Sr.No CHAPTER PAGE NO.

1 Executive Summary
2 Introduction
3 Chit Fund Overview
4 Design of the study
5 Company Profile
6 Analysis & Evaluation
7 Findings
8 Conclusion & Suggestions
9 Bibilography
 Executive Summary

Panchajanya Chits Pvt. Ltd (PCPL) is the 1st registered chit funds co., in the State of Karnataka,
registered under the Chit Funds Act 1982.

The company being registered under the Companies Act 1956, began its operations in 1984.
PCPL is the 1st licensed chit operators coming under the preview of Chit Fund Act, RBI and
Registrars of Company

The company has a member profile of more than 250 registered business class customers and
100 employed customers participating actively in its chit programmes / schemes

Presently the company offers the following chit schemes.

Chit Value Months No. of Members Monthly

Subscription
Rs. 1 lakh 40 40 2500
Rs. 5 lakhs 50 50 10000
Rs. 10 lakhs 25 25 40000
Rs. 25 lakhs 25 25 100000

STATEMENT OF PROBLEM
Chit funds in an age old unorganized non banking financial institution over the years both the
Government and players in this industry have tried to organize this important institution which
has been contributing significantly to the economic development of the country.

Both the foreman and subscribers were incurring losses due to unorganisation and lack of state
control over the chit business.

The Chit Funds Act 1982, was a major step towards organizing this activity. The efforts in this
direction have however not been totally successful. The chit fund operators still face problems
as to the default by subscribers on payment, insolvency of subscribers and fraudulent activities
of the subscriber.
 This project study is based on the pronounce of chit industry, Profitability in investing in Chit
funds and an attempt is made to find out the implications of running the chit funds and offer
suggestions.

SCOPE OF THE STUDY

The project report covers the Chit Fund Act 1982, the influencing authorities of chit funds, a
Company Profiles, an Analysis of the data collected from 50 respondents and their views on chit
business and chit funds as a source of finance. The Analysis and evaluation of responses about
the risks, advantages of the role of chit funds in the economic development of the country.

A reader of this project report would get exhaustive information on the operation of chit
business, the legal framework binding chit operators with reference to the PCPL.

OBJECTIVES OF THE STUDY

The general objectives of this project are to present a consolidated report on the Profitability
in investing in Chit funds of the Country with specific reference to PCPL.

The other objectives are : a) The functioning of chit funds. b) The legal framework governing the
chit fund industry. c) The member profile required for membership of PCPL. d) To know the
attitude of the customers about investing in the chit funds. e) Customer satisfaction
measurement of PCPL.

Research Design
a) Type of Research Study: A social research on Financial activity for economic development
using data collected from Respondents as primary data and theoretical data as secondary data.

b) Tool for Collection Data: Structured Questionnaire both for the members of the company
and the company.

c) Sample Design: Selected Targeted Company, i.e., PCPL and 50 Respondents selected as
Random Sample Method.

d) Method of Collecting Data: Interview method and investigative method.

 e) Method of Analysis: Quantitative and Descriptive Analysis.

Limitations
The project being for educational purpose, was restricted to the study of one chit fund operator
being PCPL. Since the study was restricted to one chit fund operator, the study cannot be
generalized. Lack of availability of theoretical information on chit funds was one of the major
constraints faced. Due to the constraints of time and money, the number of respondents has
been restricted to 50 members only. The information has been collected from the Chit Fund
Act, Company Profile and Respondents only.

On the analysis and evaluation of the data collected from the Respondents

The respondents are mostly from the business community and their atitude towards investing
is very favorable, and as far as PCPL the customers are very much satisfied with the services
provided by the company and are very loyal t tecopmany. The members have selected chit
funds because of various reasons among which following are important reasons.

i. Money is easily available.

ii. It can be repaid in easy monthly instalment.

iii. Procedural and documentation formalities are very less.

III SUGGESTIONS
Though the PCPL scheme has been well accepted by the members, yet based on the study
made the following suggestions are offered to improve functions of the Chit Fund.

1) The company PCPL can be more aggressive and increase its membership profile.

2) The risk factors can be covered by the company by making a good study of membership
profile.

3) The risk perception of subscriber can be overcome, by the company by making its transaction
more transparent.

4) The company can introduce more schemes, based on a survey and thus making the company
more attractive or beneficial to the members.

5) The company can reduce its commission charges from 5% to a lower rate, thus will increase
the scope for more individuals.

6) The company can consolidate the chit business by insuring each scheme against any risks.
7) The company can introduce incentive or schemes, so as to motivate the subscribers to make
prompt payment of subscription money.

8) The company can introduce lower amount chit schemes and tap the large lower middle
income group people.

9) The general public has to be communicated the advantages of Registered Chit Funds.

A study with Panchajanya Chit Pvt. Ltd.

Questionnaire for Members:

1. Name:

2. Qualification:

Under-Graduate Graduate Post-Graduate

3. Occupation:

Employed by Others Business Others

4. What type of Business:

5. Annual Income (If Employed):

6. What is your Annual Income ?

(If Salary earner)

2 3 Lakhs 3 4 Lakhs Above 4Lakhs

(If Business)

a. Turnover: Upto 25 lakhs 25-50 lakhs 50-1 crore

Above 1 Crore

(If Others)

2 3 Lakhs 3 4 Lakhs Above4Lakhs

7. Since when are you a member of PCPL?

1-2 yrs 2-3 yrs 3-5 yrs 5-10 yrs 10 or above

8.In which Chit group are you a member?

a. Chit Amount

Rs. 1 lakh Rs. 5 lakhs Rs. 10 lakhs Rs. 25 lakhs

9.When do you normally bid for the Chit?

B/w 2nd -10th month B/w 11th -20th month

B/w 21st -30th month 30th month Onwards

As need arises

10.What is the Maximum percentage you would forego?

5-10% 10-15% 15-20% 20% onwards

11.For what purpose do you use the Chit Amount?

Business Investment Private Property

Working Capital Business Assets

12.Do you give any Security, when you draw a Chit?

Yes No

13.What according to you are the advantages of Chit Fund?

Money is easily & quickly available Repayment in easy instalments

The profits distributed as dividend Interest is low Easy Membership

14.Is investing in Chit Funds profitable?

Yes No

15.Does investing in Chits gain more profit than any other Financial Institution?

Yes No

16.The interest rate on foregoing the Amount is

High Low

17.Are you happy with the Service being provided by PCPL?

Yes No

Signature.

Finance Meaning & Concept

Finance is the lifeblood of any business organization. It is the most vital resource of any
organization. In general, finance may be defined as The provision of money at the time it is
wanted. A firm secures capital it needs and employs it in activities, which generate returns on
invested capital. The firm employs capital in production and marketing functions.

Correspondence Concept and Definitions ( Meaning of Finance )

Finance is the process of conversion of accumulated funds to production use. It is commonly

known as Service of Money.

Finance may be defined as that administrative area or set of Administrative functions in an

organization which may be related with the arrangement of cash and credit so that the
organization may have the means to carry out its objective as satisfactorily as possible.

Corporation finance deals with the financial problems of corporate enterprises. These
problems include the financial aspects of the promotion of new enterprises and their
administrative during early development, the accounting problems connected with the
distinction between capital and income, the administrative questions created by growth and
expansion and finally the financial adjustment regarded for bolstering up or rehabilitation of a
corporation which has come into financial difficulties Encyclopedia of Social Services.
 Function of Finance
There are 2 types of Finance Functions

I. Managerial Functions.

II. Routine Functions.

Managerial Functions

1. Funds requirement decision

It relates to allocation of capital and involves decision to commit funds for long term assets
which would yield benefit in the future. Its significant aspect in the task of measuring the
prospective profitability of new investments.

2. Financing Decision
A finance manger has to decide when, where and how to acquire the funds to meet the firms
investment needs. The central issue before him into determines the proportion of equity and
debt. The central mix of debt and equity is known firms capital structure. The firms capital
structure is optimum when the market value of shares is maximized. When the shareholders
returns is maximized with minimum risk. The market value per share will be maximized and the
firms capital structure would be optimum.

3. Dividend Decision
The dividend decision should be analyzed in relation to the financing decision of the firm. This
decision involves the determination of the percentage of profits earned by the enterprise,
which is to be paid to its shareholders. A number of factors like market value of shares, the
trend of earnings, the top position of the shareholders play an important role in determining
the dividend policy of business.

4. Investment Decision
This relates to the decisions relating to the invetment in current capital assets. The finance
manager has to evaluate different investment proposals keeping in view the overall objective of
the enterprise.
The investment in current assets will depend on the credit and inventory policies persuaded by
the company. These policies are sent on the basis of sales forecast, demand and supply of
materials etc.

The investment decision determines the asset portfolios of the firm and the business risk
complexion of the firm as perceived by the investors. Investment decisions have the following
dimensions a. Scanning and selecting new investments. b. Managing existing efficiently. c.
Mergers and acquisitions including the international aspects in the context of globalisation
investment opportunities.

II Routine Functions
1. Operations Management.

2. Liquidity Organization.

3.Balance between receipts and payments.

