaulted

180
subscribers through the registrar of chits. The federation also fears that the companies
may not be able to pay the prize money to the subscribers.

f. The federation also suggested to the Government to strengthen the State Act, set
up special courts for early realization of the defaulted amounts and to take stringent
action to curb unauthorized chit find activities. Such steps would not only ensure safety
of public money, but also bring in more revenue to the Government.

g. It has become imperative to regulate the widespread chit fund business in the state
in view of the fact that about 40per cent of the population is said to depend on chit funds
for meeting their financial requirements.

“The cabinet approved amendment to the AP chit fund act prescribing new norms in
terms of minimum paid-up capital, imposition of restriction on chit fund companies not to
conduct any other finance business, and prescribing disputes settlement mechanism
adopting the provisions of the Central Chit Fund Act 1982, through the registration
Department.”11

The other changes to the existing law include prescription of 1 lakh as minimum paid up
capital for doing chit fund business, 100 per cent security of the chit amount in place of
the existing 50 per cent security, imposing the maximum limit of 5 years duration for
chits, a ceiling of 40 per cent discount, and investment of 10 per cent of the net annual
profit in reserve fund. Disputes will be settled through the officers of registration
department under the provisions of the Central Chit Fund Act.12

These are the amendments proposed to the Andhra Pradesh Chit Fund Act, 1971 through
a bill introduced in the State legislative Assembly by the finance minister, Mr.Rosaiah.
The proposed amendments to the chit fund act aimed at providing more safe guards to
subscribers in the chit business. As the act contains lenient penal provisions and is
ineffective in regulating the mushroom growth of unauthorized chits, the Government
constituted a committee of group of ministers to examine and make recommendations for

11
Source: Hindu business line July 8, 2006.
12
Source: Business Standard, July 10, 2006.

181
adopting certain provisions of the central chit fund act, 1982 into the AP chit funds act.
Among the recommendations are prescribing 100 per cent security of the chit amount
prescribed, investment of 10 per cent of the net annual profit in reserve fund, a ceiling of
40 per cent on discount, imposition of higher penalties of two years imprisonment and
`5,000 fine on violators. The companies will also be require restricting their activities to
chit business and not allowed to accept investments and deposits etc13.

The State Government introduced the A.P chit funds act (amendment) bill,
replacing an ordinance to regulate chit fund companies in the State on 13 November,
2007. The Andhra Pradesh Chit Fund (amendment) Bill 2007 was adopted in the
Assembly. The bill prescribes a minimum paid up capital of ` 1 lakh for doing chit fund
business, 100 per cent security of the chit amount prescribed, higher penalty of two years
imprisonment and ì.5,000 fine and settlement of disputes by the officials of the
registration department instead of the civil court14.

All the changes suggested by the state government turned out to be unacceptable to the
union government. With this, the government also decided to defer its plan to introduce
its own legislation to control and streamline chit funds business in the state. All the
suggestions for the amendments to the central act to suit the local situations in the state,
had finally resolved drop the proposal. The state government has decided to adopt the
chit funds act of 1982 enacted by the union government in full, without making any
amendments to it as planned earlier.15

Failures of Chit Fund Companies in Andhra Pradesh

Accepting deposits from the public: The reasons why some of the chit fund companies in
A.P. in recent years are defaulted to the customers are collecting deposits from the public
by attracting thousands of customers, assuring them high interest rates than banks and
investing crore of rupees collected from the thousands of people and invested these
amounts in real estate business, finance business, investment and resorts and movie

13
Source: The Hindu business line, nov13, 2007.
14
Source: The Hindu 15, November, 2007.
15
Source: The Hindu ,July 23, 2008.

182
making business and end up with huge losses and failed to pay the amounts due to the
customers. These companies are collecting deposits on personal guarantee without
leaving the opportunity to the court to seal their other businesses.

Reserve Bank of India, amended the MNBC (RBI) Directions, 1977, in exercise of the
powers conferred by Sections 45J, 45 K, &45L of the RBI Act, 1934, (2 of 1934) prohibit
MNBC from accepting deposits from public except from the share holders and any
deposit accepted and held by the MNBC other than from its share holders as on date shall
be repaid on maturity and shall not be eligible for renewal.

Increased operational costs and insufficient commission: Operational costs like salaries,
office rent, stamp duties, paper work and office equipment costs etc., are very high. The 5
Per cent commission is insufficient to meet the operational costs. Though the fore man
enjoys the first bid amount without any deduction the liquidity problem arises because of
100 per cent chit amount deposit with the bank.

