Time to get cracking on chit funds

Does money grow on trees? Yes, it does. That is what my parents thought when they invested Rs 600 in my name in a collective investment scheme floated by Esskayjay Plantations Ltd in August 1992. With its slogan “Money does grow on trees”, the company promised that “Rs 600 will grow over Rs 1,00,000 on tree in just 20 years”.

Fast forward to 2013, when time came to reap the benefits of our investments, we realised that the company had gone bust.  Repeated queries at the company’s registered address in Kolkata yielded no response. Last heard about the dubious firm is that market regulator Sebi has initiated prosecution proceedings against Esskayjay Plantations Ltd and its promoters for violation of Sebi’s  (Collective Investments Scheme) Regulations, 1999.

chit funds

The plight of gullible depositors of Sharadha Group is not surprising as many of us have been victims of Ponzi schemes, chit funds, illegal multi-level marketing , etc. The modus operandi of all the schemes is different from each other. While debate is on whether Saradha Group’s schemes can be labelled under the chit fund category, the spotlight is back on chit funds.

Widely popular in hinterland, chit fund is a vehicle for savings and borrowings and provides easy credit to meet your urgent fund requirements like marriage, health, education expenses, etc.

While households dabble in chit funds mainly to save cash on a daily basis to meet future needs, small traders and businessmen are big players in the industry as it offers them access to easy finance apart from saving their excess cash.

REASONS for chit-funds

RBI defines chit funds as “when a company enters into an agreement with a specified number of subscribers that every one of them shall subscribe a certain sum in instalments over a definite period and that every one of such subscribers shall in turn, as determined by tender or in such manner as may be provided for in the arrangement, be entitled to the prize amount.”

To elaborate on the business model- assuming that 20 depositors agree to pool in an amount of Rs 2,000 for 20 months i.e. for a total chit value of Rs.40,000/-, each depositor will get his chit amount when his turn comes by draw of lot or by auction.

During auction every month, the chit amount is given to the bidder who bids for the highest amount, not exceeding the maximum limit.

The amount, foregone by the subscriber is distributed as dividend amongst all the subscribers in every draw, after deducting 5% commission to be paid to the company or agents. 40% is the maximum bid allowed and the duration of chit is normally between 12 months to 50 months.


Suppose the winning bidder bids for Rs 25,000, he would get this amount and, the rest of the amount i.e. Rs. 15,000 is divided among the 20 depositors. This discount of Rs. 750 (i.e. 15000/20) is then returned back to each member. So the next month’s contribution would be Rs. 1250 (Rs. 2000- Rs. 750). The member winning the “prize money” must continue making payments each month but can no longer participate in the auction.

According to the All India Association of Chit Funds, there are about 10,000 Chit Funds registered in India with annual subscription of Rs 30,000 crore per annum and bulk of them operate in Tier II and Tier III towns. What explains this flourishing financial market that offers sky-high returns only to vanish?

Chit funds tapped into segments that banking channels thought was not lucrative. Lack of access to banking services and post office branches for investing their daily savings forced poor people to turn to their neighbourhood chit fund. Also, strong backing from local politicians, as evident in the Sharadha scam, allowed them to operate unhindered.

safety perception of chit funds

But it would be wrong to paint the entire chit fund industry as sham. Registered funds are regulated by the Chit Funds Act, 1982 under the control of state governments. Despite the industry’s history of scams and collapses, many genuine companies like Shriram Chits and others offer saving and borrowing options for the unbanked rural people and small businesses, thus furthering the cause of financial inclusion.

Since many chit funds have deeply penetrated into rural markets, only increased regulation can weed out fraudsters like Sharadha group. With state governments woefully ill-equipped to administer chit funds, it is time to bring chit-funds under the purview of Securities and Exchange Board of India (Sebi). On its part, the market watchdog needs to strengthen its monitoring mechanisms at the grassroot level to protect poor people from investment crooks.



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