Finance as base for economic activity

1. Capital Formation
Capital formation is the process of additions to the capital stock or capital goods. The addition
refers to the net additions or net investments, i.e. the total investment in the existing stock of
capital.

Capital formation facilitates capital widening, which result in new workesr provided with the
same level of capital as old workers. Where in growth in real capital stock is just equal to the
growth of labor force.

Capital formation makes possible capital deepening increasing the amount of capital that
individual worker has at his disposal.

It receives proficiency of labor, promotes technical advancement, helps overcome problems of

agriculture, helps in capital accumulation.

2. Capital Output Ratio

The capital output ratio may be defined as the relationship of investment in a given economy or
industry for a given period of time to the output of that economy or industry for a similar time
period.

The capital output ratio thus determines the rate at which output grows as a result of a given
volume of capital investment. The capital output ratio thus determines the actual output of a
countrys based on its capital investment. It depends upon technological and organizational
progress so that capital may be used more productively.

3. Dynamic Entrepreneurship
An entrepreneur or an organizer acts merely as an agency for bringing together the various
agents or factors of production and undertaking to remunerate them for the work done. An
entrepreneur always tries to widen his capital, under his profit margin, adopting new methods
of technology, and improved methods of production. Thus triggering economic growth of a
country. Finance being an important aspect, it is very vital role of entrepreneur in mobilizing
the resources.

4. Domestic Savings

Every individual makes some amount of savings either as bank deposits or jewellery or
investments in companies shares and debentures or his personal cash balance. This savings
habit regulates the fund mobilization cycle and there is enough purchasing power with every
individual. Once this stage is achieved, the countrys development rate moves with an upward
trend.

5. Technology and Technological Changes

Indias input investment in research and development activities both in public and private
sector has increased very much considerably. Thus as a result of this, the total output in
technological advancement also has increased efficiently. Improvements in technology or know
how results in better process of production, better products and services, and also a lower cost
of production, thus improving the level of economic activity.

6. Ensuring full capacity utilization

Ensuring a full capacity utilization would lead in economics of scale and prevent any kind of idle
in machine or man hours, thus leading to effective utilization of all the factors of production. A
full capacity utilization would lead to a full pledged employment and thus a proper distribution
of income.
 7. Literacy and Education
Literacy and education are the pillars of human resource. A well educated person can
contribute efficiently to the economic development of a country. A well educated citizen
understands his social, political, economic and natural responsibilities. He also understands his
role in the country and thus an effective contribution by such educated citizen booms up the
development or growth rule of a country.

8. Agriculture
Agriculture is the basic occupation of any developing or underdeveloped country. A country self
sufficient in its agro produce can compete itself for a position among others in the world.
However it is mainly industries that trigger growth, but industries are also dependent on
agriculture for raw materials. Labor and also for selling their products etc,. Agriculture is the
back bone of any economy

9. Banking
The banking structure or banking system in a country is very important. Banking basically
includes services, but its main component is mobilization of funds. With the new technological
advancement, banks have speedened up the process of transfer of money thus resulting in an
increase in the growth rate of the economy. Banks also create savings habits among the citizens
of the country. Apart from that the backs by their interest rates for lending, determine the
inflation index of a country, the lower the rat6e of interest, the lower the rate of increase in
inflation.

10.Employment
Employment refers to effective utilization of the available work force in the country. A 100 %
level of employment in a country ensures a contemporary growth in the economy. When the
employment rate is high, the other economic hassles such as poverty, etc get eradicated and
thus contributing to the national income and finally the per capita income of the country. It also
includes the workforce, occupational structure.

Chit Funds Overview

The economic development of a country depends upon the availability of resources. The main
activities that contribute to the growth are production and employment. Production depends
 upon the inputs of the factors such as finance, raw materials. Labor etc. The most important
here bring finance, which is the chief mobiliser of all the factors of production.

In a money economy, finance for development initially comes from private savings. These
private savings give to the secondary deposits; this is where the financial institutions come into
picture. Financial institutions occupy a central place in mobilizing savings from the people and
make it available to the trade, commerce and industries either as a capital or loans.

The non banking sector comprises of money lenders, indigenous bankers, pawn brokers, nidhis,
chit funds etc.,

The origin of chit funds can be traced way back to the 17th century when the economic wizards
of state of malabar( now known as the state of Kerala) started this activity. Those were the
people who actually founded this financial institution. It became so popular and numerous that
people started adopting this activity as a profession by the 18th century all over. As the chit
industry grew the number of people involved in this industry also grew. This gave rise to many
misconceptions, frauds, mismanagement etc., in this industry. To prevent this State
Government of Travancore took the first initiative and introduced the first Chit Fund Regulation
being the Chit Fund Act 1914. One important regulation introduced by this act was that of a
commission payable to the foreman.

The Act brought about a ceiling limit on the commission payable to the foreman that is 5%
maximum which is still the same even to this date.

Chit Funds are co-operative in nature. It is a Financial institution wherein few people join
together and form a group. All the people are called as the members of the chit group. The chit
activity beings by every member contributing a certain sum of money or moneys worth to a
common fund created by them. Any one among the members of a chit fund takes the initiative
to be the incharge or trustee of such common fund. This common fund is utilized to the benefit
of the members of the chit fund. Any one of the members becomes the beneficiary on the first
auction of such fund. The circle continues by members continuously contributing by equal
installments and members benefit by individual at a time. This is known as chit funds.

However over the period of time as the compliments in human activities and business increased
the chit funds also grew considerably simultaneously a few of the members took up the job of
conducting chit funds as their business.

Initially Chit Funds were mainly limited for the use of domestic purposes being that of
Marriages, family functions, social functions, education etc. but over the centuries chit funds
have secured their way through and now reached the stage as a source of finance for business
 activities. Chit or chit funds, which have not yet come to the lime light in the financing sector,
actually play an important role in the mobilization of financial resources.

The chit funds market can be classified into the

1. Registered chit fund operators.

2. Unregistered chit fund operators. (Illegal chit fund operators)

Registered chit fund operators are those who are licensed (registered) under the Chit Fund Act,
and registered under the Companies Act, and also come under the preview of RBI.

Unregistered chit fund operators exist all over India. They exist in cities, towns, villages, and are
more prominent in the southern part of the country.

The ratio of the registered chit fund operators to unregister or illegal chit fund is 1:100, i.e., for
every single registered fund operators there are 100 illegal chit fund operators.

The registered chit fund turnover of our country is estimated to be around 10,000 Crores P.A.
(as per the latest article in the Economic Times), however the unregistered chit fund turnover in
our country is estimated to be 100times as that of the registered chit turnover. This underlying
the importance of chit fund in our country and their ability to mobilize resources in our country.
Chit funds are believed and trusted to be the most convenient system of financing or savings.
The chit funds are procedure and documentation free, which makes them more attractive.

An important statistics about chits reveals that

For every 10 businesses there is one chit operator

For every 50 employees there is one chit operator

For every 100 house wives there is one chit operator

(Based on the research conducted by PCPL)

The above statistics reveals to us the intensity of chit activity in India and its growth.
 Chit Fund Procedure
The chit operators or the foreman takes the initiate as to starting a chit group. The foreman
based on these surveys of potential subscribers or based on his own decision determines the
amount of the chit, the time period of such chit, the number of members, the number of
installments and the amount payable on each instalment. Once the foreman has decided on the
chit group he has to go ahead with the procedural formalities as follows.

1. Fixed Deposit
The forman has to create a fixed deposit with a scheduled bank upto 100% of the chit value as
per the Chit Fund (Karnataka) Rules 1983. This fixed deposit is accountable to the foreman. The
period of the fixed deposit has to be the same as that of the chit group or anything exceeding
that.

2. Application of the prior sanction certificate

The foreman after obtaining the fixed deposit has to now make an application for prior
sanction. This application is to be made to the registrar or the officer incharge of chit funds in
that particular state. The application should also have the original copy of the fixed deposit. The
registrar after receiving such application and deposit certificate would issue the prior sanction
certificate.

3. Formation of chit group.

The foreman is allowed to communicate or advertise about the new chit group only after
obtaining the prior sanction certificate. The foreman now invites application from prospective
subscribers. The application is in the form of chit agreement, which is filled in triplicate by the
subscribers and duly signed and attested. The foreman has to now sort all these application in
order.

4.Certificate of Commencement
The foreman after collecting all application from the subscribers and deciding on the number of
subscribers for the chit group has to make an application to registrar for the certificate of
commencement. The application should accompany all the applications received by the
foreman from the subscribers. The registrar on proper scrutiny of the application and collection
of the charges would issue the certificate of commencement and also attest the applications
received.
 5.Communication of Certificate of Commencement
The foreman has to now communicate to all his registered subscribers the receipt of the
certificate of commencement and he has to send the chit agreement duly attested and signed
by the foreman himself and the registrar. The foreman also collects the first instalment of the
chit.

6. Chit Auction
The date and time of auction is decided and communicated to all the subscribers. All the
subscribers interested in drawing the chit amount make themselves present at the auction.

