Auction Chits or Business Chits

 

Under Auction Chits or Business Chits. The capital, less of foreman’s commission. is kept open for bidding. The members present or by proxy, offer discount on the amount and the one who offers the highest Discount (or accept the lowest prize amount) is declared the prize-winner. In this auction system. it becomes possible for needy members to bid for an amount depending upon the urgency of their need. Auction Chits are highly beneficial to businessmen who need credit. By joining an Auction Chit of Their choice and paying subscription for one or two months, they can bid for a fairly big sum.

 

The difference between Chit capital and the bid amount is distributed as dividend to the members – both prized and non-prized. Under conditions of ceiling on bid. When more than one member offers the ceiling Rate; there would be a draw among such members to decide the prize-winner. The Auction Chits are also known as Business Chits.

Chit Fund Working Model

 

In India, if the value of the chit run by a chit fund operator exceeds Rs. 100 and is not registered, it is considered to be an illegal chit fund. Every institutionalized and registered chit fund is safe and sound and offer greatest support to its customers. Before understanding the working model of chit fund, let us know few terminologies which are specifically used in the working of such schemes.

 

  1. Chit Agreement – a legal contract with all detail of rules and regulations signed by foreman and investors
  2. Chit Group – group of investors who are the part of registered chit fund group
  3. Chit amount – the amount paid by the investors on specific period
  4. Foreman – person/company who maintains records, responsible for collection of money and heads the auctions
  5. Foreman’s Commission – 5% of the gross chit fund amount paid to the foreman
  6. Prize money – Summation of all periodic collections minus maximum bidding amount (maximum bidding amount is inclusive of foreman’s commission)

Chit Funds: Meaning

 ▫a transaction by whatever name

▫wherein a person enters into an agreement with a specified number of persons

▫every one of them shall subscribe a certain sum of money by way of periodical installments over a definite period and

▫that each such subscriber shall, in his turn, as determined by lot or by auction or in any other manner as in the chit agreement, be entitled to the prize amount.

 

THE ORIGIN OF CHIT

 The word ‘Chit’, suggests the origin of Chit Funds. ‘Chit’ means a written note on a small piece of paper. In the Malayalam language, it is known as ‘Kurr, which has been derived from ‘Kurippu’ (which means a piece of writing or script). The ‘Chitty’ or ‘Kuri’l is a derivative, the root being the ‘lot’. The foreman writes the name of each subscriber on a small piece of paper and folds it several times with the name inside for the purpose of deciding the prize-winner. He calls it the ‘Kuri’ or ‘Chit’ or ‘Narukku’ and in the transaction, one ‘Narukku’ also means one member.

How chit fund it works?

Chit funds operate in different ways, and this may lead to many fraudulent tactics practised by private firms. The basic necessity of conducting a ‘Chitty’ is a group of needy people called subscribers. The foreman — the company or person conducting the chitty — brings these people together and conducts the chitty. The foreman is also responsible for collecting the money from subscribers, presiding over the auctions, and keeping subscriber records. He is compensated by a fixed amount (generally 5% of gross chitty amount) monthly for his efforts. Other than that, the foreman has no specific privileges, she is just a chitty subscriber. A simple formula depicts the pattern of the chitty:

 

Monthly Premium × Duration in Months = Gross Amount

E.g., 1000 * 50 = 50,000/- Where 1000 is the maximum monthly contribution needed from a subscriber, 50 is the duration of the chitty in months and 50,000 is the maximum sum assured. The duration also equals the number of subscribers, as there must be (not more or less) one subscriber to receive the prize money every month.

 

The chitty starts on an announced date, every subscriber come together for the auction/lot. As per Kerala chit act, the minimum prize money of an auction is limited to 70% of the gross sum assured that is 35,000 in the above example. When there are more than one person willing to take this minimum sum, lots are conducted and the ‘Lucky subscriber’ gets the prize money for the month. If there is no person willing to take the minimum sum, then a reverse auction is conducted where subscribers open-bid for lower amounts; that is from 50,000 >> 49,000 >> 48,000, and so on. The person bidding the lowest sum will get the bid amount.

In both the cases the auction discount, that is the difference between the gross sum and auction amount, is equally distributed among subscribers or is deducted from their monthly premium. For example, if the auction is settled on a sum of 40,000, then the auction discount of 10,000 (50,000 – 40,000) is divided by 50 (the total number of subscribers) and every one gets a discount of 200. The same practice is repeated every month and every subscriber gets a chance of receiving some money.

 

Chit funds are considered microfinance organizations.

Contribution of Thrissur According to All Kerala Kuri Foremen’s Association, Kerala has around 5,000 chit companies, with Thrissur district accounting for the maximum of 3,000. These chit companies provide employment to about 35,000 persons directly and an equal number indirectly.

what is chit fund?

Chit fund

A Chit fund is a kind of savings scheme practiced in India. A chit fund company is a company that manages, conducts, or supervises such a chit fund, as defined in Section of the Chit Funds Act, 1982. According to Section 2(b) of the Chit Fund Act, 1982:

 

“Chit means a transaction whether called chit, chit fund, chitty, kuree or by any other name by or under which a person enters into an agreement with a specified number of persons that every one of them shall subscribe a certain sum of money (or a certain quantity of grain instead) by way of periodical installments over a definite period and that each such subscriber shall, in his turn, as determined by lot or by auction or by tender or in such other manner as may be specified in the chit agreement, be entitled to the prize amount”.

 

Such chit fund schemes may be conducted by organised financial institutions, or may be unorganised schemes conducted between friends or relatives. In some variations of chit funds, the savings are for a specific purpose. Chit funds also played an important role in the financial development of people of south Indian state of Kerala, by providing easier access to credit. In Kerala, chitty (chit fund) is a common phenomenon practiced by all sections of the society. A company named Kerala State Financial Enterprise exists under the Kerala State Government, whose main business activity is the chitty. Chit fund concept came into the eyes of people in 1800’s when Raja Rama Varma, ruler of erstwhile Cochin state gave a loan to a Syrian Christian trader, by keeping a certain portion of it to himself for other expenses and later he drew that money for the principle of equity.