Frauds and Malpractices: Diversion of funds into other businesses, intentionally

delaying the payments to the subscribers, attracting deposits from the public, conducting
unregistered chits in the roof of registered business are some of the mal practices
practiced by the chit fund companies.

Lack of control and regulations on unregistered business: The unregistered chit fund
business in A.P. is more than 6 times to the registered business. Mushroom growth of
unregistered companies creating unhealthy condition to the industry. Most of the
registered companies are turning to be unregistered firms as there are no stringent norms
and conditions and control over this business.
Lack of financial planning and discipline among the subscribers: Most of the registered
chit fund companies default because of the irregular and delayed payment of future
subscriptions by the subscribers. Well established and financially sound companies
appointing agents for selecting good customers but small and new companies cannot
afford for this. The financial indiscipline of the customers damages the industry.

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Processing delays: Nearly 65 Per cent of the subscribers who prefer the unregistered
companies are due to the reason easy access to money and 32 Per cent of them because of
fewer formalities. Basing on the opinions collected from the customers the money will be
given to the winning subscriber immediately where as in registered companies, after
submitting the collateral, it will take 15 days to 30 days to collect the money. Because of
these reasons people prefer unregistered companies.

Complicated collaterals: Most of 33 Per cent of the customers invest in unregistered

companies opinioned that no collateral is required and 37 Per cent opinioned it is very
reasonable and viable. The collateral requirement in registered chit company is
complicated than unregistered chit companies. In registered chit companies, according to
the size of the liability they demand collateral like salary certificate, income tax returns,
LIC surrender value, bank guarantee or personal surety.

Registered companies are away from Low income group: For registered companies it is
not profitable to run low value chits as the commission charges are very low (5 Per cent).
Low income people preferring unregistered companies as there are no rules and stringent
norms and collateral requirement with the companies.

Stringent norms and control: The infant registered companies are suffering more with the
stringent norms and control by the government.

Lack of Government support and concentration on the industry: Actually industry does
not need financial support from the government. But government should morally support
the industry. Even after the enormous development of banking system, insurance and
credit system in the country, still lakhs of people are benefiting out of chit funds. Though
chit funds lend for unproductive consumption needs, it is important to cater the social
needs of the people in the economy.

Future of Chit Funds

After the crisis in the MFI sector especially in Andhra Pradesh, investment opportunities
in NBFCs (Non-Banking Finance Companies) have shrunk. Investors are looking at

184
alternative investment options and a chit fund is one better option of investment though
the returns may not be as alluring as the MFI sector.

The southern states of Kerala, Tamilnadu, and Andhra Pradesh, where the MFI crisis got
precipitated, account for 1/3rd of the chit fund industry in India. The total size of the
industry in the country is estimated at ì. 35,000 crore. The total number of registered
companies in the country is 30,000 and the unregistered sector is 100 times bigger than
the registered one. The industry grew around 20 Per cent last year, against a usual growth
of 10-15 per cent. Typically, these companies cater to middle-income group clients, due
to the high cost of operations and cap on revenue. However, with the crisis in the micro
finance sector, chit fund companies are now eager to tap lower income group households.
Thus, over the past year, chit funds of lower denomination, with a higher number of
participants, fuelled the growth of the industry in the southern states.

A country like India, which is most predominantly agricultural country, and is being
industrializing itself, the trade, communications and transport needs of the country are
increasing on a massive scale. This situation increased the credit needs of the country.
The organized banking sector being limiting its credit to certain types of business and
under severe restrictions and conditions to extend credit, the credit needs of various
sectors is being met on a large scale by the non-banking sector of the economy. Even
after the nationalization of the commercial banks and enormous branch expansion the
credit needs of the vendors, petty trades, poor agriculturists and the very poor sections of
the economy, who need credit for a very short period of time varies from a day to a week
or a month, are not met properly by the commercial banks. This untapped segment of the
credit needs of the country and also a part of the credit needs of industry and trade are
met by the unorganized and individual money lending facilities available in the country.
The Governments credit squeezing policies to control inflation and demand increased the
demand for money through unorganized sector. The unorganized and the individual
money-lending facilities supplement the institutional credit in the economy. The role of
non-banking finance companies and chit fund companies has been increasing in serving
the credit needs of the middle class and poor rural segment of the economy.

185
People join chit funds for saving as well as borrowing. The main purpose of agriculturist
subscribers in joining the chits is saving, and for traders and merchants it is borrowing.
As the borrowing aspect of the chit fund raised, it gave momentum to the expansion of
the chit fund business and a new class of institutional foremen developed. The chit fund
business nowadays became a modern business serving the credit needs of the all
categories of rural as well as urban people with branches spread all over the country.
Chit fund companies pool the resources by diverting the surplus funds from one branch to
the other and maintain the liquidity properly in order to meet the customer’s credit
requirements in time. With the help of these branches it runs various chit schemes of
various denominations ranging from daily or weekly chits to help small traders and daily
vendors.