There should be a minimum of 2 subscribers present at the auction as per the Chits Funds Act
1982. The chit auction is conducted in the presence of all the subscribers and the foreman
himself. The auction begins on the order of the foreman. The bid for the auction has to start
from 5% of the chit amount which can go up to a maximum of 30% of the chit amount. The
subscribers who are in immediate need of funds make to higher bid. The subscriber making the
highest bid to forego the maximum percentage is declared as the Prized subscriber in the
presence of all the other subscribers. In case there are more than two subscribers who are
willing to forego the maximum of 30%, the prized subscriber is decided by a lucky draw.

7. Payment to the Prized subscriber and Security.

The foreman is liable to pay the amount in full to the subscriber as per the bid. The payment
has to be made within a maximum of 30 days from the date of such auction or before the next
draw.

8. Distribution of Surplus as Dividend.

The amount foregone by the prized subscriber is the Surplus for the chit group. This surplus is
to be distributed equally among all the subscribers also known as Dividend. This surplus can be
distributed either in cash or can be adjusted towards the next installment of such chit.

9. Minutes of the Chit.

The minutes of the chit along with all the details of the prized subscriber, the amount foregone
by him etc., are to be communicated to the Registrar of Chits. This report has to be submitted
to the Registrar within a maximum of twenty one days from the date of such auction.
 The cycle continues by the Foreman collecting the next installment from the subscriber and
making the next auction.

CHIT FUNDS AS TAX PLANNING TOOL

An important advantage of Chit funds is its tax saving aspect. Income Tax Act of 1961 provides a
special benefit to chit fund subscribers. The chit subscribers are allowed to write off their chit
loss against their source of income. This can be best explained with the following example

Assumptions
1) Mr. X is carrying on a proprietary business, and has a net income under the head income
from business of Rs. 2,00,000/-. Also assuming that Mr. X has other sources of income which
set off the basic exemption and the differential rates of tax and that his business income of Rs.
2,00,000/- is qualifying for 30% tax bracket.

Then the tax payable on his business income is

2,00,000 x 30% =Rs. 60,000.

But if he is a chit subscriber and that he has drawn a chit by foregoing Rs. 30,000/- he can set
off his this chit loss of Rs. 30,000/- against his income from business. Thus his net income from
business would be Rs. 1,70,000/-. The net tax payable on this amount is Rs. 1,70,000/- is

1,70,000 x 30% =Rs. 51,000.

The net savings that Mr. X is making on his tax liability is Rs. 9,000/-. Thus, by investing in chit
funds Mr. X is saving Rs. 9,000/- and this amount reduces his interest burden of drawing such
a chit.

CHIT FUNDS AS COMPARED TO OTHER SOURCES OF FINANCE

Any business organization has to its options various sources of finance. It is purely a decision of
the businessman as to choose which source. While taking such a decision every businessman
would look into the costs, advantages and disadvantages of every source and thus determine
the best source. The different sources of finance have already been discussed in this Project
Report. The short term sources being Bank Overdraft, Cash Credit, Money Tenders, Trade Credit
and Chit Funds.
Chit Funds as a source of finance have occupied a very important place in the business activity.
Most important advantage of chit funds is the lowest effective interest rate. This particular
advantage has been emphasized throughout this project. Chit funds along with its other
advantages has proved a point as a position in the company sources of finance. The aspect of
lowest interest rate can be explained as below with the following example:

Assumptions

1) Mr. X is a member of a chit group of Rs. 1,00,000/-. The group comprises of 40 members
and 40 installments equally divided into Rs. 2.500/- per month.

2) Mr. X is in need of money and presents himself at the chit auction. He makes a bid to draw
the chit. He successfully draws the chit at 30% discount.

3) Mr. X makes his draw in second month of the chit.

Mr. X is paid Rs. 70,000/- by the foreman. Mr. X having foregone Rs. 30,000/- and thus his
interest rate would be

(30,000 / 38 months / 70,000) x 100 =1.13% per month.

i.e. 13.50% per annum. (Note: 38 months, because he draws the chit in the second month, and
the chit group is for 40 months, thus the period for which he actually uses the money and
calculated interest is 38 months).

However this 13.50% is not the correct interest rate that Mr. X pays because he also enjoys
the other benefits such as dividends and taxation benefits which reduces interest burden.

The company records reveal that on an average every member of a Rs. 1,00,000 chit group gets
a total dividend of Rs. 15,000/- during that chit group. Thus Rs. 15,000/- being an income to Mr.
X reduces his effective interest burden.

Another important aspect reducing the interest burden would be the Income Tax benefit. As
already calculated let us say Mr. X earns a tax benefit of Rs. 9,000/-. Thus the effective
discounted amount of Mr. X would be

30,000 (The actual 30% foregone by Mr. X)

- 15,000 (Dividend earned by him)

_______
 15,000

- 9,000 (Being income tax benefit)

________

6,000 (This amount is the actual discount or amount foregone by Mr. X)

Thus, considering this Rs. 6,000/- as the foregone amount the interest rate applicable to Mr. X
would be as follows:

(6,000 / 38 months / 94,000) x 100

=0.167% per month.

i.e. 2.01% per annum.

The effective rate of interest applicable to Mr. X is 2.01% per annum. Example 2:

Assumptions:

1) Mr. X is a member of a chit group of Rs. 1,00,000/-. The group comprises of 40 members
and 40 installments equally divided into Rs. 2,500/- per month. 2) Mr. X this time makes a
draw in the end of the chit group.

Mr. X who makes a draw in the last would have to forego only 5% of the chit amount being the
company commission.

The net amount that Mr. X would get is Rs. 95,000/-.

Mr. X who has right since the beginning being paying his installments has been earning
sufficient dividends on those also.

As the company records reveal that a chit subscriber of Rs. 1,00,000/- group with 40
installments earn a dividend of Rs. 15,000/-. Mr. X is actually earning an interest on his every
installments being

15,000 / 40 =375. (This is the monthly dividend he receives).

Thus the interest he is earning on every installment is

(375 / 2500) x 100

=15%.
This reveals that even if Mr. X makes a draw in the last he is actually not losing any interest but
instead earning an interest of 15% every month on his installment that being the total dividend
money he earns through the chit group.

Table Showing Comparison.

Particulars (source) Interest Rate Charged

Bank overdraft 16.5%
Cash Credit. 16%
Discounting of Bills 18%-20%
Term loan 15%-16%
Indigenous Money Lenders 18%
Trade Credit. 24%

DISTRIBUTION OF SURPLUS / DIVIDEND

Chit funds is the only Financial Institution wherein a borrower enjoys the benefit of profit from
his lender. Any person making an investment in chit funds is said to be making his best
investment. Even the amount which he foregoes as a discount is against distributed to him as
dividend.

When a chit auction is conducted the members bid from 5% upto 30% of the chit amount. 5%
being company commission and 30% being the upper ceiling limit as per the Chit Fund Act
1982.

Example:
Let us take a Rs. 1,00,000/- chit group of 40 members and 40 installments of Rs. 2,500/- each.
Mr. X draws the chit in the second month at a discount of 30%. Thus Mr. X discounts Rs.
30,000/- from Rs. 1,00,000/- and takes only Rs. 70,000/
Out of this Rs. 30,000/- the company deducts its 5% commission being Rs. 5,000/-. Thus the net
surplus of the chit being Rs. 25,000/-. This Rs. 25,000/- is distributed equally among all the 40
subscribers at Rs. 625/- per member.

The dividend can be either paid in cash or can be adjusted against the next installment due
from all the subscribers that is Rs. 2,500-Rs. 625 = Rs. 1875.

Thus Rs. 1875 is the net amount payable on next installment.

THE CHIT FUNDS ACT 1982.

TO PROVIDE FOR THE REGULATION OF CHIT FUNDS AND FOR
MATTERS CONNECTED THEREWITH.
A. PRELIMINARY

1) SHORT TITLE, EXTENT AND COMMENCEMENT

1. This Act may be called the Chit Funds Act, 1982.

2. It extends to the whole of India except the State of Jammu and Kashmir.

3. It shall come into force on such date as the Central Government may by notification in the
official Gazette, appoint, and different dates may be appointed for different states.

