A chit fund is a type of rotating savings and credit association system practiced in India, Bangladesh, Sri Lanka, Pakistan and other Asian countries.
[3] In 1887, William Logan, erstwhile Collector of the Malabar district of the Madras Presidency, described the custom of chit funds among friend groups in that region.
[3] In 1894, economic historian Edith Simcox mentioned that chit fund lotteries were used to raise money for special events like weddings in South India.
[3] Institutional organizers including partnerships, limited liability firms, co-operatives and joint-stock banks entered the business.
[4] Due to the rigid provisions of the 1975 Kerala Chitties Act, many fund organizers moved to other states and started operating there.
[3] In urban areas of Tamil Nadu, Karnataka, Andhra Pradesh, Kerala, 5 to 10% of households participate in registered chit funds.
If the auction determines a winner who is willing to accept ₹45,000 for that month, the surplus ₹5,000 is distributed to the other 49 members, after subtracting fees paid to the organizer.
The system acts as a borrowing scheme, because subscribers are able to access large sums of money before they've paid the full amount.
It also acts as a savings system, because each subscriber contributes every month and may retrieve a large sum in the future while receiving their share of the surpluses.
[1] Chit fund companies can sue defaulters in court but the procedure is time-consuming and is unlikely to produce a timely settlement.
To reduce the risk of default, some organizers also require subscribers who win auctions to submit sureties for their future liabilities.
[7]Though they are not required to be registered under the RBI Act, chit funds are regulated as Miscellaneous Non-Banking Companies (MNBCs).