Chit Funds / Kuries: savings schemes practiced in India Chit fund is a simple financial transaction where a certain number of people come together and contribute money, which is accepted by one person between them at a time. Contribution and acceptance continue in turn until the cycle in which contribution equals acceptance is complete.

For example, suppose 30 people join and contribute Rs 5,000 each, for a total of Rs 150,000, which any one of them accepts. The next month too, the contribution of the sum of Rs.5,000/- is accepted and the same procedure is repeated for 30 months. The complete procedure will become clear after studying the following definitions.

Definitions Subscriber (Chittal) Subscriber is a person who joins a chit managed by the organization. Each Subscriber has an identification number. Foreman (Thalayal) Foreman is the person who performs the chit. He is also one of the chit subscribers.

Subscription Subscription is the periodic contribution payable by the subscriber.Eg.Rs.5,000/-

Room (Face value) Room is the total contribution collected from all subscribers each time. For example, Rs.1,50,000/- prize money The prize money is the amount for which the token is awarded or auctioned. For example, Rs.1, 05,000/- (see Auction Discount)

auction discount Auction discount = Room: prize money that is reduced when an auction is held. The reduction is limited to a certain percentage of the room, say 30%. For example, (Rs 150,000/-) – (Rs 1,05,000/-) = Rs 45,000/-

foreman commission It is a certain percentage of room, normally 5% of room. Ex.7, 500/-

dividend auction The auction dividend is the auction discount minus the foreman’s commission, which is divided among eligible subscribers. For example, Rs 45,000 – Rs 7,500 = Rs 37,500

net subscription The net subscription is the subscription minus the auction dividend, which subscribers must pay in cash each time.

precious subscriber An Awarded Subscriber is a subscriber who has auctioned the token or was awarded.

No rewarded subscriber A non-winning subscriber is a subscriber who has not yet auctioned the token or who has not yet won the prize.

Foreman Responsibility Responsibility of the foreman for accepting the prize money, normally the first prize money. In the above example, one month’s subscription charges are taken by the foreman without any deduction, ie Rs.1, 50,000/-. For the next month, whoever wishes to obtain the receipt either goes to a lottery or an auction to decide the lowest bidder, which must not exceed 30%. If more than one person bids or the reduction exceeds 30%, the case is decided by lottery. The auction dividend (Auction Discount less Foreman Commission) is divided equally among eligible subscribers and the net balance of the subscription is collected in cash and the total of such collections will be equal to the prize money payable.

This procedure is continued until the cycle is complete.

Let’s take a simpler example and work through it in more detail. Suppose there are 10 people in a chitty including the foreman. Ten people contribute Rs.1000/- every month for ten months. So the room is 10,000 rupees per month. Remember that the first month’s subscription collection is taken by the foreman without deduction ie Rs 10,000/-. For the next month the auction is held and there is a limit to bid which is 30%. So let’s say the price money is not less than 70%. Suppose the price money is Rs.7,000/- then the discount of the first auction will be Rs.3,000/-. The foreman’s commission is 5% of the room, so it will be Rs 5,00/-. Now the auction dividend will be 2 rupees, 500/- (3000 – 500). The dividend share of the auction for each person will be Rs 250 (2500/10). Therefore, next month’s net subscription will be Rs.750/- (1000 – 250).

This process will continue up to 10 installments.

Room = No: of Facilities * Subscription Amount (10000=10*1000)

Auction Discount = Room – Prize Money (3000 = 10000 – 7000)

Prize money not less than or equal to 70% (70% of the room (10000) that is 7000)

The foreman’s commission (FC) is 5% of the room. (5% of 10000 that is 500)

Auction Dividend = Auction Discount – Foreman Commission (2500 = 3000 – 500)

Dividend Auction Participation = Dividend Auction / no: of divisions (people) (250 = 2500 / 10)

Net Subscription (NS) = Subscription – Dividend Participation in Auction

(750 = 1000 – 250)

Chit funds in India are governed by various state or central laws such as the Travancore Chit Act of 1945, the Chit Funds Act of 1982 and the Madras Chit Funds Act of 1961. Organized chits must register with the Registrar or Companies, Societies and Chits.