Chit Funds / Kuries – saving schemes practiced in India Chit fund is a simple financial transaction where by certain number of peoples join together and contribute money, which is accepted by one person among them at a time. The contribution and acceptance are continued in turns until the cycle is completed where up on the contribution equals the acceptance.
For example, assume that 30 persons join together and contribute Rs.5, 000 /-each totaling to Rs.1, 50,000/- which is accepted by any one among them. Next month also, the sum contribution of Rs.5, 000/- is accepted and the same procedure is repeated for 30 months. The complete procedure will be clear after studying the following definitions.
Definitions Subscriber (Chittal) Subscriber is a person who joins a chit run by the organization. Each Subscriber is having an identification number. Foreman (Thalayal) Foreman is the person who conducts the chit. He is also one of the subscribers of the chit.
Subscription Subscription is the periodic contribution payable by the subscriber.Eg.Rs.5,000/-
Sala (Face value) Sala is the total contribution collected from all the subscribers each time.Eg.Rs.1,50,000/- Prize Money Prize money is the amount for which the chit is prized or auctioned.Eg.Rs.1, 05,000/- (see Auction Discount)
Auction Discount Auction Discount = Sala – Prize Money which is reduced by conducting auction. The reduction is limited to a certain percentage of sala say 30%.Eg.(Rs. 1,50,000/-) – (Rs.1,05,000/-) = Rs.45,000/-
Foreman’s Commission It is certain percentage of sala, normally 5% of sala. Eg.7, 500/-
Auction Dividend Auction Dividend is Auction Discount less Foreman’s Commission, which is divided among the eligible Subscribers. Eg.Rs.45, 000 – Rs.7, 500=Rs.37, 500
Net Subscription Net Subscription is Subscription less Auction Dividend, which is to be paid in cash by the subscribers each time.eg.Rs.5, 000 – Rs.1, 250 = Rs.3, 750 (37500/30=1250)
Prized Subscriber A Prized Subscriber is a subscriber who has auctioned the chit or who was prized.
Non Prized Subscriber A Non Prized Subscriber is a subscriber who is yet to auction the chit or who is yet to win the prize.
Foreman’s Liability Liability of the foreman for accepting the prize money, normally the first prize money. In the above example, subscription collections of one month is taken by the foreman without any deduction i.e Rs.1, 50,000/-. For the next month, whoever desires to get the receipt either goes for a lottery or an auction to decide the lowest bidder, which should not exceed 30%. If more than one person bids or reduction exceeds 30%, the case is decided by draw on lots. The auction dividend (Auction Discount less Foreman’s Commission) is equally divided among the eligible subscribers and the balance net 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 completed.
Let’s take a simpler example and work it out in more detail. Assume that there are 10 persons in a chitty including the foreman. Ten persons contribute Rs.1000/- each month for ten months. So the sala is Rs.10, 000/- per month. Remember for the first month’s subscription collection is taken by the foreman without deduction i.e. Rs.10, 000/-. For next month, auction takes place and there is a limit for bidding it is 30%. So, lets say the price money is not less than 70%. Suppose the price money is Rs.7, 000/- then first auction discount will be Rs.3, 000/-. Foreman’s commission is 5% of sala so it will be Rs.5, 00/-. Now auction dividend will be Rs.2, 500/- (3000 – 500). Share of auction dividend for each person will be Rs.250 (2500 / 10). So, next months net subscription will be Rs.750/- (1000 – 250).
This process will continue till 10 installments.
Sala = No: of Installments * Subscription Amount (10000 = 10 * 1000)
Auction Discount = Sala – Prize Money (3000 = 10000 – 7000)
Prize money not less than or equal to 70% (70% of sala (10000) i.e. 7000)
Foreman’s commission (FC) is 5% of sala. (5% of 10000 i.e. 500)
Auction Dividend = Auction discount – Foreman’s commission (2500 = 3000 – 500)
Share of Auction dividend = Auction Dividend / no: of divisions (persons) (250 = 2500 / 10)
Net Subscription (NS) = Subscription – Share of Auction dividend
(750 = 1000 – 250)
Chit funds in India are governed by various state or central laws, like Travancore Chit Act of 1945, Chit Funds Act, 1982 and Madras Chit Fund Act, 1961. Organised chit fund schemes are required to register with the Registrar or Firms, Societies and Chits.