CHIT FUNDS OR CHEAT FUNDS The concept of Chit Fund is almost unique to India, when banks were rarer, it was one of the most acceptable ways to get bulk cash for millions of households looking to finance a marriage or buy a house. A chit fund at the basic level is simple: A. Members gather at periodic intervals to pool in their savings and a lottery determines who will get the pool. B. The winner drops out of the lottery but is obliged to keep on contributing to the pool. C. The auction discount, that is the difference between the gross sum and auction amount is divided among all members. Let us understand this using a simple example: Let’s say there are 20 people who come together and form a group. Each one will contribute Rs. 2,000 per month and this will continue for next 20 months (equal to number of people in the group). In this group there will be one Organiser or foreman, who will take the pain of fixing the meetings, collecting money from each other and then doing other procedures. So each month all these 20 people will meet on a particular day and deposit Rs. 2,000 each. That will make a total of Rs 40,000 every month. Now there will be a bid on who will take this money. Naturally there will be few people who are in need of big amount because of some reason or the other. Out of all the people who are in need of money, someone will bid the lowest amount, depending on how urgently he / she needs the money. The person who bids for lowest amount wins. Suppose out of total 3 people who bid for Rs. 38,000, Rs. 37,000 and Rs. 36,000, the one who bids the lowest will win. In this case it’s the person who has bid Rs. 36,000. There will also be Organiser charges which may be around 5% of the total amount, i.e Rs. 2,000. So out of the total Rs. 36,000 which this winner was going to get, Rs. 2,000 will be deducted and the winner will get only Rs. 34,000, Rs. 2,000 will be Organiser charges and Rs. 4,000 (Rs. 40000 – Rs 36000) is the auction discount, which will be equally distributed among each and every member (all 20 people) which comes out to be Rs. 200 per person, and it will be deducted from their next monthly contribution. The winner took a loss because of his urgent need of getting the money and others benefitted by it. So each person actually paid just 1,800, not 2,000 in this case (they got 200 back). Note that when a person takes the money after bidding, he can’t bid from next time, only 19 people will be eligible for bidding. So this is basically how a chit fund works, there are various versions of chit funds and how they work, but the idea here is to communicate the basic model and how it works. Chit funds in India are governed by various state or central laws. Organised chit fund schemes are required to register with the Registrar or Firms, Societies and Chits. Hope you have understood the concept of chit fund.
Posted on: Wed, 12 Jun 2013 13:41:24 +0000
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