Chit Funds in India
What are Chit Funds?
Chit Fund is one of the popular savings options in India. It is both a savings and a credit product. Chit funds may be organized by financial institutions or informally between a group of people or as microfinance organizations.
Chit fund is defined under Section 2(b) of the Chit Fund Act, 1982. As per this act, a chit fund is a type of rotating savings and agreement among various persons. These people may be friends, relatives, and family members. They subscribe to a certain sum of money for a specified time. Chit Funds may also be known as the Chitty, Chit, Kitty over India.

How does Chit Funds work?
Once the chit group comes into existence, the foreman needs to register the chit company with the registrar of chits. Foreman is the person who arranges the chit. He is responsible for bringing members together, collecting money from investors, keeping records, and presiding over auctions. He gets a fixed compensation (5% of the pooled amount) for his work.
The chit owner has to pay an amount equal to 100% of the chit value as security with the registrar of chits. The amount so deposited can only be withdrawn after the said chit group is closed and every subscriber has been paid the due amount. However, the chit is not legally bound to pay the amount deposited by the subscriber if it is not registered with the register of chits.
When a chit group is formed, the value of the chit, the monthly contribution, and tenure of the chit is decided. All the members of the chit group have to deposit the amount regularly. The number of investors will always be equal to the number of times the contributions are to be made to ensure that every member gets a chance to withdraw the chit amount.
When the money is collected, any of the members who need the money can bid in the auction. Here bidding means that you have to specify the amount you are ready to forego from the total value of the chit. The member who quotes the highest discount will win the bid. The discount in turn is distributed among all the other members as a dividend.
For example, if the chit value is Rs.5 lakhs, you can choose to forego Rs.1 lakh and accept only Rs.4 lakhs. Here, Rs.1 lakh is known as a discount. However, the monthly contribution remains unchanged. This 1 lakh is distributed equally among the chit members.
After the first installment is deposited by all members, When the money is collected, any of the members who need the money can bid for an auction. The member who quotes the highest discount will get the money. The discount in turn is distributed among all the other members as a dividend.
What are the regulations?
The Chit Fund Act, 1982 regulates the Chit Funds in India. As per this act, registration of the chit fund business can be done by the respective state governments.
As per section 61 of The Chit Fund Act 1982, the Chit Registrar is appointed by the Government. The Registrar of chit fund and the State Government under whose purview the chit comes under are authorized to take regulatory action in the cases related to chit fund fraud.
The Chit Funds (Amendment) Act of 2019 recognize the industry and introduced tighter operational guidelines for chit funds to protect the investors. For example, an amendment has been made that the word ‘chit’ (along with other terms used to mean chit funds) should only be used by persons/companies managing chit funds.
Currently, the RBI is acting in an advisory role, state-level registrars handle on-group operations and the Central Government is the main body supervising chit funds. The chit fund manager or the foreman needs to get separate approvals for introducing new schemes, submitting collection and auction records regularly, and also maintains deposit security.
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Advantages of Chit funds
Easy access to high amounts of liquid cash whenever needed.
Risks of Chit funds
Even though chit funds are regulated by the government, there are multiple risks involved in both registered and unregistered chit funds.
- There is no guarantee of returns.
- The interest rates earned are usually much lower than fixed deposits of banks.
- Possibility of a member defaulting on future payments after winning the bid.
- The chit manager may collect the funds and may become untraceable.
- High chances of misappropriation by the chit manager.
- A member in urgent need of money might end up paying a higher discount.
Major Chit Fund Scams
The PACL Scam
The company started operations in 1982. PACL and Pearls Golden Forest Limited (PGFL) illegally raised money from the poor via sale and development of agriculture land for 18 long years. The company made false allotments of land to investors.
The PACL scam amounted to approximately Rs 49,100 crore. It is considered to be one of the biggest chit-fund scams in India. Due to the fraud, nearly 5.6 Crore Investors did not receive their money.
The Saradha scheme
This scheme was run by the Saradha Group. It was started in the early 2000s by the businessman Sudipto Sen. The scheme became popular among small investors in a very short time since it promised high returns. A wide network of agents who collected money was paid commissions of over 25 percent.
The Saradha Group raised around Rs 2,500 crores in a few years. The company used many marketing means to build its brand like celebrity endorsements. It used to sponsor cultural events and invested in popular football clubs to attract more investors.
Problems started in 2012 when SEBI asked the group to obtain the regulator’s permission to run its schemes and stop accepting money from investors. By January 2013, Saradha Group’s cash inflows were found to be lower than its outflows. The scheme collapsed by April, with agents and investors to file police complaints.
What to do in case you get involved in a chit fund scam?
If the chit fund you have put your money in is a registered chit fund and is involved in a scam, you can do either one or all of the below-listed actions.
- Send a Legal Notice to pay the dues.
- Lodge a criminal complaint with Police.
- File a money recovery suit in the court.
If the chit fund you have invested is not registered, there is very little chance of recovery.