Chit Fund

Customer attitude towards investing in chit funds & Customer satisfaction measurement
Contents
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. Bblography 16 7 42 43 46 47 51 52 73 74 75 76 77 78
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Customer attitude towards investing in chit funds & Customer satisfaction measurement 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 Rs. 1 lakh Rs. 5 lakhs Rs. 10 lakhs Rs. 25 lakhs Months 40 50 25 25 No.of Members 40 50 25 25 Monthly Subscription 2500 10000 40000 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 Babasabpatilfreepptmba.com Page 2
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. Babasabpatilfreepptmba.com Page 3
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) c) d) e) Tool for Collection Data: Structured Questionnaire both for the members of the company and the company. Sample Design: Selected Targeted Company, i.e., PCPL and 50 Respondents selected as Random Sample Method. Method of Collecting Data: Interview method and investigative method. 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 te copmany. The members have selected chit funds because of various reasons among which following are important reasons. i. Money is easily available. Page 4
ii. iii. It can be repaid in easy monthly installments. 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.
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A study with Panchajanya Chit Pvt. Ltd. Questionnaire for Members: 1. 2. Name: Age:
3. Address: 4. Qualification: Under-Graduate 5. Occupation: Employed by Others 6. what type of Business: 7. Annual Income (If Employed): 8. What is your Annual Income ? (If Salary earner) 2 3 Lakhs (If Business) a. Turnover: Upto 25 lakhs Above 1 Crore (If Ohers) 2 3 Lakhs 3 4 Lakhs Above4Lakhs 25-50 lakhs 0.5-1 crore 3 4 Lakhs Above 4Lakhs Business Others Graduate Post-Graduate
9. Since when are you a member of PCPL? Babasabpatilfreepptmba.com Page 6
1-2 yrs 5-10 yrs 2-3 yrs 10 or above 3-5 yrs
10. In which Chit group are you a member? a. Chit Amount Rs. 1 lakh Rs. 5 lakhs Rs. 10 lakhs Rs. 25 lakhs
11. When do you normally bid for the Chit? B/w 2nd -10th month B/w 21st -30th month As need arises B/w 11th -20th month 30th month Onwards
12. What is the Maximum percentage you would forego? 5-10% 10-15% 15-20% 20% onwards
13. For what purpose do you use the Chit Amount? Business Investment Working Capital Private Property Business Assets
14. Do you give any Security, when you draw a Chit? Babasabpatilfreepptmba.com Page 7
Yes No
15. What according to you are the advantages of Chit Fund? Money is easily & quickly available The profits distributed as dividend Easy Membership Interest is low Repayment in easy instalments
16. Is investing in Chit Funds profitable? Yes No
17. Does investing in Chits gain more profit than any other Financial Institution? Yes No
18. The interest rate on foregoing the Amount is High Low
19. Are you happy with the Service being provided by PCPL? Yes No
Signature.
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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. Babasabpatilfreepptmba.com Page 9
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.
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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 Babasabpatilfreepptmba.com Page 11
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 Babasabpatilfreepptmba.com Page 12
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
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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 Babasabpatilfreepptmba.com Page 14
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 17 th 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 Babasabpatilfreepptmba.com Page 15
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. Babasabpatilfreepptmba.com Page 16
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
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(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. I 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. II 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. Babasabpatilfreepptmba.com Page 18
III 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. IV 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. V 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. VI. 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.
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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. VII. 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. VIII. 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. IX. 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. Babasabpatilfreepptmba.com Page 20
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. Babasabpatilfreepptmba.com Page 21
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
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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) Page 23
15,000 _______ 15,000 9,000 ________ 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. (Being income tax benefit) (Dividend earned by him)
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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) Bank overdraft Cash Credit. Discounting of Bills Term loan Indigenous Money Lenders Trade Credit. Interest Rate Charged 16.5% 16% 18%-20% 15%-16% 18% 24%
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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/Babasabpatilfreepptmba.com Page 26
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.
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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. Babasabpatilfreepptmba.com Page 28
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.
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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.
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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.
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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.
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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. Babasabpatilfreepptmba.com Page 33
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. Babasabpatilfreepptmba.com Page 34
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. Babasabpatilfreepptmba.com Page 35
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 Babasabpatilfreepptmba.com Page 36
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 Babasabpatilfreepptmba.com Page 37
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) i. ii. iii. a registrar containing The names and full particulars of the subscribers. The date on which the subscribers signed the chit agreement. 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. Babasabpatilfreepptmba.com Page 38
c) A ledger containing i. ii. iii. Amount paid by subscribers in each chit and dates of such payments. Amount paid by prized subscribers and dates of such payments. 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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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. Babasabpatilfreepptmba.com Page 47
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
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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 Babasabpatilfreepptmba.com Page 49
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
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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.
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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.
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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.
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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) c) d) e) Tool for Collection Data: Structured Questionnaire both for the members of the company and the company. Sample Design: Selected Targeted Company, i.e., PCPL and 50 Respondents selected as Random Sample Method. Method of Collecting Data: Interview method and investigative method. Method of Analysis: Quantitative and Descriptive Analysis.
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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.
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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.
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The company began its operation with a meager 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 Rs. 1 lakh Rs. 5 lakhs Rs. 10 lakhs Rs. 25 lakhs Months 40 50 25 25 No.of Members 40 50 25 25 Monthly Subscription 2500 10000 40000 100000
In order to meet the growing demand of its clientele, the company proposes to start the full chit schemes.
Chit Value Rs. 50 lakhs Rs. 75 lakhs Rs. 100 lakhs
Months 25 25 25
No.of Members 25 25 25
Monthly Subscription Rs. Rs. 2,00,000 Rs. 3,00,000 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
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receive results. The company has dedicated staff at all levels working in a smooth and efficient manner.
MISSION Panchajanya endeavors 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.
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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 02 D. Ramachandra Prashanth R. Dhondale Chairman. 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 Babasabpatilfreepptmba.com Page 59
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 father Babasabpatilfreepptmba.com Page 60
and 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 view Babasabpatilfreepptmba.com Page 61
of 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.
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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 analyzed.
Analysis
Table 1 : Indicates the name profile of the respondents
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Particulars Name Given Name not Given Total No. of Respondents 48 02 50 Percentage 96 04 100
4%
Name given Name not given
96%
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.
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Customer attitude towards investing in chit funds & Customer satisfaction measurement Particulars
20 25 Years 25 35 Years 35 45 Years 45 & Above
No. of respondents
2 16 22 10
Percentage
4 32 44 20
Age Profile
No. of respondents 25 20 15 10 5 0 22 16 10 2 20 - 25 25- 35 35-45 45 & above Series1
Years
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.
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Particulars Undergraduate Graduate Post Graduate Total No. of respondents 08 32 10 50 Percentage 16 64 20 100
Qualification Profile
20% 16% Under Graduate Graduate Post Graduate 64%
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 Page 66
Salary Earners Business Others Total 5 37 8 50 10 74 16 100
Occupation Profile
16% 10% Salary Earners Business Others 74%
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.
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5a. Salary Earners Income 2 3 Lakhs 3 4 Lakhs More than 4 Lakhs Total No of Respondents 2 2 1 05 Percentage 40 40 20 100
Income Level
20% 40% 2- 3 lakhs 3- 4 lakhs More than 4 Lakhs
40%
Inference: Respondents having considerable amount of income to over come the risk and invest in chit funds.
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5b. Businessmens
Turnover
Up to 25 Lakhs 25 50 Lakhs 50 100 Lakhs Above 1 Crore Total
No. of respondents
08 13 12 04 37
Percentage 22 35 32 11 100
Turnover Level
11%
22% Upto 25 Lakhs 25-50 Lakhs 50- 100 Lakhs Above 1 Crore 35%
32%
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.
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5c. Other Respondents
Income 2 3 Lakhs 3 4 Lakhs More than 4 Lakhs Total
No of Respondents 3 4 1 08
Percentage 38 50 12 100
Income level
13% 38% 2- 3 Lakhs 3-4 Lakhs More than 4 Lakhs
49%
Inference: Respondents having considerable amount of income to over come the risk and invest in chit funds.
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Table 6: Indicates the membership profile of the respondents. No. of Years Below 2 24 46 68 Above 8 Total No. of respondents 08 06 08 10 18 50 Percentage 16 12 16 20 36 100
Duaration of Members with PCPL