2) DEFINITION:
a) Approved Bank means the State Bank of India constituted under Sec 3 of State Bank of
India Act 1955 or a Subsidiary Bank constituted under Sec 3 of the SBI (Subsidiary) Act 1959,
or a corresponding New Bank constituted under Sec 3 of Banking Companies (Acquisition and
Transfer of Undertakings) Act, 1970 or a Regional Rural Bank established under Sec 5 of
Regional Rural Bank Act 1976 or a corresponding New Bank constituted under Sec 3 of Banking
Companies (Acquisition and Transfer of Undertakings) Act 1980 or Banking Company defined
under clause (C) of Sec 5 of Banking Regulation Act 1949, or a Banking Institution notified by
the Central Government under sec 51 of the Act or such other Banking Institution as the State
Government may, in consultation with the Reserve Bank, approve for the purposes of this Act.
b) Chit means a transaction whether called chit, chit fund, chitty, kuri or by any other name
by or under which a person enters into an agreement with a specified number of persons that
every one of them shall subscribe a certain amount of money (or a certain quantity of grain
instead) by way of periodical installments over a definite period and that each such subscriber
shall, in his turn, as determined by lot or by auction or by tender or in such other manner as
may be defined in the chit agreement, be entitled to the prize amount.

c) Chit Agreement means the document containing the articles of agreement between the
foreman and the subscribers relating to the chit.

d) Chit Amount means the sum total of the subscription payable by all the subscribers for any
installments of a chit without any deduction of discount or otherwise.

e) Chit Business means the Business of conducting a chit.

f) Defaulting Subscriber means a subscriber who has defaulted in the payment of subscription
due in accordance with the terms of the chit agreement.

g) Discount means the sum of money (or the Quantity of grain) which a prized subscriber is,
under the terms of the chit agreement required to forego and which is set apart under the said
agreement to meet the expenses of running the chit or for distribution among the subscribers
or both.

h) Dividend means the share of the subscriber in the amount of discount available under the
chit agreement for rateable distribution among the subscribers at each installment of the chit.

i) Draw means the manner specified in the chit agreement for the purpose of ascertaining the
prized subscriber at any installment of the chit.

j) Foreman means the person who under this chit agreement is responsible for the conduct of
the chit and includes any person discharging the functions of the foreman. k) Prize Amount
means the difference between the chit amount and the discount and in case of a fraction of a
ticket means the difference between the chit amount and the discount proportionate to the
fraction of the ticket.

l) Registrar means the Registrar of Chits appointed under Sec 61 and includes an Additional, a
Joint, Deputy or an Assistant Registrar appointed under this section.

m) Subscriber includes a person who holds a fraction of a ticket and also a transferee of a
ticket or fraction thereof by assignment in writing or by operation of law.

n) Ticket means the share of a subscriber in a chit. All to override other laws, memorandum,
articles etc.
 B. REGISTRATION OF CHITS, COMMENCEMENT AND CONDUCT OF CHIT BUSINESS

Sec 4:- PROHIBITION OF CHITS NOT SANCTIONED OR REGISTERED UNDER THE ACT.

4(1) : No chit shall be commenced or conducted without obtaining the previous sanction of the
State Government within whose jurisdiction the chit is to be commenced or conducted or of
such officer as may be empowered by that Government in this behalf, and unless the chit is
registered in that state.

Sec 5:- PROHIBITION OF INVITATION FOR SUBSCRIPTIONS EXCEPT UNDER

CERTAIN CONDITIONS.
No person shall issue or cause to be issued any notice, circular, prospectus, proposal or other
document inviting the public to subscribe for tickets in any chit unless such notice, circular,
prospectus, proposal or document contains a statement that the previous sanction required
under sec 4 has been obtained and the particulars of such sanction.

Sec 6:- FORM OF CHIT AGREEMENT

1) Every Chit agreement shall be in triplicate, and shall be signed by each of the subscriber or by
any person authorized by him in writing and the foreman and attested by atleast two
witnesses, and it shall contain the following particulars.

a) Full name and address of every subscriber.

b) The number of tickets including the fraction of a ticket held by each subscriber.

c) The number of installments, amount payable at every installment, interest, penalty.

d) Probable date of commencement and duration of the chit.

e) Manner of ascertaining the prized subscriber

. f) The maximum amount of discount which the prized subscriber has to forego (The
discounted amount cannot exceed 30%) Sec 6(3).

g) The mode and proportion in which the discount amount would be distributed by way of
dividend.
 h) The name of the approved bank in which chit money shall be deposited by the foreman.

i) The consequences to which a non prized subscriber or prized subscriber of the foreman shall
be liable in case of violation of any of the provisions of the chit agreement.

j) The nature and particulars of the security to be offered by the foreman.

6(2) : The duration of a chit shall not extend beyond a period of 5 years from the date of
commencement.

Provided the State Government may permit the duration of a chit up to a period of 10 years as
per satisfaction of the necessary provision.

Sec 7 :- FILING OF CHIT AGREEMENT.

1) Every chit agreement shall be filed in triplicate by the foreman to the Registrar (JRC).

2) The registrar shall retain one copy and return the duplicates to the foreman with an
endorsement that the chit agreement is registered.

The registrar may refuse if

a) The security is insufficient.

b) The foreman has been convicted of any offence of this Act or any other Act regulating Chit
Business.

c) Foreman has defaulted in payment of fees or filing of sanction.

d) That the foreman has been convicted of any offence involving moral turpitude and sentence
to imprisonment for any such offence.

Sec 8 :- MINIMUM CAPITAL REQUIREMENTS FOR COMMENCEMENT OF A CHIT

AND CREATION OF A RESERVE FUND, BY A COMPANY.
1) A company shall not commence or carry on chit business unless it has a paid up capital of not
less than 1 lakh rupees (not withstanding the provisions of Sec 1 of Companies Act 1956).
 2) Every company with its paid up capital being less than 1 lakh has to increase its paid up
capital upto 1 lakh with in 3 years from the such commencement.

3) Every company carrying on chit business shall create and maintain a Reserve Fund and
transfer 10% of the profit as per the profit and loss account before any dividend.

Sec 9 :- COMMENCEMENT OF CHIT

1) After all the tickets are fully subscribed the foreman files a declaration with the registrar. 2)
Registrar after satisfying himself with the formalities shall issue Certificate of Commencement
to the foreman.

Sec 10 :- COPIES OF CHIT AGREEMENT TO BE GIVEN TO SUBSCRIBERS

1) The foreman shall furnish the Certificate of Commencement as per sec 9(2) to all the
subscribers before 1st draw.

2) The foreman has to file to the registrar that the provision of Sec 10(1) have been complied.

Sec 11 :- USE OF WORDS CHIT, CHIT FUND, CHITTY OR KURI

1) The person carrying on such business shall include any of above terms.

Sec 12 :- PROHIBITION OF TRANSACTING BUSINESS OTHER THAN CHIT BUSINESS

BY A COMPANY.
1) No company carrying on chit business shall conduct any other business except under
permission from State Government.

2) Any company carrying on any other business, it shall be wound up with in 3 years of
commencement of this Act.

Sec 13 :- AGGREGATE AMOUNT OF CHITS

1) Foreman other than AOI, Co, Co-op society shall conduct chit business, the aggregate
amount of which exceeds (25000) Twenty Five Thousand Rupees. (As per the latest
amendments this limit has been enhanced to Rs. 1,00,000/- incase of individuals).
2) Where the foreman is a firm or other association of individuals, the aggregate chit amount of
the chits conducted by the firm or other association shall not at any time exceed.

a) Where the number of partners of the firm or the individuals constituting the association is
not less than four, a sum of rupees one lakh; (This has been amended to Rs. 1,00,000/- per
partner upto a maximum of Rs. 6,00,000/-).

b) In any, other case, a sum calculated on the basis of twenty five thousand rupees with respect
to each such partner or individual.

3) Where the foreman is a company or co-operative society, the aggregate chit amount of the
chits conducted by it shall not at any time exceed ten times the net owned funds of the
company or the co-operative society, as the case may be.

Sec 14 :- UTILISATION OF FUNDS

1) A foreman cannot utilize money collected in respect of chit business except for

a) Carrying out Chit Business.

b) Giving loans and advances to non prized subscribers on appropriate securities.

c) Investing in trustee securities. (Indian Trusts Act 1982 Sec 2).

d) Deposits with approved banks mentioned in the Chit agreement. (Money from chit business
does not include commission or remuneration payable to such person or interest or penalty
received).

Sec 15 :- ALTERATION OF CHIT AGREEMENT.

It can be added, altered, cancelled with consent in writing of the foreman and all subscribers.

Sec 16 :- DATE, TIME AND PLACE OF CONDUCTING CHIT

 1) Every draw shall be conducted on such a date, time and at a place as mentioned in chit
agreement or as per notice issued by foreman to the subscribers.

2) Every draw shall be conducted in the presence of atleast 2 subscribers in the manner
prescribed.

3) Where any draw was not conducted, registrar would direct the draw as the case may be.

Sec 17 :- MINUTES OF PROCEEDINGS

1) The minutes of proceedings of a draw shall be entered in a book after the end of such draw
and signed by the foreman, prized subscriber and any two subscriber as per 16(2) or as per
provisions of 16(3).

2) The minutes shall clearly state

a) Date and hour when proceedings started and ended and the place of draw.

b) The number of and amount of installment.

c) Name of prized subscribers and other subscribers.

d) Amount of discount.

Sec 18 :- COPIES OF MINUTES TO BE FILED WITH THE REGISTRAR

A true copy of the minutes of the proceedings of every draw certified as such by the foreman
shall be filed by the foreman with the Registrar within twenty one days from the date of draw
to which it relates.

C. RIGHTS AND DUTIES OF A FOREMAN

Sec 20: SECURITY TO BE GIVEN BY FOREMAN

1) For the purpose of conduct of the chit every foreman shall before applying for a previous
sanction

a) Deposit in an approved bank an amount equal to chit amount in the name of Registrar (as
per the latest amendment 50% can be provided as Fixed Deposit and the rest 50% as Bank
guarantee).
 b) Transfer Government securities in face value / market value (which ever is less) of not less
than one and a half times the chit amount in favour of the Registrar.

