HISTORY: Chit funds history goes back to more than 1000 years in India. It started as an informal association of traders, farmers and households within communities with an objective of converting small savings into lump sum. Majority of dealings in Chit funds are in cash, hence awareness about rules and regulations governing chit funds is beneficial to the participants. In 1887, Collector of the erstwhile Malabar district of the Madras Presidency, described the custom of chit funds as informal arrangement to meet funds requirement among friends group in that region. Some economic historians stated chit fund lotteries as mode of raising money for special events like Marriages. Reports suggest existence of large number of chit funds every year in the state of Kerala in 1930s and 1940s. Twentieth century witnessed formalization of chit funds through several stages. Institutional Organisations including partnership firms, limited liability firms, cooperative societies and Banks entered the Chit Fund business. Kerala Government introduced first State run chit fund, Kerala State Financial Enterprises, in 1969 with an explicit purpose to provide an alternative to unscrupulous private-sector chit fund operators. Chit funds were more popular in the Southern states than North India, excepting Haryana, Delhi, Gujarat and Maharashtra.
HOW IT WORKS: Chit Fund Act 1982, defines Chit as a transaction irrespective of nomenclature under which a person enters into an informal or formal arrangement with group of persons who will subscribe a certain sum of money periodically for a definite period and each such participant shall, in his turn, as determined by lottery or auction or by tender or in such other manner as described in the Chit agreement, be entitled to the lump sum.The system also acts as a borrowing mode where subscribers/participants are paid large sums even before all the installments are paid periodically. It also acts as a savings system, where every subscriber contributes every month with an objective of getting a large sum in future, in addition to getting share of surpluses when auction method is applied. Both Organizers and Subscribers of the Chit fund run the credit risk where Subscribers might default in periodic payment. Organised Chit fund companies have a legal recourse against defaulters, which is a time consuming process. In order to mitigate risk, some of the organizers ask subscribers who win auctions to produce sureties for their future liabilities.
REGULATIONS: Organised Chit funds are required to register with the Registrar of firms, Societies and Chits. Though these chit funds are not required to be registered under RBI Act, Chit fund companies are regulated under Deposit accepting Non-Banking Companies. The following acts were promulgated over a period of time to regulate Chit Funds by State Governments and the Central Government:-
* Tamil Nadu Chit Funds Act, 1961
* The Andhra Pradesh Chit Funds Act, 1971
* Kerala Chitties Act, 1975
* Maharashtra Chit Fund Act, 1975
* Central Government Chit Funds Act, 1982
* The Chit Funds (Karnataka) Rules, 1983
* Delhi Chit Funds Rules, 2007
* Kerala Chit Funds Rules 2012 and Amendment 2016
The capital requirement was Rs 1 lakh for establishing Chit fund and at least 10% of the profits should be transferred to a reserve fund. The amount of discount (bid) is capped at 40% of the total Chit fund value. Parliament has passed Chit Funds (Amendment) Bill, 2019, which prohibits a chit fund being created without prior sanction of a State Government. The amendments have been made to facilitate disciplined growth of the Chit fund sector to remove lacunae and enable greater financial inclusion of the populace. Under the legislation, the prescribed ceiling of aggregate chit fund amount for individuals has been enhanced to Rs 3 lakhs and in case of firms, the limit stands raised to Rs 18 lakhs from extant Rs 6 lakhs.
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