Chit Funds Act: An Overview

A chit fund functions in a way that consists of a group of members, known as subscribers. The group is brought together, and its activities are managed by an organizer, which might be a business, a person, a close family member, or a neighbor. The organizer gets rewarded for their work either monthly or at withdrawal time. In casual circumstances, the charge may be skipped.

Features of the Chit Fund

Chit fund has the following characteristics 

  • They have a fixed value and time frame.

  • They operate much like microfinance organizations.

  • Credits and savings are combined in a single plan.

  • They provide for the monetary requirements of low-income households.

  • They enable the contributors' deposits to be consolidated into a single total. Three mechanisms carry this out.

  • Safe Deposits: A person can place money in a safe deposit now and take advantage of the lump sum afterwards.

  • Loans: A person has the option to take out a loan now and make payments over time.

  • In the event of an emergency, insurance enables the depositor to use the lump sum amount.

  • Compared to moneylenders, they offer loans at cheaper interest rates.

What Purposes Do Chit Funds Serve?

The following uses for chit money are listed 

  • They deal with consumption requirements.

  • They assist in times of need, such as when a daughter gets married.

  • They aid a person in making purchases like buying a house or paying for their children's education.

  • They aid in financing more expensive loans from moneylenders.

  • They take care of small firms' capital requirements.

Critical Analysis

According to the Act, the terms "chit fund," "chitty," or "Kuri" must appear in the name of every registered chit fund. No other person or organization has the right to use these names; only chit funds are permitted to use them. Chit enterprises are the only kind of business that registered chit funds may operate.

The foreman is permitted to start or operate many chits at once. Before beginning any chitty, the state government must first provide its consent. Any type of fund that does not have the prior consent of the relevant state government is prohibited.

Prior to the start of the chit plan, the foreman must deposit 100% of the chit value with the Registrar of Chits. On the successful conclusion of the chit cycle, the foreman will get a reimbursement of this deposit. A certified chartered accountant must audit the financial statements of any Chit Fund registered under this Act.

According to the Act, the maximum bid amount must be capped at 40% for all registered chit funds. Based on the scheme's chit value, this 40% is determined. This bid cap is used to prevent the bid from rising out of control and the bidder from subsequently defaulting.


The following are the disadvantages 

  • High cost per transaction.

  • It is well recognized that chit funds are susceptible to fraud.

  • Saradha Chit Fund Scam − The Saradha Group was the con artist. Before it disintegrated in 2013, the organization amassed 200 to 300 billion rupees.

  • Rose Valley Chit Fund Scandal − More than Rs 15,000 crore was purportedly taken from depositors all throughout India in the Rose Valley scam, which was a larger financial fraud than the Saradha scam.

  • Linked to a variety of dangers. As follows 

    • The foreman misusing the pooled cash is the largest danger associated with a chit fund.

    • Members occasionally cease paying their dues after placing the opening bid.

Role of SEBI and RBI

The Reserve Bank of India (RBI) oversees the regulation of banks and other NBFCs, but it does not oversee the chit fund industry. Chit subscriptions are not considered deposits under the Reserve Bank of India Act, 1934, even if chit funds do take deposits. The RBI can, however, advise state governments on regulatory matters, like formulating laws or exempting particular chit funds. As the overseer of the securities market, SEBI controls collective investment programs. However, the SEBI Act of 1992 expressly states that chit funds are not collective investment plans. According to SEBI's examination into the current Saradha Group matter, Sarada was in fact running a collective investment plan without SEBI's consent.


Above all, chit funds are unreliable unless they come from a human group made up of friends and family that you have a high level of confidence in. I disagree that one should invest money in chit funds outside of their social network. It could be logical for residents of smaller cities to admire them. As a last reminder, these chit funds are not places where you should put your hard-earned money. If you don't want to take that type of risk, avoid them. Because of their short maturity time and low subscription price, chit funds are a special means for those with low and moderate incomes to save money. There is no absolute law to regulate.

Frequently Asked Questions

Q1. How does a digital chit fund operate?

Ans. In an online chit fund, a number of participants each contribute a specified sum over a period of time equal to the number of participants. A group member receives the chit fund sum through an auction. The bidder or claimant who offers the lowest chit fund amount receives the fund value. After removing the organizer's commission or charge, the sum the winning bidder forfeits is then divided evenly among the remaining participants. The dividend is the sum that each member receives. Even after claiming the sum of the chit fund, the winning member must continue to contribute.

Q2. What distinguishes a digital chit fund from a conventional or physical one?

Ans. This traditional method of funding now has a more modern, streamlined appearance because to technology and legislative reforms. Online chit fund schemes are becoming more popular because of their simplicity, high liquidity, low risk, respectable returns, and lack of paperwork. Registered online chit funds are very transparent, technologically advanced, quick, and effective. hence decreasing the likelihood of fraud. Additionally, it is more practical since participants may register, bid, and transfer funds online without having to physically gather to conduct the auction and disperse the winning bids.