2) A separate security has to be provided for every chit.

3) The registrar at any time during the currency of chit, permit the substitution of chit.

4) The security given shall not be liable to be attached in execution of a degrees or otherwise
until the chit is terminated and claims of all the subscribers are fully satisfied.

Sec 21 : RIGHTS OF A FOREMAN

1) The foreman is entitled.

a) To receive the 1st installment of the chit without deduction of the discount, provided he is a
subscriber to that chit agreement.

b) To such amount not exceeding 5% of the chit amount by way of commission, remuneration
or for meeting the expenses of running the chits.

c) To interest and penalty payable to the foreman as per the chit agreement.

d) To receive and realize all subscriptions from the subscribers and to distribute the prize
amounts to the prized subscribers.

e) To demand sufficient security from any prized subscriber for the payment of future
subscriptions payable by him.

f) To substitute subscribers in place of defaulting subscribers and

g) To do all other acts that may be necessary for the due and proper conduct of the chit.

Sec 22: DUTIES OF FOREMAN

1) The foreman shall pay the prized subscriber only on sufficient security for payment of future
subscriptions.

2) In case if draw remains unpaid then such amount shall deposited in a separate account with
an approved bank before next draw and intimate the registrar and all other subscribers.

3) The foreman shall not appropriate to himself any amount in excess of entitled under clause
(b) or (c) or 21(1).

4) The foreman shall distribute the dividend either as cash, grains or by way of adjustment
towards the subscriptions payable towards next installments.
 Sec 23 : BOOKS, RECORDS, ETC., TO BE KEPT BY FOREMAN
The foreman shall at his Registered office, or his prinicipal place of business or nay branch
office, sub office, or office in any other state maintain

a) registrar containing

i. The names and full particulars of the subscribers.

ii. The date on which the subscribers signed the chit agreement.

iii. In case of an assignment of a ticket by a subscriber, name and address of such

assignee.

b) A book containing the minutes of the proceedings of each draw.

c) A ledger containing

i. Amount paid by subscribers in each chit and dates of such payments.

ii. Amount paid by prized subscribers and dates of such payments.

iii. Deposits with approved banks if any.

d) Register showing the amounts deposited in approved Banks as per provisions of this act.

Sec 24 : BALANCE SHEET

The foreman shall prepare a Balance Sheet and a Profit and Loss Account at the end of such
financial or calendar year audited by an approved auditor as per the provisions of Companys
Act of 1956.

Sec 25 : LIABILITY OF FOREMAN TO SUBSCRIBERS

1) Every foreman shall be liable to account to the subscriber for amounts due to them.

2) Where there are more than one foreman in a chit, each one of them jointly and severally and
if the foreman is a firm or other association of individuals, each one of partners or individuals
thereof jointly and severally and if the foreman is a company, the company as such, shall be
liable to the subscribers in respect of the obligations arising out of the chit.
 D. RIGHTS AND DUTIES OF NON PRIZED SUBSCRIBERS

Sec 27: NON PRIZED SUBSCRIBERS TO PAY SUBSCRIPTIONS AND OBTAIN

RECEIPTS.
Every non prized subscriber shall pay his subscription within the due date for each draw and
also obtain receipts for such payments.

Sec 28 : REMOVAL OF DEFAULTING SUBSCRIBERS

In case of default by any subscriber on the payment of subscription amount, he is liable to have
his name removed from the list and a written notice is issued by the foreman to such subscriber
within 14 days of such removal.

E. RIGHTS AND DUTIES OF PRIZED SUBSCRIBERS

Sec 31 : PRIZED SUBSCRIBERS TO FURNISH SECURITY

Every prized subscriber shall furnish security for the future subscriptions amount payable to the
satisfaction of the Registrar.

Sec 32 : PRIZED SUBSCRIBER TO PAY SUBSCRIPTIONS REGULARLY

Every prized subscriber should pay his subscriptions promptly and on his failure he shall be
liable to make consolidated payment of all future subscriptions forthwith.

Sec 33 : FOREMAN TO DEMAND FUTURE SUBSCRIPTIONS BY WRITTEN NOTICE.

 1) A foreman shall not be entitled to claim a consolidated payment from a defaulting prized
subscriber.

2) In case of any dispute, the adjucating authority would make the defaulting customer to pay
al due subscriptions, interest, penalties and legal charges as claimed by the foreman and also
collect all future subscription as a consolidated amount with interest as case may be.

3) Any person who holds any interest in the property furnished as security or part there of, shall
be entitled to make payments under sub sec (2).

4) A consolidated payment for future subscription shall be deposited in an approved bank

mentioned in the chit agreement and such amount shall be used only for payment of such
future subscriptions.

F. TRANSFERS

Sec 34 : RESTRICTIONS ON TRANSER OF RIGHTS OF FOREMAN

1) The right of foreman to collect subscriptions from prized subscribers shall not be transferred,
without the previous sanction in writing by Registrar.

Sec 35 : TRANSFER OF NON PRIZED SUBSCRIBERS RIGHTS TO BE IN WRITING

Transfer of a non prized subscriber rights in a chit agreement shall be in writing duly signed and
attested by 2 witnesses and shall be filed with the foreman.

Sec 36 : RECOGNITION OF TRANSFER BY FOREMAN

Every transfer shall within 14 days from the date of proposal for such transfer be recognized by
the foreman.

G. MEETINGS OF GENERAL BODY OF SUBSCRIBERS

Sec 38 : MEETINGS OF GENERAL BODY OF SUBSCRIBERS

1) The foreman may on his own motion, convene a special meeting of the General body of
Subscribers for considering any proposal to pass a special resolution.

2) The foreman shall convene the meeting on requisition of not less than 25% of the non prized
and unpaid prized subscribers. The meeting shall be convened within 30 days of date of receipt
of requisition. If the foreman fails then such group of subscribers can approach the Registrar.
 3) The registrar shall within 21 days of notice under Sub Sec (2), direct the convening of a
Special Meeting.

H. TERMINATION OF CHITS

Sec 39 : PROVISION FOR CONTINUATION OF CHITS IN CERTAIN CASES

1) Where foreman dies, becomes of unsound mind or in otherwise incapacitated the chit may
continue in accordance with the provisions of the chit agreement.

Sec 40 : TERMINATION OF CHITS

A chit shall be deemed to have been terminated

a) When the period specified in chit agreement has expired provided the payment dues to all
the subscribers has been completed or

b) When all the non prized and unpaid subscribers and the foreman consent in writing to the
termination of the chit or

c) When a foreman dies, becomes insecure or is otherwise incapacitated and the chit is not
continued as per provisions of chit agreement.

I. INSPECTION OF DOCUMENTS

Sec 44 : FOREMAN TO ALLOW CERTAIN SUBSCRIBERS TO INSPECT CHIT

RECORDS.
The foreman shall allow all non prized subscribers, unpaid subscribers and also prized
subscribers to inspect the books of account on all the dates of draw or as provided in the
agreement. They shall be allowed to check securities furnished by prized subscriber, all chit
records including books of accounts, pass books, Balance Sheets, Profit and Loss Account.

Sec 45 : PRESERVATION OF CHIT RECORDS BY FOREMAN

All the records pertaining to a chit agreement shall be maintained for 8 years.
 Sec 46 : INSPECTION OF CHIT BOOKS AND RECORDS BY REGISTRAR.
1) The registrar or a person appointed by State Government may inspect chit books or all
records of a chit on any working day at the premises of the foreman with or without any notice.

2) The Registrar or any person appointed by State Government issue a 7 days notice to a
foreman for the submission of all chit records.

3) On the finding of any defects, the registrar or office may order the foreman to rectify such
errors giving certain period of time.

4) Every foreman shall be bound to comply with directions contained in an order made under
Sub Sec (3).

Sec 47 : POWER OF RBI TO INSPECT CHIT BOOKS AND RECORDS

1) The power of RBI to inspect chit books and records remain same as stated in Sec 45 N of RBI
Act 1934.

2) The RBI if it considers necessary may forward a report on the inspection of chit books and
records of a foreman for taking necessary action.

3) Any foreman is bound to comply with the report received from RBI, and even make
periodical reports to RBI as may be needed.

4) The RBI may forward a report to State Government or Registrar to inspect the chit books
and records.

J. WINIDING UP OF CHITS

Sec 48 : CIRCUMSTANCES UNDER WHICH CHITS MAY BE WOUND UP

A chit may be wound up by the Registrar either on his such motion or on an application made
by any non prized or unpaid prized subscriber.
 a) If the chit has terminated under clause (c) of sec 40 or

b) If the foreman commits any such act in respect of the security specified in Sec 20 as is
calculated to impair materially the nature of the security or the value thereof or

c) If the foreman fails to deposit any amount required to be deposited under any of the
provisions of this Act or

d) If it is proved to the satisfaction of the Registrar that the foreman is unable to pay the
amounts due to the subscriber or

e) If the order issued by Registrar as foreman has not been complied with for payments to any
subscriber or

f) If it is proved that there has been fraud or collision on part of foreman in the matter of taking
securities from the prized subscriber or

g) If the foreman has appropriated amount to prized subscribers without appropriate securities.

h) If registrar is satisfied that the affairs of the chit are being conducted in a manner prejudicial
to the interests of the subscribers or

i) If it is just and equitable that the chit should be wound up.

