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THE WORKING OF A CHIT FUND SCHEME
The modus operandi of the chit fund, in a nutshell, is as follows:
The foreman of the fund collects a specific periodic subscription from each of a certain number of subscriber-members. The total of the periodic subscription, called the capital of the chit fund, is given out periodically as the prize amount to any one of the members through a system of auction. There will be many periodical installments as there are members. Thus each members gets an opportunity to receive the prize amount once during the tenure of the scheme. All members contribute towards the periodic subscription till the end of the duration of the chit scheme.
The scheme involves the following functions:
1.Pooling together of scattered sums of a group of individuals;
2.Loaning out of the pooled amount to a member of the group; and
3.Continuing the process of collection and distribution of amounts for a certain definite period. This time-bound function of collecting and distribution of funds is different from the function of other financial intermediaries.
Let us illustrate by way of an example. A chit scheme with a duration of 40 months and a face value of Rs.10,00,000/- will have monthly subscription of Rs.25,000/-. There will be, conventionally, 40 members in the scheme. Each member will pool in his subscriptions of Rs.25,000/- every month for 40 months and ends up paying Rs.10,00,000/- in the month in which he requires the consolidated amount.
Industrial practice, the dealings do not take place at face values. The subscribers who takes the fund in the beginning gets it at a discount. This discount is divided equally in favour of all the 25 members of the fund after providing for the service charges of the foreman. The capital funds received by subscribers in succeeding months shows a rising graph and with each passing month the subscribers get a bigger prize amount. The discount/dividend each month is the profit for all the subscribers have taken their prize money at the end of 25 months.
The actual practice, schemes may be structured for duration’s varying between 10 months to 100 months. The rests between successive auctions may be one week, fortnight, month, two months or one quarter year. The total number of subscribers that may enroll in a scheme may be 10 on the lower side and on the higher side there may be built into the chit schemes.
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