Chit funds are designed as support structure for needy people who cannot get loans from
banks or some money lender in the situations when they are unsure of their cash flows or
some big expenses coming on the way. The concept of Chit funds works very good when
all the participants in the group are well known to each other and have high level of thrust
between them. These social networks would help people with the availability of
immediate funds in the time of urgent need. As some of the subscribers in the survey
shared their good experiences with chit funds told that they met all their life obligations
like sister’s marriage, daughter’s marriage, father’s medical expenses, buying new house,
children’s education expenses were met solely through this type of monthly chit fund
investment.

There are some bad experiences people shared how they are deceived by the Chit funds.
One retired employee when he retired put all his money in a chit fund. The chit fund
company suddenly closed and the foreman absconded without notice. He lost all his life
earning money and is now helpless and become dependent on his son. There are many
standard organizations which run schemes with a good track record. However, caution is
needed when opting for chit funds.

186
In chit funds generally those who wait till the end of the scheme will be saver in the fund
and get a variable return depending on the situation and the need of the other subscribers.
The return generally is not more than 11-15 Per cent. If other subscriber is in urgent need
and bid for high discount, all other members get high rate of interest and vice versa. If the
subscriber is lucky enough, the rate of return is more than 15 Per cent. One may think
why invest in chit fund its better to invest in Fixed Deposit with the bank. In FD one
cannot borrow or break before the term for getting the benefit, but in chit fund if any
urgency comes one can attend the auction and have the money. One should not look at
the chit fund as an investment tool rather chit funds are for helping some needy person in
their urgency.

With rapid industrial development in the country, the need for credit enormously
increased and the organized financial sector of the country is unable to meet the credit
requirements of the people. With the traditional social customs prevailing in the country
the need for credit for non productive purposes also increased. The commercial banks
with their rules and conditions limiting the disbursement of credit to some extent and
cannot sanction loans for consumption purpose. The agencies provide credit for such
purpose is money-lenders, pawn-brokers, indigenous bankers and chit funds. People
prefer these agencies to get credit to meet their urgent requirements mostly for
consumption purpose.

Chit funds are preferred to banks because of its adoptability to the requirements of the
local people, easy accessibility and less formalities and procedures. Despite of many
drawbacks, frauds and failures chit funds are growing with expansion of branches all over
the country. The general impression that chit funds are cheap source of credit may not be
true. People join chit funds either to borrow or to save. People who join to borrow, they
borrow for two purposes. Some they borrow for consumption expenditures and some for
productive purposes. The former category, generally borrow because of easy availability
of funds and they will not bother of the cost of funds. The latter category also will not
bother of the cost of funds because they invest the money and earn more return than what
they pay for the funds. People, who join the chit funds to save, are generally high ranked

187
people like lawyers, doctors, pensioners and house wives getting income from farm, rent
and interests on their deposits with the banks to get the advantage of high rate of return
on their money.

Chit funds catering the credit needs of many people in the semi urban and rural areas,
which are neglected by the commercial banks. Chit funds are more than a savings bank to
the saver and more than a lender to the borrower. Basically, chit funds are viewed to
serve the poor and middle class people with small value of chits. But chit funds nowadays
became profit earning organizations and completely neglecting the basic principle of
mutual co-operation among the members. The chit fund companies, like commercial
bank branches are opening several branches in the urban and metropolitan cities and
diverting their activities into other businesses like real estate and amusement. They are
only running schemes of bigger denominations. Keeping the needs of some segments of
the society especially very poor who lend small amounts of money in the morning
conduct their business earn some money and return the lent money in the evening, the
State Governments should run the chit funds in the rural areas conducting different
schemes like marriage schemes, education schemes, agriculture schemes, buying goods
schemes and small vendor schemes etc., engaging the young, educated unemployed
youth.

From centuries together chit fund business is part and parcel of our economy. Despite the
enormous changes in the field of finance, chit funds surviving successfully in the
economy. The so called modern banking system has been developed out of chit fund
business in the country. Chit funds are mutual benefit organizations and its services are
needed to fill the credit gap left by the organized financial sector.