K. APPOINTMENT OF OFFICES AND LEVY OF FEES

Sec 61 : APPOINTMENT OF REGISTRAR AND OTHER OFFICERS

1) The State Government may by notification in the Official Gazette appoint f Registrar of Chits
and as many Additional, Joint, Dy. And Assistant Registrars

L. DISPUTES AND ARBITRATION

Sec 64 : DISPUTES RELATING TO CHIT BUSINESS

 Any disputes relating to the management of Chit business, shall be referred to any of the
parties to the dispute, to the Registrar for arbitration, if each party thereto is of the following
(non withstanding any other law for the time being in force)

a) A foreman, prized subscribers, non prized subscriber defaulting subscriber, past subscribe or
a person claiming through a subscriber or a deceased subscriber to a chit.

b) A surety of a subscriber, past subscriber or a deceased subscriber

ii. a claim by or against a foreman or any debt or demand due to him from a subscriber or due
from him to a subscriber, past subscriber or the nominee, heir or legal representative of a
deceased subscriber whether such debt or demand is admitted or not.

iii. A claim by a surety for any sum or demand due to him from the principal borrower in respect
of a loan by a foreman and recovered from the surety occurring to the default of the principal
borrower, whether such sum or demand is admitted or not, and

iv. A refusal or failure by a subscriber, past subscriber or the nominee heir or legal
representation of a deceased subscriber to deliver possession to a foreman of land or any other
Asset resumed by him for breach of condition of the Assignment.

2) Where a question arises whether the matter referred to the Registrar by any one of the
parties is a dispute or not, shall be decided by the Registrar whose decision shall be final.

3) No civil court shall have jurisdiction to entertain any suit in respect of any dispute as
referred to in Sub Sec 1.

Sec 66 : SETTLEMENT OF DISPUTES

1) If the Registrar is satisfied that the matter referred to him is within the meaning of Sec 64, he
shall settle the dispute himself or refer it to a person appointed by him (so called nominee)
subject to the rules of this Act.

2) Where any dispute is referred to a nominee, the Registrar at any time, for reasons recorded
by him in writing, withdraw such dispute from the nominee and settle it himself or appoint any
other nominee.
 Sec 67 : PROCEDURES FOR SETTLEMENT OF DISPUTES AND POWERS OF
REGISTRAR OR NOMINEE

2) A Registrar or a Nominee having a dispute under Sec 66 shall in addition to the powers
conferred on him under that section, have the same powers as are vested in a Civil Court while
trying a suit under the Code of Civil Procedures 1908 (5 of 1908) in respect of the following
matters namely :

a) Summoning and enforcing the attendance of persons and examining them on oath.

b) Requiring the discovery and inspection of documents.

c) Receiving evidence on affidavits.

d) Requisitioning any public record or copies there of from any count or office.

e) Issuing commissions for the examinations of witnesses or documents.

f) Any other matter which may be prescribed.

3) Except with the permission of the Registrar or the Nominee, no party shall be represented at
the hearing of any dispute by a legal practitioner.

4) A) If any person whether he is a subscriber or not, has acquired any interest in the property
of the person who is a party to the dispute and the registrar is satisfied by above act, the
registrar may give an order which is binding on that person who has acquired the interest in the
property, in the manner as if he were the original party to the dispute.

B) Where a dispute has been referred in the name of a wrong person, or where all the
necessary parties have not been included, the Registrar or the nominee may if he is satisfied
that it was due to a genuine mistake, order any other person to be substituted or added as
parties to the dispute at any stage of hearing of the dispute on such terms as he thinks fit.

C) The Registrar or Nominee may at any stage of proceedings either upon or without an
application of either party and on such terms as may appear to the Registrar or Nominee to be
just may order that the name of any party improperly joined be struck off.

D) The person who is a party to the dispute and entitled to more than one relief in respect of
the same cause of action may claim all or any such relief, but if he wants to claim any such
relief, but he shall not be entitled to claim that relief, except with the leave of the Registrar or
the Nominee.
 M. MISCELLANEOUS

Sec 73 : ADVISORY ROLE OF RBI

The Reserve Bank may tender to any State Government such advice on Questions of policy with
respect to this Act as it thinks fit either on its own motion or on a request made by the State
Government.

STATEMENT OF PROBLEM
Chit funds in an age old unorganized non banking financial institution over the years both the
Government and players in this industry have tried to organize this important institution which
has been contributing significantly to the economic development of the country.

Both the foreman and subscribers were incurring losses due to unorganisation and lack of state
control over the chit business.

The Chit Funds Act 1982, was a major step towards organizing this activity. The efforts in this
direction have however not been totally successful. The chit fund operators still face problems
as to the default by subscribers on payment, insolvency of subscribers and fraudulent activities
of the subscriber.

This project study is based on the pronounce of chit industry, Profitability in investing in Chit
funds and an attempt is made to find out the implications of running the chit funds and offer
suggestions.

SCOPE OF THE STUDY

The project report covers the Chit Fund Act 1982, the influencing authorities of chit funds, a
Company Profiles, an Analysis of the data collected from 50 respondents and their views on chit
business and chit funds as a source of finance. The Analysis and evaluation of responses about
the risks, advantages of the role of chit funds in the economic development of the country.

A reader of this project report would get an exhaustive information on the operation of chit
business, the legal framework binding chit operators with reference to the PCPL.
 OBJECTIVES OF THE STUDY
The general objectives of this project is to present a consolidated report on the Profitability in
investing in Chit funds of the Country with specific reference to PCPL.

The other objectives are :

a) The functioning of chit funds.

b) The legal framework governing the chit fund industry.

c) The member profile required for membership of PCPL.

d) To know the attitude of the customers about investing in the chit funds.

e) Customer satisfaction measurement of PCPL.

Research Design

a) Type of Research Study:A social research on Financial activity for economic

development using data collected from Respondents as primary data and theoretical
data as secondary data

b) Tool for Collection Data:Structured Questionnaire both for the members of the
company and the company.

c) Sample Design: Selected Targeted Company, i.e., PCPL and 50 Respondents selected
as Random Sample Method.

d) Method of Collecting Data: Interview method and investigative method. e) Method

of Analysis: Quantitative and Descriptive Analysis.

The findings are recorded based on evaluation of Data, the evaluation is done for each data and
conclusion is based on the evaluation of the data.

Suggestions are given at the end of the project study.

 Limitations
The project being for educational purpose, was restricted to the study of one chit fund operator
being PCPL. Since the study was restricted to one chit fund operator, the study cannot be
generalized. Lack of availability of theoretical information on chit funds was one of the major
constraints faced. Due to the constraints of time and money, the number of respondents has
been restricted to 50 members only. The information has been collected from the Chit Fund
Act, Company Profile and Respondents only.

COMPANY PROFILE
Panchajanya Chits Pvt. Ltd (PCPL) is the 1st registered chit funds co., in the State of Karnataka,
registered under the Chit Funds Act 1982.

The company being registered under the Companies Act 1956, began its operations in 1984.
PCPL is the 1st licensed chit operators coming under the preview of Chit Fund Act, RBI and
Registrars of Company.

The company began its operation with a merger turnover of Rs. 32 lakh by the end of 1984, but
with its constant dedication, hardwork and effort towards the growth of chit industry and
business community it has reached a record high of Rs. 1200 crores in the year 1998-99,
showing a average growth rate of 235% every year for the past 16 years.

The company has a member profile of more than 250 registered business class customers and
100 employed customers participating actively in its chit programmes / schemes.

Presently the company offers the following chit schemes.

Chit Value Months No.of Members Monthly

Subscription
 Rs. 1 lakh 40 40 2500
Rs. 5 lakhs 50 50 10000
Rs. 10 lakhs 25 25 40000
Rs. 25 lakhs 25 25 100000

In order to meet the growing demand of its clientele, the company proposes to start the full
chit schemes.

Chit Value Months No.of Members Monthly

Subscription
Rs. 50 lakhs 25 25 Rs. 2,00,000
Rs. 75 lakhs 25 25 Rs. 3,00,000
Rs. 100 lakhs 25 25 Rs. 4,00,000

The management team comprises of Board of Directors, known of their commercial acumen,
who plan the companys long term strategies and implement them in order to

receive results. The company has dedicated staff at all levels working in a smooth and efficient
manner.

MISSION
Panchajanyaendeavors to reach the zenith of business excellence through value based
service and uncompromising quality there by ensuring complete customer satisfaction

OBJECTIVES
To develop business models and strategies that maximizes customers and employee value.
To be a forerunner in the use of Chit solutions.

To ensure service norms and standard systems, on dot and round the clock support.

Develop and retain key resource and capabilities.

To evolve continuously servicing organizations.

 BOARD OF DIRECTORS
01 D. RamachandraChairman.

02 Prashanth R. Dhondale Managing Director.

PROMOTERS
Mr. D. Ramachandra, Chairman.

