Chit funds explained: Facts vs fiction


The Saradha scam in West Bengal has created a storm and the murky multi-level marketing scheme of the group — helped and sustained by political leaders and other godfathers — is repeatedly and erroneously described as the ‘Chit Fund Scam’. This would be hilarious but for its ominous implications for the chits industry. Saradha had more than 160 entities /activities and not even one of them was registered under the chit fund category.

The mainstream media which thrives on abysmal ignorance in matters of finance repeatedly refers to Saradha as a chit and sometimes ‘cheat fund’ scam. It is obnoxious since the scam has nothing to do with chit fund activity. There are reports that some members of the Parliamentary Committee on finance headed by Yashwant Sinha – former Finance Minister — is discussing the possibility of abolishing all chit funds in the light of the Saradha scam when Saradha group did not have any activity linked to chit funds. This is like amputating the left leg when there is gangrene in the right leg.

1. Chit Funds are defined under Sec. 45 I(c) of the RBI Act. RBI Notification No.DNBC.39/DG(H)-77 dated June 20, 1977 categorises it as miscellaneous non-banking company (MNBC).

2. Since the subject is in the concurrent list (entry 7 of List III) of the Constitution, administration of the rules is with the respective State Governments. The company should be registered with the Registrar of chit fund of the State of their operation.

3. Chit fund company means a company managing, conducting or supervising, as foremen, agent or in any other capacity, chits as defined in Section 2 (b) of ‘The Chit Funds Act, 1982’.

4. Any company carrying out the operation of ‘Chit Fund’ should have the words ‘Chit’, ‘Chitty’ or ‘Kuri’ as part of their company name.

5. Chit fund companies are not allowed to accept deposits from the public, trade in stock, equity or other cash management.

6. Chit funds, as of now, are not allowed to carry on other businesses without the permission of the Registrar/State Governments.
Now given these characteristics and parameters, it is very clear that Saradha never was a chit company and nor did it intend to be one. There are many multi-layer marketing outfits which collect funds from gullible public and utilise the funds in the unorganised credit market or in real estate etc. In this case, the Group seems to have invested substantially in smaller print and visual media ventures also.

It would not be easier for such entities to operate without the cooperation of police and other political leaders/ Ministers. There was a similar case in Bangalore sometime before and in that case the receipts were given as ‘donations’ to temples. There is a huge appetite for use of funds and also a large number of gullible people’s interest in investing in such offers due to ignorance or greed or both.

On the contrary, there are many chits companies in southern part of India which are thriving for the last many decades some even over hundred years. Capitalising on the social networking and community participation, this institution has survived over several years, even after the influx of several other organised financial institutions and the increased complexity of financial markets. Under this model, money is circulated to the entire cross section of our society; be it housewives, salaried class, businessmen, Government servants, club members under different names namely: Kitties, bisies, kuries and Chit funds.

A chit scheme generally has a predetermined value and duration. Each scheme admits a particular number of members (generally equal to the duration of the scheme), who contribute a certain sum of money every month (or everyday) to the ‘pot’. The ‘pot’ is 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 the prized subscriber wins the sum of money equal to the chit value less the discount and the fixed fee to the foreman. The discount money is then distributed among the rest of the members (or the non-prized subscribers) as ‘dividend’ and in the subsequent month, the required contribution is brought down by the amount of dividend.

The primary use of Chit Funds include:

• To address consumption needs such as, marriage, education, property purchase and so on.

• To pay off costlier loans from outside sources like loan from money lenders.

• To address working capital, business expansion or start-up capital needs of small businesses, besides providing bridge loans.

• For an emergency or simply as savings for future needs.

In the context of reduced availability of bank financing many small and tiny business people use chits for their credit requirements. It is important that in our knee-jerk reaction to scams we do not throw the baby out with the ‘balti’. As a first step, mainstream media [MSM] must stop calling Saradha type scams chit fund scam. It is a multi-level marketing scam assisted by political leaders. Some reports suggest that the Centre was very much aware of it but kept quiet as long as Mamata’s TMC — was supporting the UPA and took action once the support was withdrawn.

Be that as it may, it is important that genuine chits numbering thousands and facilitating consumption and investment requirements of a large number of middle-class people should not be strangulated in the name of ‘cleaning’ the sector.

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