Chit Fund Working Model

By Author: Santhosh Kumar
Total Articles: 51
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Chit Fund Working Model

In India, if the value of the chit run by a chit fund operator exceeds Rs. 100 and is not registered, it is considered to be an illegal chit fund. Every institutionalized and registered chit fund is safe and sound and offer greatest support to its customers. Before understanding the working model of chit fund, let us know few terminologies which are specifically used in the working of such schemes.
1. Chit Agreement - a legal contract with all detail of rules and regulations signed by foreman and investors
2. Chit Group – group of investors who are the part of registered chit fund group
3. Chit amount – the amount paid by the investors on specific period
4. Foreman – person/company who maintains records, responsible for collection of money and heads the auctions
5. Foreman’s Commission - 5% of the gross chit fund amount paid to the foreman
6. Prize money – Summation of all periodic collections minus maximum bidding amount (maximum bidding amount is inclusive of foreman’s commission)

Auction Chits or Business Chits

Under Auction Chits ...
... or Business Chits. The capital, less of foreman’s commission. is kept open for bidding. The members present or by proxy, offer discount on the amount and the one who offers the highest Discount (or accept the lowest prize amount) is declared the prize-winner. In this auction system. it becomes possible for needy members to bid for an amount depending upon the urgency of their need. Auction Chits are highly beneficial to businessmen who need credit. By joining an Auction Chit of Their choice and paying subscription for one or two months, they can bid for a fairly big sum.

The difference between Chit capital and the bid amount is distributed as dividend to the members - both prized and non-prized. Under conditions of ceiling on bid. When more than one member offers the ceiling Rate; there would be a draw among such members to decide the prize-winner. The Auction Chits are also known as Business Chits.