Types of chit funds in India

Types of chit funds in India

Chit fund is a saving s scheme typically found in India. These are managed, conducted, and regulated according to Chit Funds Act of 1982.  In India there are three types of chit funds, namely: i) funds run by state governments; ii) private registered chit funds; and iii) unregistered chit funds.

Though chit funds in India are under the governance of central legislation, state governments are responsible for their administration. Rules and their execution rest with state governments. In fact, before Supreme Court ruling of 1982 chit funds were particularly popular in South Indian states. In Tamil Nadu such funds were guided by Tamil Nadu Chit Funds Act of 1961; Maharashtra Chit Funds Act of 1975 was in operation in Maharashtra; and in Kerala, the Kerala Chitties Act 1975 regulated these funds.

Chit funds run by state governments

Chit funds managed and regulated by state governments are included in this category. Even those run by PSUs (public sector undertakings) belong to this class. These are safe and chances of loss are limited. Business processes are transparent and clean. Participating in such funds is safe and protected to a significant extent. Mysore Sales International Limited (MSIL) and Kerala State Financial Enterprises (KSFE) are examples of government managed chit funds.

Private registered chit funds

These chit funds came into being in the 1980s and are registered as per Chit Funds Act of 1982. These are normally floated by prominent financial institutes or business houses. Participating in these funds is not as safe as in state governments or public sector undertakings. However, as they are under the management of leading private sector companies or institutes the risk is calculated and bearable. Contributing to chit funds are subject to market risks and conditions. There are many co-operative societies that also conduct chit funds. Shriram Chits of Shriram Group, and Margadarsi Chit of Ramoji Rao group are among the well known private registered chit fund companies.

Unregistered chit funds

Unregistered chit funds are not legal and participation in these is up to the risk of members. Such chit funds are common throughout India and are usually formed by a close group of associates. Formation and management of these chit funds are totally based on trust. Participation in these funds should be avoided as disputes are subject to members’ integrity and honesty. Surprisingly the number of unregistered chit funds in India is significant.

Participation in government or registered chit funds is bound by rules of Chit Funds Act 1982. There are specific guidelines regarding foreman’s commission, minimum prize money for every bid, and members’ behaviour. According to the Act every beneficiary must pledge collateral for any successful bid. This collateral could be in the form of gold, property, National Savings Certificates (NSCs), bonds, or insurance policies. Personal guarantee from any other member who has not received any prize money might also be kept as security. This security is to ensure participation of members till the end of a chit fund’s term period. Or else, members have the tendency to leave a chit fund once they get their prize money.