Chit Fund

Chit Funds: an overview Chit

Background

Chit fund schemes have a long History  in India. In fact they are the Indian version of the rotating Savings and credit associations that have long flourished in different parts of the world, especially in developing countries. this is because chit funds have proved extremely useful in meeting domestic and business financial needs. They are actually an easy and profitable means of access to  finance by all business enterprises

The uniqueness of this industry

Over  other financial intermediaries is the ability of the chit operators to evaluate the chit operators to evaluate the intrinsic strength of potential clients mainly on the faith in the subscriber’s ability to repay and its help to all income groups. businessmen etc. who are often wedged between the exorbitant cost of the money lenders and the stringent procedures of the bank

The chit is also seen note merely as an investment but a drop-by-drop plan to get lump sum finance for marriage, education. housing business etc at a future date The chit funds are of a self-liquidating nature and take on the character of mutual benefit schemes. The presence of more than30,000 chit operators generation several million employment opportunities either directly or indirectly. Speaks volumes of its strength in our national economy.

The organized chit fund ensures greater transparency and accountability in its operations which in turn contributes to the members’ confidence in the scheme. Naturally the risk involved in investing in an organized chit fund is much less than with an unorganised fund.

 Functioning

Every Chit scheme has a predetermined value, duration and membership. It admits members, usually in relation to its duration, each of whom a fixed amount at regular intervals (every day, week or month, depending on the scheme’s rules) to what is known as a ‘pot’.

This pot is then auctioned every month and the proceeds given to the highest  highest  bidder, called the ‘Prized Subscriber’, Who offers the highest discount, which is deducted from the total residual pot before it is handed over to that winning bidder. The discount money is distributed among all the members of that chit as a dividend. In the required contribution is reduced by the amount of the dividend.

The funds generally permit multiple-membership in each scheme allowing each member to contribute more than once and take part in as many auctions.

The big advantage over banks and other financial institutions that they avoid heavy documentation. Usually, income and address proof with up to five guarantors or gold will suffice for  becoming a new member with chit funds. Most require members to have a bank account since all transactions are necessarily through cheque payments.

The auction

On a predetermined date, chit managers auction a chit and interested members assemble usually in the manager’s cabin. Preliminaries take about five minutes, the bidding another five, at the end of which the auction bell rings, and the functioncloses five minutes later.

The highest bid is the winning bid but, in case there is an equal bid, the decision is made by means of a draw. When no members requires a lone, a draw is conducted among the non bidders and the selected member gets the loan minus a minimum bid of 5%.

Uses of chits

While there is no need to specify the purpose of the bid, households use the loan for marriages, buying property and vehicles and education. Chit funds help companies to save their excess cash and have access to easy finance to meet emergencies, also as working capital or business expansion.

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