Chit fund
Topic: Banking Regulation, NPAs and Financial Stability · NCERT: Beyond NCERT
Meaning
A chit fund is a savings-cum-borrowing group. Members pay a fixed amount at regular intervals. In each round, the pooled sum goes to one member, chosen by auction or by lot. Members who take the money early are borrowing. Members who wait are saving. Chit funds are legal. They are regulated by state governments under the Chit Funds Act 1982, not by RBI.
Example
Twenty members each pay Rs 5,000 a month, so the pool is Rs 1 lakh every month. A member who needs money urgently bids to take Rs 90,000 now. The Rs 10,000 discount is shared among the other members as a dividend. Over 20 months, every member gets the pool once.
Don't confuse with
- Ponzi scheme: this is a fraud that pays "returns" to earlier investors out of new investors' money and collapses when new money stops coming in. Saradha (2013) was often loosely called a chit fund, but it was a Ponzi-type scheme.
Related concepts
- Letter of undertaking
- Know Your Customer
- Legal Entity Identifier
- Ponzi scheme
- Subprime lending
- Systemic risk
- Stress test