Concept of Chit fund
A chit fund is a savings and borrowing, 2 in 1 scheme which has its roots in India. A chit fund is governed under The Chit Funds Act 1982 and is not regulated by the RBI like Non-Banking Finance Companies. Chit funds are commonly held among family members, neighbours, etc, or by Companies which specialize in Chit fund business. A person (Foreman, as per the Chit Funds Act 1982) makes an agreement with a certain number of people (Members) to contribute money together for a specified period of time and each member claims the prize amount by the end.
Who can start Chit fund Business
As per the Chit Funds Act 1982, an individual, Association of Partnership Firm, Society, Company can engage in the business of Chit fund with the prior approval of Registrar of Chits.
Why Register a Chit fund
Chit fund has long been India’s favourite saving scheme in the unorganized finance sector, so why should you register the business? Unregistered chit funds can be created by anyone — from a group of friends to your neighbour, that service a certain area. They operate on the basis of trust, but the lack of regulation makes it easy for people to misappropriate money. The unregistered Chit funds are estimated to be worth over Rs 100 crore illegal. On the other hand, registered chit funds are regulated under the Chit Fund Act of 1982, and hence the trustworthiness and credibility comes along with that could be a great asset if you plan to operate on a wider market.
The person, who intends to conduct a Chit fund business, shall secure the Certificate of Commencement of Chit from the Registrar of Chits of the concerned District. For this, an application has to be made accompanied by an Agreement of Chit in the prescribed format, proof of deposit of security equal to the amount of chit which propose to be started, a certificate of sufficiency, and other documents as required by the registrar including ID Proof, Address proof, etc. A nominal fee is levied by the Government with the application, also stamp duty as per the Kerala stamp duty rates are applicable for Agreement of Chit.
Overview of Compliances
- A company which propose to undertake Chit business shall have a minimum paid up capital of Rs. One lakh .
- It must use one of the words “chit fund”, “chitty” or “Kuri” as part of the Company name.
- The Company should keep books of accounts, registers, passbook of chit subscribers, and documents as prescribed under the Act.
- Apart from this, proper record of minutes of each chit “draw” shall be maintained and filed with the Registrar of Chits.
- Any changes in the registered office, or any other changes in the Chit agreement should be done only with the consent of the members and the same shall be conveyed to the Registrar.
Fin-tech as the Future of Chit Fund
There is untapped potential in the digitalization of Chit industry of India. Over the last couple of years, several fin-tech players are in the business of data analytics in the chit fund sector. In India the unbanked population is around 19%, but most of them have both a smart phone and access to Internet. Despite the Popularity of Chit funds, it suffers from a bad reputation owing to recent scams and to the general perception of being “unorganized”. Fintech Chit funds are an opportunity for start- ups to step in to bridge this trust gap and make it more accessible to “digital India”. It can enable chit funds to scale across India and not be limited to a narrow catchment area.