What is Chit Fund?

Chit Fund institution is indigenous, simple easy and readily understood and widely accepted by the rural and urban middle-class people. It is an user friendly savings cum borrowing instrument. Its aim is to pool small saving for being managed by a foreman who will act as a trustee- cum- supervisors for the process of collection and allotment for the pool amount to catch member by rotation. Chit funds represent a traditional form of saving-cum-credit institution evolved before the bank system was introduced in rural India.

Chit funds cater to the need of the rural as well as urban middle-class people. They meet their specific needs for large family functions, festivals, educational, housing, agriculture, occasional (cottage industries etc.) and medical expenses. There are many who avail themselves of this avenue for saving for a reasonable return.

Chit is a humble home grown handy artefact, which caters to the location-specific time-specific credit needs of the humble and the needy. State intervention into the day-to-day running of this immensely popular and useful credit institution has, by an dlarge, proved to be counter-productive and delay generating process with no commensurate benefits. Chit is a dual purpose institution of saving and borrowing. It is a unique body of borrowers and investors who have a common goal of mutual help.

Chit has no pre-determined interest or return-rate. The rate of return or cost of funds is determined by supply and demand, which is thrown up at the monthly auctions. Since chit is a subscriber's main source of pernnial credit and savings, irresponsible behaviour or conduct of the subscriber is relatively rare. Prudence and sincerity inform all its internal processes, because of the enlightened self interest of the subscriber members.

The most significant aspect of the chit fund business is the element of mutuality and participation by every subscriber.

In chit business, the interest rate if determined by the supply and demand situation is not imposed on the user by any external agency. It provides a right to the subscribers to access credit on providing necessary security, without any pressure on his self-respect.

The field is fully self-financing and completely independent of external support unlike rural self-help credit groups which lean on Government for financial needs.

The significance of Chit business can be realized from the fact that in Karnataka there were about 500 foreman who organized about 12500 (min) groups involving about 5,00,000 subscribers And about Rupees few hundred crores annual turnover as of 1993. In 2001 the volume of chit maybe estimated at Rs. multiple of 1000 crores. The chits' popularity is due to its simple and easy procedures.

The premises are also situated at places within easy reach. There is mutuality and transparency in the proceedings. The foremen are easily approachable and are responsible to the needs of the subscribers according to the financial status and capacity of the subscriber.

Chit fund is very valuable to those sections of business community which find it difficult to get their credit needs met by commercial banks who are reluctant to lend to this segment, mainly due to the administrative burden and cost involved in them.

In Karnataka, the chit fund has provided direct employment opportunities to over 35,000 people and indirect but full time employment opportunities to another one lakh people working as agents. If a proper legislative environment could be created that would encourage the entry of large and medium sized industrial houses into the business of chit funds, job creation in the next 10 yrs could be in the region of 10 lakh new jobs, without the Government having to make any capital investment.