A chit fund is a type of rotating savings and credit association system practiced in India. Chit fund schemes may be organized by financial institutions, or informally among friends, relatives, trade community, or neighbors. In simple terms, a chit fund is a savings cum borrowings scheme, wherein a few people (known as members or subscribers) come together and invest a fixed amount every month for a fixed period. In some variations of chit funds, the savings are for a specific purpose.
One of the best example of unorganized “Chit Fund” scheme is our own “Kitty parties”, which rely more on pooling the savings and redistribution to the winner for shopping of jewellery, expensive jewellery etc.
Even poor living in shanties, zopadpatties, bastis also pool their savings and redistribute to the winner every month for buying some FMCG Luxury item like Freeze, TV etc.
Vishi (20s) Schemes: It is an informal version of the chit funds and the money, the type of people involved, and the violence unleashed are transforming many peaceful little known towns into a gangster's haven. The money game is known as Vishi or Bisi for it normally involves 20 (“vis” in Gujarati “BisI) players. It works like a kitty. A group of, 20 people get together and decide to pool in Rs 20,000 each every month. This amount, Rs 4 lakh in this case, is then put on auction. The members bid for the kitty and the one willing to give up the highest chunk of the total clinches it. Supposing the winner settles for Rs 3.5 lakh, the remaining Rs 50,000 is distributed as profit among all the members. And the cycle carries on, with each member continuing to contribute Rs 20,000 every month. Only next time the winner is barred from bidding. The trouble starts when a member refuses to pay instalments after winning the “Vishi” - a common occurrence among the less affluent who are exposed to sudden wealth. Often, the other members also refuse to pay up. The organiser then lets loose his goondas on the truant members. Unregistered chit funds are run in a manner very similar to vishi schemes.
Vishi schemes, community saving schemes popularly known as kuries outside Gujarat, and small unregistered chit funds that invest in stock markets, are struggling to return money invested by investors. There are number of unregistered chit fund managers and vishi sanchalaks (vishi bookmaker) out there struggling to recover public money invested in the market.
How it works?
A chit fund comprises a group of members, called subscribers. An organizer, a company or a trusted relative or neighbor, brings the group together and administers the activities of the group. For their efforts, the organizer is either compensated each month or at withdrawal time. The fund starts at an announced date and continues for the number of months equal to the number of subscribers. Each month, the subscribers put in their monthly installments into the pot. Then, an open auction is conducted to determine the lowest sum a subscriber is willing to take that month. For example, if the monthly installment is Rs.1000 and there are 50 members, the pot in the first month will contain Rs.50,000. If the auction determines a winner who is willing to accept Rs.45,000 for that month, the surplus Rs.5,000 is distributed to the other 49 members, after subtracting fees paid to the organizer. The subscriber who won the auction was able to access Rs.45,000 in the first month and the others benefited in their share of the Rs.5,000 surplus. The process repeats, distributing the auction amount to one member each month. All of the other subscribers, including the ones who took their share in a previous month, continue paying the monthly installments. 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. Variations of the system omit the auction part, instead drawing a winner by picking a chit out of a box.
What are risks?
· Credit risk-Defaults of subscriber and collective contributions gets disturbed.
· This is not regulated by any independent Regulators like RBI, SEBI.
· We have seen many defaults and scams, very recently in Bengal and this is public knowledge.
· Chit fund payments are not insured by the government, the system is a riskier method of saving than using a bank savings account
Which are famous cases of defaults?
Ø Sharda Chit Funds of West Bengal
Ø Sahara Schemes
Many of such schemes are run by local politicians and when scam unfolds, nothing happens.
This also acts as money laundering vehicle for people affiliated with politicians. Eg. Sahara (having political support base) is facing serious enquiries from SEBI, ED, Income Tax & the case is monitored by SC.
Hence be careful. Avoidable.
Regulator: None. But State Government can monitor through police, particularly cases of cheating, mismanagement etc.