More About Chit Fund Business
What is Chit Fund & How it Works?
Chit-Funds are a popular mode of saving cum borrowing from time immemorial. The concept of Chit Fund is based upon the principal of mutuality, whereby a group of persons participate in a scheme to contribute fixed periodical amounts and distribute the amount so collected, in rotation, to each of the participants. The foreman i.e., the Chit Fund Company itself carries on this scheme of a chit fund.
Example: Functioning of Chit funds are better explained using an example. Take a typical chit fund with 25 members contributing Rs 100 per week. This fund will run for 25 weeks. On the first week all members will contribute Rs 100. An auction meeting will be conducted, and the foreman of the chit fund will preside over it. The total amount will be Rs 2,500. The auction will start with this amount. Bidders will start bidding by discounting this amount (reverse bidding). Let us consider that lowest any person bids is Rs 2,150 (a discount of Rs 350). This amount (Rs 2,150) is given to this winning bidder. Rest of the amount (Rs 350) is divided by 25, bringing the discount per person to Rs 14. This discount amount is returned back to each member. Sometimes a part of this may be kept by the foreman as service charges, usually in organised chit funds.
These (25) subscribers constitute a ‘Chit Group’ and the Chit fund company can run many such groups. For each group approval of bye-laws and commencement certificate from the office of the Registrar, Chit Funds, is must. The share of a subscriber in a chit is also known as ticket.
How it Works?
Different chit funds operate in different ways; and there are also many fraudulent tactics practiced by many private firms. The basic necessity of conducting a 'Chitty' is a group of needy people called subscribers. The foreman - the company or person conducting the chitty - brings these people together and conducts the chitty. Foreman is also the person responsible for collecting the money from subscribers, presiding the auctions and keeping records of subscribers. He is compensated a fixed amount (generally 5% of gross chitty amount) monthly for his efforts; other than that the foreman does not has any specific privileges, he is just a subscriber of the chitty.
The general pattern of the chitty can be readily noticed by a simple formula:
Premium * Duration = Gross Amount
Eg: 1000 * 50 = 50,000/-. Where 1000 is the maximum monthly contribution needed from a subscriber, 50 is the duration of the chitty in months and 50,000 is the maximum sum assured. The duration also equals the number of subscribers, as there must be (not more or less) one subscriber to receive the price money every month.
The chitty starts on an announced date, every subscriber come together for the auction/lot. As per Kerala chit act, the minimum prize money of an auction is limited to 70% of the gross sum assured that is 35,000 in the above example. When there are more than one person willing to take this minimum sum, lot are conducted and the 'Lucky subscriber' get the price money for the month. If there is no person is willing to take the minimum sum, then a reverse auction is conducted where subscribers open-bid for lower amounts; that is from 50,000 >> 49,000 >> 48,000, and so on. The person bidding lowest sum get bid amount.
In both the cases the auction discount, that is the difference between the gross sum and auction amount, is equally distributed among subscribers or is deducted from their monthly premium. Fore example if the auction is settled on a sum of 40,000, then the auction discount of 10,000 (50,000 - 40,000) is divided by 50 (the total number of subscribers) and every one gets a discount of 200. The same practice is repeated every month and every subscriber get at least a chance of receiving money.
How To Deal With Defaulting Subscriber?
If a non-prized subscriber defaults in paying his subscriptions, foreman should follow the following steps:
Give a written notice of such removal to him within 15 days of such removal.
File a true copy of such entry with the Registrar, Chit Funds, Delhi within 14 days from the date of such removal.
Don’t substitute any defaulting subscriber until the expiry of the period for approval i.e. within 7 days from the date of receipt of notice of removal by the defaulting subscriber or where an appeal is pending before the R.C.F. till the same has been disposed of.
Enter every substitution in the relevant book maintained. A copy of every such entry shall be filed with the RCF within 14 days from the date of substitution.
It is permissible to deduct 25% of the total subscription paid by the defaulting subscriber or 5% of the total chit value, whichever is less.
Foreman is liable to pay the amount of subscription to the defaulting subscriber after the termination of chit or when the chit is prized to the substituted subscriber, whichever is earlier.
If the defaulting subscriber fails to furnish the acknowledgement, foreman should deposit the amount in the S/D Account to be opened in an approved bank. The amount so deposited shall not be withdrawn for any purpose other than for making payment to the defaulting subscribers.
How To Deal With Prized Subscriber?
When a chit is prized to a subscriber, you must pay the chit amount to him after obtaining the sufficient surety as prescribed in the approved Bye-laws of that chit group.
No surety from a prized subscriber is required, if he agrees to pay all future instalments in lumpsum.
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