Chit fund in India: how chit funds work, and how to run a group safely
In India a chit fund is a savings scheme in which a group of subscribers pays a fixed amount in regular instalments, and each period one subscriber receives the pot. Unlike a simple rotating group, a chit fund usually decides who gets the pot by auction: the subscribers who need money most bid for it, and the lowest bid wins. The bid amount is shared among the other members.
The same idea goes by many local names across India, including kuri, vishi, bishi and nidhi. In Gujarat it is often called visi. The name changes from place to place, but the question for the organizer is the same: who has paid, and whose turn is next.
What is the law on chit funds in India?
Chit funds are regulated by the Chit Funds Act, 1982. Under that Act a company or individual that runs a chit fund as a business needs to be registered, and chit funds are supervised by state governments. A registered chit fund has to follow rules on how the foreman (the person who runs it) handles subscriptions, the auctions and the security given by subscribers.
This is the key difference from a family arrangement. A chit fund run as a business by a company, with advertised schemes, agents and returns, is regulated. A group of relatives, friends or colleagues that pools money among themselves, with no company and no advertising, is an informal arrangement and is not a registered chit fund. Both can go wrong, but the protections are different.
How does a chit fund auction work?
- The foreman, or the organizer, sets up the chit with a total amount, a number of subscribers and a fixed monthly instalment.
- At each meeting, the subscribers who have not yet received the pot bid for it. A bid is usually a discount on the total, and the discount is shared among the subscribers.
- The lowest bid wins the pot for that period. The winner then continues to pay the instalments, but the winner has taken the money early.
- The cycle repeats until every subscriber has taken the pot once, or the chit ends.
In an informal group with no auction, the order is usually drawn by lots or agreed in advance. That is simpler, but it still needs a record that everyone can check.
What are the risks?
- Unregistered schemes. Some schemes call themselves chit funds, promise high returns, and recruit members who are not known to each other. Returns that are promised but cannot be paid are a warning sign, and an unregistered scheme has none of the protections of a registered one.
- A subscriber stops paying after taking the pot. The subscribers still waiting carry the loss, and the organizer usually has to cover the gap.
- Disputed records. When payments and bids are recorded only on paper or in a chat group, they are hard to prove later.
- Lost trust. When the organizer is not clear about the rules, members stop paying and the group falls apart.
How do you keep a group safe?
Whatever the name, a group works best when the members know each other, the rules are agreed in writing before the first payment, and every payment is recorded in a way everyone can see. Keep the group to people you know, avoid any scheme that promises returns beyond what the members pay in, and check the registration of any company before you hand over money to it.
This guide does not give legal or tax advice. If your group handles large sums, or you are unsure whether a scheme needs to be registered, speak to a qualified adviser in your state.
How do you run a chit or kuri group with Savings Circle?
- Create the group. Choose “Chit fund” or “Committee” as the name type, or the word your group uses. Set the currency (Indian rupee is supported) and what each member pays per round.
- Add members from your contacts. They don’t need to install anything.
- Set the order. Run a random draw in front of everyone, or enter the order you agreed. A random draw saves its seed, so anyone can check later that it was not changed.
- Record payments as they come in, by cash, bank or UPI, with a screenshot as proof if you like. It works offline and syncs when you are back online.
- Remind the late ones. One tap opens WhatsApp, SMS or Telegram with a polite message ready to send.
- Record each payout. Every entry is dated. A correction is added as a new entry, and the original stays in the history.
Savings Circle is a record book. It does not run auctions, hold money or make payments, and it is not a registered chit fund. Members pay each other the way they already do; the app keeps the shared record of who paid, who is next and what is owed.
Other names and other places
Outside India the same kind of group is a kameti or committee in Pakistan, a tanda in Mexico, a susu in Ghana, a chama in Kenya, an arisan in Indonesia and a paluwagan in the Philippines. Economists call all of these rotating savings and credit associations, or ROSCAs. For a Pakistan-focused guide to the kameti, see the kameti guide.
Guides
- South Asia: committee, kameti, chit fund, bhishi, kitty party and samity
- Africa: susu, chama, ajo, adashe, equb, hagbad, stokvel, tontine, mukando and chilimba
- The Americas and the Caribbean: sou-sou, tanda, junta, lending circle and pardner
- Asia and the Pacific: arisan, paluwagan and hụi
- The Arab world: jam’iya