History of chit funds

Chit Funds are indigenous financial institutions unique to South India and predating commercial banks. They have stood the test of time, as evidenced by the growth in the number of chit fund companies in the South. However, the importance of any financial institution cannot be judged by its numerical strength alone, but by its performance.


Tracing back the history of the origin of chit funds reveals that they evolved at a time when banking facilities had not developed, thus filling an important credit gap in the economy. But with the growth of banks, chit funds were doomed to closure.


However, on the contrary, vast expansions in the chit fund business were witnessed over the years, neck to neck with that of the banking system. Proof enough that chit funds continue to fill the credit gap in the developing economy of our country. Today chit fund companies are recognized as important credit and investment agencies.

Why use Chit Funds?

 In many parts of India, Chit Funds address gaps left by the traditional banking sector. They mobilize huge amounts of small savings, and in return allow members to have access in the form of loans to lump sum amount of money that they would often not be able to get from traditional banks.

Easy accessibility and flexibility are important aspects of this form of financing. Compared to banks, Chit Funds require less documentation, are more flexible about collateral, and allows to determine own interest rate (within the constraints of a given chit scheme). Furthermore, there is no need to determine upfront whether funds are used for saving or borrowing.

This is a salient feature of chit funds as it not only puts in place a disciplined saving mechanism, but it also allows to access cash when needed. In addition, as Chit Funds use the funds of the participants there is much less capital requirements for the institution (unlike banks). Literature shows that the primary uses of Chit Funds are the following:-


 To address consumption needs such as marriage, education, property purchase and so on.


 To pay off costlier loans from outside sources like loan from money lenders.


 To address working capital, business expansion or start-up capital needs of small businesses.


 For emergency needs or simply as savings for future needs.


Our survey results also show that Chit Funds are mainly used as a tool for saving and as a source of loan for consumption, business and emergency purposes.

The Chit Funds Act, 1982


The Chit Funds Act, 1982 39 is the Central Act applicable to the whole of India, introduced to ensure uniformity in Chit business. It prevents the Chit Fund institutions from taking advantages either in the absence of any laws governing business in any state or exploiting the shortcomings in the administration of the Act in certain states. A Central Act is preferable to various State Acts because of the following reasons:



The basic characteristics of Chit Funds in the country are similar and a uniform legislation can treat them all alike. Many Chit Funds have branches in more than one state and independent Act in each state will, not only create difficulties, but also pave the way for lopsided development of Chits in various states.

The mushroom growth of Chit Funds in many states, where there are no legislative controls and also the failure of improperly managed Chit Funds can be attributed to the absence of comprehensive legislation. Absence of uniform legislation may result in the growth of Chit Funds on unhealthy lines 40.



The Central Act gave full freedom to the state governments to adopt the same in their respective states as and when they desire. However many statesincluding Kerala have not yet adopted the Central Chit Funds Act.

The Act, 1982 has fixed the limit of aggregate business that can be done by the entities, as Rs.25,OOO in the case of an individual foreman, as Rs. One Lakh for firms with four or more partners, and for a company or society, ten times the net owned funds.

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 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.