How chit works?
A certain amount is deposited on a regular basis by the group of people till the specified tenure and the auction shall be conducted on monthly basis and the prize money shall be disbursed to the successful highest bidder.
It works as a "low interest loan scheme & high interest return scheme".
Now let us see how it works with a example.
Chit amount : ₹ 2,00,000
Chit group members : 20
Chit duration : 20 months
Once the chit group commences:
- The amount to be contributed every month by the Subscriber is Chit value/No of person's i.e. 2,00,000/20 = 10,000.
- This is also known as Monthly Subscription. It may be noted here that the number of persons investing in the chit and the duration of the chit is always the same.
- The maximum monthly contribution or Subscription Amount that a Subscriber will pay is 10,000.
- The Subscriber does not always pay the entire Subscription amount every month.
- Let us consider that the highest bid received during the time of auction is 50,000 (which is called as Chit Discount) then the successful bidder will receive an amount of Rs. 1,50,000 (2,00,000-50,000=1,50,000)
- The foreman charges 5% of chit values as commission. In this illustration, that would amount to 10,000. This is deducted from Chit Discount i.e. 50,000 - 10,000 = 40,000. This amount is available for equal distribution among the subscribers. In our example, 40,000 would be divided equally among 20 subscribers. Each subscriber would get a discount of 40,000/20=2000. This amount is known as Dividend.
- In the following month, all subscribers would have to only pay 8,000 instead of 10,000. This is because they have earned a chit discount of 2000.
- The above example clearly explains the entire chit process & also the terms involved in a chit.
Chit funds are equivalent of Rotating Savings and Credit Associations (ROSCA) that are famous throughout the world. ROSCAs are a means to "save and barrow" simultaneously. It is considered one of the best instruments to cater to the needs of a customer. In enables people to convert their small saving into lump sums.