The lack of Government concentration on chit fund business is effecting the growth and
reputation of the business. Due to Government’s negligence many small chit funds
sprouting all over the state and misusing the subscriber’s funds. Some of these companies
are pooling the money and winding up without any notice to subscribers, because of these
companies entire industry is under question. Not only new chit funds but also very well

188
established chit fund companies having a good track record of more than twenty years are
also defaulting and deceiving their customers by absconding with the money of the
subscribers. Crore of rupees are still unrecovered by these companies. These companies
stood as obstacles in the smooth running of the chit funds.

Lots of unregistered chit fund companies operating without any control by the
Government. Because of these unregistered chit funds, Registered companies stopped
operating small ticket schemes. Another reason that the established registered companies
away from small value chits is high operating costs (rent of the office building, salaries to
the employees, stationery, stamp duties and power). Because of this reason low income
people approaching their neighborhood unregistered chit funds, where accessibility of
money is even easier but very risky.

As one of the reputed chit fund company managers told in the interview, it is nowadays
difficult to survive in chit fund business for the new entrants. The central Act being
implemented in Andhra Pradesh, new chit funds are unable to survive due to less
commission to the foreman and high operating costs. Where as it is not at all a problem
for the established companies who engaged in the business for more than two to four
decades. But as he told it is very difficult for them to run small value chits. Lower income
group, who need money for their daily needs or to conduct their vending activities are
approaching an unregistered foreman though the amount of risk is high.

Keeping the credit needs of the low income people, Government should take an effective
action or pass a rule to protect the interests of the poor and safe guard their money from
the hands of these foremen. The Government should provide the required facilities in the
form of subsidy to the industry to conduct small value chits and encourage the chit fund
industry which is so far working independently without Government’s support. One may
think that chit funds lend money for unproductive purposes and it cannot be a financial
intermediary that helps for economic growth. But one should think that how far the credit
disbursed by the bank is used for productive purposes. There are hundred and one per
cent chances that the money lent by the banks is not used for productive purposes

189
especially the cash credit system of banks allows the borrower to draw funds up to the
limit sanctioned and no questions are asked about the deployment of funds.
.
As it is told by one of the leading registered chit fund company managers, lack of
financial discipline and financial literacy of the subscribers causing damage to the chit
fund industry. Lack of publicity is another reason why chit funds not preferred by most of
the educated employees. Because of financial illiteracy, people do not know well the cost
borrowing from the chit funds. And do not know how to calculate the interest rates.

190
 Table 4.6
Comparative Position and growth of Chit Fund Industry in Andhra Pradesh
(During 1975 to 2010)
year No’ of Chit Cumulative Growth in No’ of Cumulative Growth in
Companies Growth of Chit (%) commerci Growth of (%)
Registered Companies al Banks Banks
1975 7 7 1371 1371
1976 2 9 29 173 1544 13
1977 6 15 67 292 1836 19
1978 9 24 60 303 2139 17
1979 12 36 50 233 2372 11
1980 18 54 50 121 2493 05
1981 38 92 70 290 2783 12
1982 29 121 32 282 3065 10
1983 55 176 45 260 3325 08
1984 51 227 29 182 3507 05
1985 43 270 19 642 4149 18
1986 53 323 20 73 4222 02
1987 68 391 21 80 4302 02
1988 71 462 18 103 4405 02
1989 73 535 16 154 4559 03
1990 78 613 15 92 4651 02
1991 98 711 16 52 4703 01
1992 86 797 12 42 4745 01
1993 114 911 14 36 4781 01
1994 143 1054 16 98 4879 02
1995 196 1250 19 39 4918 01
1996 345 1595 28 51 4969 01
1997 203 1798 13 53 5022 01
1998 123 1921 07 55 5077 01
1999 71 1992 04 72 5149 01
2000 63 2055 03 77 5226 01
2001 35 2090 02 42 5268 01
2002 25 2115 01 48 5316 01
2003 30 2145 01 60 5376 01
2004 31 2176 01 60 5436 01
2005 33 2209 02 60 5496 01
2006 16 2225 01 82 5578 01
2007 20 2245 01 239 5817 04
2008 18 2263 01 239 6056 04
2009 155 2418 07 579 6635 10
2010 23 2441 01 314 6949 05
Total 2441 6949
Source: Registrar of stamps and duties, Andhra Pradesh.
Statistics related to banks in India, RBI, Mumbai, various issues.
191
 Table 4.7
Comparison between Banks and Chits in Andhra Pradesh
(During 2000 to 2010)
(Amount in ì. Lakhs)
No. of
Growth in Aggregate Average No. of Scheduled Commercial Growth in
Year Registered Chit Deposits
Percentage Turnover Turnover Banks Percentage
Companies
2000 63 0 5226 0
2001 35 -44 5268 1
2002 25 -29 5316 1 41201695
421181 70196
2003 30 20 5376 1
2004 31 3 5436 1
2005 33 6 5496 1
2006 16 -52 5578 1
2007 20 25 5817 4
2008 18 -10 514655 102931 6056 4 89555206
2009 155 761 6635 10
2010 23 -85 6949 5

Total 449 935836 63153 130756901

Per unit turnover 2084.27 2070.48

Source: Registrar of stamps and duties, Andhra Pradesh.
Statistics related to banks in India, RBI, Mumbai, various issues.