Mr. D. Ramachandra, 58 years, studied in Bangalore University. He worked in the familys retail
cloth stores and readymade garment industry. He started an Industrial Management
Consultancy services in the year 1976 to 1984. He had exhaustive knowledge of Industry, which
resulted into the preparation of project reports, market surveys and excellent contact and repo
with banks and financial institutions and during his stinct as consultant, he prepared around
300 project reports and innumerous representations of industrialist before financial
institutions. Soon it proved to be a domain for new business learning and contacts. In 1984 he
promoted Panchajanya Chits (P) Ltd. As its founder Chairman and Managing Director he made a
humble beginning in the Chit industry. Panchajanya Chits scaled new heights year after year
and has to its distinction as the first licensed chit operator in the state, first to promote and
operate Rs. 1 lakh, Rs. 2 lakhs, Rs. 3 lakhs, Rs. 5 lakhs, Rs. 10 lakhs and Rs. 25 lakhs chit groups
in the state of Karnataka. He became the President of Karnataka Chitsters Association, and in
the year 1999 he was elected as the President of All India Association of Chit Funds, New Delhi.
He participated in number of meetings, seminars and workshops on Banking, Finance and Chit
Industry. Presently he is the Chairman of Banking and Finance and Chit Industry. Presently he is
the Chairman of Banking and Finance Committee with various educational, religious and social
organizations and has been an active member of many institutions, clubs including the Rotary
International.

Sri.Prashanth R. Dhondale, Managing Director.

 Mr.Prashanth R. Dhondale, 24 years, is the son of Mr. D. Ramachandra, the founder of
Panchajanya Chits. He studied as a commerce student from the University of Bangalore. He was
associated with Chit Industry from the age of his teens, who was virtually brought up in and
among the Chit Industry. His penchant for Chit Industry resulted into his choosing the same as a
career. His contact with Chit Industry began as early as 18 years and he has very wide
knowledge of chits under the tutege of his illustrious fatherand is a veteran in solving all
problems concerning chits. His yound hunger for growth and excellence has led the company at
an astounding growth rate and he is instrumental in establishing alliances with top notch
Captains of Industry, Trade and Commerce. He heads the Corporate office of the company,
which is equipped with all modern business equipment, fully computerized and has an air
conditioned ambience at Madhav Nagar, Race course Road, Bangalore 560001. He leads a
highly efficient and result oriented team of professional executives, who are instrumental in
promotion and operation of chit groups worth Rs. 3790 lakhs in a short span of 36 months,
which is a record in the field of Chit Industry. He is connected with many organizations,
institutes and clubs. He is also a good classical singer.

The company has its registered office at Chickpet but with a objective to serve its customers
more effective and meet the growth of the company, a new corporate office was set up in
Madhav Nagar which began its operation in June 1997.
 ANALYSIS AND EVALUATION OF DATA
Chit Funds are age old conventional financial institution in India. But of late chit funds have
taken the role of a organized system. However it could not be classified as Banking System nor
lending system, but it is having its own unique financial operations. In viewof the very high risk
factors both for the members and for the people who conduct chit funds. Many normal
educated persons who are not investing in this financial institutions. Only those who had
(immediate need for) unexpected need for finance who were engaged in risky business and
those who did not want to invest in Banking institutions, those who wanted high yields were
investing in Chit funds. Persons with (high) sound financial background, those who had control
in their own local areas were running chit funds in unorganized manner. There were incidents
of incurring loss, both by the members and the chit fund owners, but it was a fact that very
heavy turnover was carried out throughout country especially in Rural and sub urban areas.
Money was not accounted for and there was not control over the chit fund activity.

Chit Funds have contributed widely for economic development because most of the members
were those who were engaged in one or other kind of business and the money was doubled.
Considering the importance of Chit Funds in the company activity, the Government of India
enacted the Chit Fund act in 1982 to control and regulate the chit funds. It ensured the state
 control and the control by RBI on chit funds activities and now chit funds has become one of
the recognized financial institutions in India. The chit fund companies have been registered
under companies act 1956, with their Articles of Association and Memorandum of Association.

Upto this day, the searches made on various studies pertaining to finance have revealed that no
project study was made on the Profitability in investing in Chit Funds. Therefore a case study is
undertaken to conduct a study with the objective of understanding the intrigues of running a
chit fund company and the expectations of members.

Among many registered firms dealing with Chit funds in Karnataka, the Panchajanya Chits
Pvt.Ltd, is the one which has become popular and therefore this study is with particular
reference to Panchajanya Chits Pvt Ltd.

The data has been collected from 50 respondents who are the members of PCPL. A structured
Questionnaire was used to collect the data which is placed at Annexure A. Each data is tabled
and analysed.

Analysis
Table 1 : Indicates the name profile of the respondents

Particulars No. of Respondents Percentage

NameGiven 48 96
Name not Given 02 04
Total 50 100
From the above table and graph, 48 persons has given their name and only 2 persons have not
given their name.

Inference:
Name indicates the identity of the respondents and his opinion in furnishing the data, which
could be relied upon.

It is seen from the above table and graph that 96% of the respondents have given their name
and therefore it is evident that they are totally willing to participate in the project study. Hence,
the data supplied by them can be reliable.

Table 2 : Indicates the age profile of the respondents.

PARTICULARS NO.OF RESPONDENTS PERCENTAGE

20 25 Years 2 4
25 35 Years 16 32
35 45 Years 22 44
45 & Above 10 20

Inference:
From the above its clearly shows that the respondents between the age group of 35 45 Years
are majority and hence it shows that they are all experienced in their respective fields and have
good decision make abilities in investing in chit funds.
 Table 3 : Indicates the qualification profile of the respondents.

Particulars No. of respondents Percentage

Undergraduate 08 16
Graduate 32 64
Post Graduate 10 20
Total 50 100
 Inference:
Educational qualification makes respondents to take the right decision in investments.

From the above, it is presumed that respondents will have clear thinking about the advantages
and care to be taken in chit fund investments.

Table 4 : Indicates the occupation profile of the respondents.

Particulars No. of Respondents Percentage

Salary Earners 5 10
Business 37 74
Others 8 16
Total 50 100
 Inference:
From the above its clear that most of the respondents are engaged in business and therefore
they need money for cash flow to carry out the business as working capital. They can take a
decision when to bid the amount from chit unlike applying to the bank and rising the loan
where securities issues arise.

Table 5 : Indicates the annual income profile of the respondents.

5a. Salary Earners

Income No of Respondents Percentage

2 3 Lakhs 2 40
3 4 Lakhs 2 40
More than 4 Lakhs 1 20
Total 05 100
 Inference:
Respondents having considerable amount of income to over come the risk and invest in chit
funds.

5b. Businessmens

Turnover No. of respondents Percentage

Up to 25 Lakhs 08 22
25 50 Lakhs 13 35
50 100 Lakhs 12 32
Above 1 Crore 04 11
Total 37 100

Inference:
Every business must have a annual turnover, which decides the stability and growth of
business. This decides the profit and investment pattern.
From above it is presumed that the respondents have considerable amount of turnover to over
come the risk and invest in chit funds.

5c. Other Respondents

Income No of Respondents Percentage

2 3 Lakhs 3 38
3 4 Lakhs 4 50
More than 4 Lakhs 1 12
Total 08 100
 Inference:
Respondents having considerable amount of income to overcome the risk and invest in chit
funds.

Table 6: Indicates the membership profile of the respondents.

No. of Years No. of respondents Percentage

Below 2 08 16
24 06 12
46 08 16
68 10 20
Above 8 18 36
Total 50 100
 This data is to ascertain the period of association of membership with PCPL.

Inference:

It is confirmed from the above data that the respondents have built a good rapport with PCPL
and have been the members of different types of chit schemes over many years. This will
definitely attract other members to join the chit fund and also the new members to continue
the membership.

Table 7 : Indicates the chit group membership.

Chit Amount No. of Respondents Percentage

1 Lakh 12 24
5 Lakh 20 40
10 Lakh 06 12
25 Lakh 08 16
50 Lakh 04 08
Total 50 100
 Inference :

From the above data it seems that the most popular chit groups are 1 lakh and 5 lakhs groups,
which attract moderate and stabilized business groups. However there are high interest
business respondents who are members of other chit groups. This evaluation further reveals
that the respondents must have a high monthly income because the instalment towards chit
fund ranges from minimum of Rs. 2500 per month to a maximum of Rs. 2 lakhs per month,
besides this other expenditures and commitments.

Hence it is felt that those business that have continuous sources of income can become the
members of high value chit groups.

Table 8 : Indicates when the chit is normally bid.

Period No. of Respondents Percentage

Between 2nd & 10th month 15 30
Between 11th & 20th month 11 22
Between 21st & 30th month 09 18
30th month onwards 09 18
As need arises 06 12
Total 50 100
 Inference:

The chits are bid based on financial requirement and sometimes when their ia urgency, the
subscribers may bid by foregoing heavy amount.

