A Study about Chit Funds – A Boon to the Small Enterprises
Introduction: Chit funds are the Indian equivalent of the Rotating Savings and Credit Associations (ROSCA) that are famous throughout the world. ROSCAs are a means to ’save and borrow’ at the same time. It is considered one of the best instruments to cater to the needs of the poor. The concept of chit funds originated more than 1000 years ago. Initially it was in the form of an informal association of traders and households within communities, wherein the members contributed some money in return for an accumulated sum at the end of the tenure. Participation in chit funds were mainly for the purpose of purchasing some property or, in other words, for ’consumption’ purposes. However, in recent times, there has been tremendous alteration in the constitution and functioning of chit funds.
How Do Chits Work?: A chit scheme generally has a predetermined value and duration. Each scheme admits a particular number of members (generally equal to the duration of the scheme), who contribute a certain sum of money every month (or everyday) to the ’pot’. The ’pot’ is then auctioned out every month. The highest bidder (also known as the prized subscriber) wins the ’pot’ for that month. The bid amount is also called the ’discount’ and the prized subscriber wins the sum of money equal to the chit value less the discount. The discount money is then distributed among the rest of the members (or the non-prized subscribers) as ’dividend’ and in the subsequent month, the required contribution is brought down by the amount of dividend. Keep reading…