192
 Table 4.8
Details of Registered Chit Fund Companies in Andhra Pradesh (Region wise) (During 2000 to 2010)
(Amount in ì.)
schemes above 2000 to 2010 Aggregate Region wise Region wise
District
companies/Branches ì.5 Lakh Customers Turnover in ì.. totals in ì.. Percentage
Srikakulam 15 49 300 1960728275
Vizianagaram 12 60 2205 2005827585
Visakhapatnam 18 107 440 2472068965
East Godavari 62 112 4737 6624070795
West Godavari 28 91 6490 4628686205 41706568565 44.56
Krishna 76 115 5255 7553636895
Guntur 89 276 11370 15153277430
Prakasam 5 44 2170 729931035
Nellore 6 34 4550 578341380
Kurnool 4 17 830 343875860
Kadapa 16 53 2085 1469317120
14405559360 15.40
Ananthapur 6 9 355 548716380
Chittoor 45 84 2565 12043650000
Adilabad 10 10 490 1333017240
Karimnagar 7 33 1395 616096550
Nizamabad 13 19 880 1352827090
Medak 11 11 550 1061172415
Ranga Reddy 45 252 0 5431000000
37471461570 40.04
Hyderabad 90 91 4750 12408500000
Mahabubnagar 14 14 670 1341393105
Nalgonda 18 73 3015 3229568965
Warangal 18 154 5695 1582368965
Khammam 10 82 3910 9115517240
Total 618 93583589495 100.0
Source: Registrar of stamps and duties, Andhra Pradesh.
Statistics related to banks in India, RBI, Mumbai, various issues.

193
Comparative Position and growth of Chit Fund Industry in Andhra Pradesh

From the Table 4.6 it is clearly understood that, the growth rates of chit fund companies
varied from 1 per cent to 70 per cent between the year 1975 to 2010 and banks varied from
1 per cent to 19 per cent only. At any particular year, the percentage growth rate of chit funds
is much higher than that of the percentage growth rate of banks. The chit fund companies
registered in the state in the duration of 35 years are increased from 7 to 2441 between the
years 1975 to 2010, i.e. 341 times the industry showed the growth in the state, whereas
commercial banks are increased from 1371 to 6949 between the years 1975 to 2010, i.e. only
4 times the sector noticed growth rate.

This shows the rapid growth of chit fund industry in the state 85 times faster than that of
banking sector in the state. This is only the growth of registered companies. And there are
many unregistered chit fund companies which have almost 10 times more than the registered
companies. Altogether, whether it is registered or unregistered, the industry has mushroom
growth in the state.

Comparison between Banks and Chits in Andhra Pradesh:

Table 4.7 presents the picture of number of registered chit fund companies in AP and their
growth, average turnovers. And the table also presents the details of number of scheduled
commercial banks in AP and their growth, deposits. In the year 2008-09 the number of
registered chit fund companies enormously increased and the growth is -10 per cent to
761 per cent. By the year 2010, the growth reduced by 85 per cent. The reason for the
reduced growth rate of these companies in the year 2010 is that most of the chit fund
companies in Andhra Pradesh in this time period were into loses and winded up and some
companies converted into unregistered firms. The growth in average turnovers of the
companies from 2000-2005 to 2005-10 is 31.8 per cent. Per unit turnover of these companies
recorded as ì.2084.27 lakh.

The number of scheduled commercial banks also had shown a decrease in their growth from
10 per cent- 5 per cent .in the years2009-10. The deposit growth rate is 59.9 per cent and per
unit deposits ì.2070.48 lakh. Per unit turnovers of the chit fund companies are more than per
unit deposits of banks.

194
Details of Registered Chit Fund Companies in Andhra Pradesh (Region wise)

Table 4.8 furnished the region wise details of registered chit fund companies and their
turnover of the companies and Percentage of turnover of three regions of the state. It is
evident from the table that among the total turnovers of registered firms 44.56 Per cent of the
turnover belong to coastal Andhra region, 40.04 Per cent belong to Telangana region and
only 15.40 per cent is from Rayalaseema region.

195