Chit Funds and Informal Credit in India
Chit Funds: How They Work
In a chit fund, a group contributes every month and each month one member receives the whole pot, decided by auction or draw.
A chit fund is a savings-and-credit club run by an organiser.
Basic set-up
Suppose 20 members each pay a fixed sum monthly. Each month one member receives the total pot.
The auction
Members who need money early bid, accepting a discount. The discount is shared among the others as a dividend.
Foreman
The organiser, or foreman, manages the chit and earns a commission.
The Chit Funds Act
In India these are regulated by the Chit Funds Act, 1982 and state rules, including a cap on the foreman’s commission.
A member who takes the pot in month one is a borrower; one who waits until the end is a saver.
They are structured savings and lending arrangements.
- Members contribute regularly.
- One member receives the pot each month.
- Discounts create dividends.
- The 1982 Act regulates chits.
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