The above data reveals the patterns in which the respondents have bid and drawn their chit
amounts. Every respondent has its own needs for funds. It could be necessary for one bidder or
more at a time, whereas others might not have such an immediate need. The need for such
finance to creep over the financial crisis or constraints brings out the picture, the discount or
bidding or auction factor. The members in need make their bid in auction and person with the
highest bid takes the chit draw.

However, the analysis of the data reveals that the bidders plan well and do not lose much by
foregoing the chit fund.

Table 9 : Indicates the maximum percentage foregone.

Percentageforegone No. of Respondents Percentage

5 10 % 25 50
10 15 % 12 24
15 20 % 08 16
Above 20 % 05 10
Total 50 100
 Inference :

Respondents who forego 25% onwards are early drawer or bidders who actually need quick
money. There is corroboration in the response from table 8 and 9, normally those who forego
less percentage by bidding will have already earned more than or equal amount by way of
dividends and virtually they are not the losers.

Table 10 : Indicates the interest rate on the foregone amount.

Particulars No. of respondents Percentage

Interest rate is high 02 04
Interest is low 48 96
Total 50 100
 Inference:

From the above table and chart it is clear that the interest rate on the foregone amount is less
and it works out in favor of the bidder, compared to the interest charged on the amount when
taken on credit from the market.

Table11 : Indicates the use of the chit amount.

Particulars No. of Respondents Percentage

Business:
- Working Capital 32 64
- Business Assets 10 20
Private Property 08 16
Total 50 100
 Inference:

The pattern of chit fund is an interesting topic to discus. Every individual has his own plan for
the use chit amount. In the above table 64% of the respondents used their chit amounts for
their working capital in their business, basically because they are from the business class, the
most important factor is business growth. A total a 20% of the R use chit amount for acquiring
the business asset, which help in increasing the productivity of the firm. Only 16% of the
respondents used the chit money for their private or personal use for buying certain personal
assets or private properties. From this it is clear that the members who draw the chit money for
business savings, a few members may use it for private expenditure or property.

Table 12 : Indicates the security demanded and provided.

Particulars No. of respondents Percentage

Security Provided 20 40
Security not Provided 30 60
Total 50 100
 Inference :

The above data provides details on security demanded by the company from the prized
subscribers. However, the above data reveals that the majority of the clients being 60% of the
respondents have not given any security, i.e., because they have built a very good rapport with
the company and since their guarantee stands at their association with the company for the
past years on the past performance. However, 40% of respondents have been asked to submit
the security as against the drawn amount or chit, being the security for default of such prized
subscribers. From the above, it may be ascertained that the chit funds for the business people
are preferred to the banksor any other financial institution because these securities are must,
though a client is continuously doing business with them. In chit fund, personal rapport plays a
vital role and therefore security is not always required.

Table 13: Indicates the advantages of chit funds.

Sl. No Particulars No. of respondents Percentage

1 Money is easily & quickly available 08 16
2 Repayment in easy instalments 20 40
3 The profits distributed as dividend 4 8
4 Interest is low 10 20
5 Easy Membership 8 16
Total 50 100
 Inference:

From the above data, most of the people invest in chits due to easy monthly instalments.

Table 14 : Indicates profitability in investing in chit funds.

Particulars No. of Respondents Percentage

Profitable 50 100
Not Profitable NIL 00
Total 50 100

Inference :

The above data reveals that all the respondents believe that investing in chit funds are very
profitable.

Table 15 : Indicates the average profit earned from chits.

Profit (Range) No. of Respondents Percentage 1 5 % Nil 00 10 15 % 22 44 Above 15% 28 56

Total 50 100

Average Profit earned from chits

0%

44%

56%

1 - 5. 10 - 15. 15 or more
 Inference :

The data clearly shows that the 56% of the respondents earn a profit of 15% and more and this
shows that the profit earned through chit funds is a very considerable amount.

Table 16 : Indicates the comparison of profit with other financial institution.

Particulars No. of respondents Percentage Profits earned more than other financial institutions
32 64 Profits earned lesser than other financial institutions 18 36 Total 50 100

Comparision of profit with other FI's

64%

36% More than other FI's Less than other FI's

Inference :

The above data reveals that 64% of the respondents agree that they earn good profits through
chit funds. Hence, investing in chit funds is a profitable activity.

Table 17 : Indicates the satisfaction of the customers towards the service provided
by the company.

Particulars No. of respondents Percentage Satisfied with the service 45 90 Not satisfied with the
service 05 10 Total 50 100

Costomer satisfaction towards service

90%

10%

Satisfied Not satisfied

Inference:

From the above data, it reveals that 90% of the respondents are satisfied with the service
provided by the company. Hence, it shows that the company is very much concerned about its
customers in providing them with good service.
 FINDINGS, CONCLUSION AND SUGGESTIONS
1. FINDINGS

On the analysis and evaluation of the data collected from the chit fund company, the following
important findings are recorded.

1) PCPL is a well established company having established in the year 1984, which is registered
under Companies Act.

2) It is also covered under Chit Funds Act 1982.

3) It has to obtain the license for every chit group as per the Act.

4) The company runs the chit under 4 schemes at present which are all designed for Business
community because minimum chit amount is 1 lakh and maximum chit amount is 25 lakhs.

5) The monthly Turnover for each chit group would range from 2000 to 1,00,000 rupees and
for each chit fund there will be requirement of members and these are meticulously fulfilled.

6) Majority of the members are from Karnataka and only few are from other states.

7) The members are not permanent and their membership is confirmed only to a chit group,
after which it is left to them to become a member for a new chit group.

8) The members who want to draw money have to being their bid where the minimum bid is
prescribed for every chit fund.

9) There is no private prizing and it is a monthly bidding.

10) The bidding is an open activity only among the members.

11) There is minimum of 5% of the bid amount to be foregone by the subscriber and the
subscriber cannot go beyond 30%.

12) The bidding surplus is distributed equally as dividend among subscribers and thereby the
loss, if any by early bidding is made good to a maximum extent.

13) The RBI controls the chit fund activities as stipulated under Chit Fund Act.

14) The Joint Registrar of Chits controls all the chit fund activities in Karnataka, because many
returns have to be sent to him.
15) Normally the member profile must be those as follows

- Established in Business Balance Sheet and Income Statement to be provided.

- Whose credentials are well known.

16) The chit funds demand securities in the form of Bank Guarantee, property documents, in
the initial stages, and when once the rapport is built, then the demand for security is relaxed.
17) The new schemes are developed based on the customer (member) demands, company
decisions, and reserves and surplus of the company.

On the analysis and evaluation of the data collected from the Respondents

The respondents are mostly from the business community and their attitude towards investing
is very favourable, and as far as PCPL the customers are very much satisfied with the services
provided by the company and are very loyal company. The members have selected chit funds
because of various reasons among which following are important reasons.

iv. Money is easily available.

v. It can be repaid in easy monthly installments.

vi. Procedural and documentation formalities are very less. The surplus is distributed among
members as dividend.

II CONCLUSION

The project study makes a deep study on the chit fund industry and the responses of the
foreman and its subscribers.

The project covers the aspect of profitability in investing in Chit funds. The legal framework
governing the Chit business, and the responses of the members of the Chit Business to know
the attitude of the customers towards investing in chit funds and customer satisfaction
measurement.

The objective of the study being a depth study of the chit business operation and risks involved
in such business. The ways of overcoming such risks in chit business have been identified in this
project study. The project also covers the responses of 50 members, who were surveyed,
supported the fact that chit funds is very important and preferable as compared to other
sources of finance.
This study has fulfilled the objective of the researcher i.e., the researcher has learnt how a chit
fund can be of help to the people in Business community in providing adequate financial
resources. It has also revealed that the chit funds in India, which were run

(conducted) most unorganized have now been legalized as one of the Non Banking Financial
Institutions with statutory control over the activities.

III SUGGESTIONS
Though the PCPL scheme has been well accepted by the members, yet based on the study
made the following suggestions are offered to improve functions of the Chit Fund.

10)The company PCPL can be more aggressive and increase its membership profile.

11)The risk factors can be covered by the company by making a good study of membership
profile.

12)The risk perception of subscriber can be overcome, by the company by making its
transaction more transparent.

13)The company can introduce more schemes, based on a survey and thus making the
company more attractive or beneficial to the members.

14)The company can reduce its commission charges from 5% to a lower rate, thus will increase
the scope for more individuals.

15)The company can consolidate the chit business by insuring each scheme against any risks.

16)The company can introduce incentive or schemes, so as to motivate the subscribers to make
prompt payment of subscription money.

17)The company can introduce lower amount chit schemes and tap the large lower middle
income group people.

18)The general public has to be communicated the advantages of Registered Chit Funds.
 BIBLIOGRAPHY
The Chit Fund Act, 1982 M/s Vijaya Publications.
Modern Economic Theory S. Chand & Co. Ltd.
K.K. Dewett.
Economics of Development and Planning
- A.N. Agrawal ;Vikas Publishing House Pvt. Ltd.
- KundanLal.
- Finance and Profits
- N.J. Yasaswy ; Vision Books Pvt. Ltd.
-Business Finance.
- Financial Management
- P.N. Reddy, H.R. Appannaiah, B.G. Sathyaprasad; Himalaya Publication House.