20 18 16 14 12 10 8 6 4 2 0 18
Respondents
10 8 6 8
Series1
Below 2 - 4. 2
4 - 6.
6 - 8. Above 8
No. of Years
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. Babasabpatilfreepptmba.com Page 71
Table 7 : Indicates the chit group membership. Chit Amount 1 Lakh 5 Lakh 10 Lakh 25 Lakh 50 Lakh Total No. of Respondents 12 20 06 08 04 50 Chit Groups of Members 25 No of Respondents 20 15 10 5 0 1 Lakh 5 10 25 50 lakhs Lakhs Lakhs Lakhs Amount 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. Babasabpatilfreepptmba.com Page 72 12 6 8 4 20 Percentage 24 40 12 16 08 100
Series1
Table 8 : Indicates when the chit is normally bid. Period Between 2nd & 10th month Between 11th & 20th month Between 21st & 30th month 30th month onwards As need arises Total No. of Respondents 15 11 09 09 06 50 Percentage 30 22 18 18 12 100
Bidding of Chits
16 14 12 10 8 6 4 2 0
2
15 11 9 9 6 Series1
No of Respondents
-1 0.
-2 0.
-3 0.
ds 0n w ar As
11
21
Months
Inference: The chits are bid based on financial requirement and sometimes when their ia urgency, the subscribers may bid by foregoing heavy amount. Babasabpatilfreepptmba.com Page 73
ne ed
30
ar is
es
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.
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Table 9 : Indicates the maximum percentage foregone. Percentage foregone 5 10 % 10 15 % 15 20 % Above 20 % Total No. of Respondents 25 12 08 05 50 Percentage 50 24 16 10 100
Maximum Percentage Forgone

No of Respondents 30 25 20 15 10 5 0 25 12 Series1 5
5 - 10.
10 - 15. 15 - 20. Percentage
Above 20
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.
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Table 10 : Indicates the interest rate on the foregone amount. Particulars Interest rate is high Interest is low Total No. of respondents 02 48 50 Percentage 04 96 100
Interest rate on the forgone amount

4% Rate is high Rate is low 96%
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.
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Table11 : Indicates the use of the chit amount. Particulars Business: - Working Capital - Business Assets Private Property Total No. of Respondents 32 10 08 50 Percentage 64 20 16 100
Usage of Chit Amount

16% Working Capital Business Assets Private Property
20% 64%
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 Babasabpatilfreepptmba.com Page 77
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 Security Provided Security not Provided Total No. of respondents 20 30 50 Percentage 40 60 100
Security Demanded & Provided
40% 60%
Security Provide Security Not Provided
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 th 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 banks Babasabpatilfreepptmba.com Page 78
or 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 1 2 3 4 5 Particulars Money is easily & quickly available Repayment in easy instalments The profits distributed as dividend Interest is low Easy Membership Total No. of respomdents 08 20 4 10 8 50 Percentage 16 40 08 20 16 100
Advantages of Chit Funds

25 20 15 10 5 0 1 2 3 4 5 8 4 20
10
Series1
Inference: Babasabpatilfreepptmba.com Page 79
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 Profitable Not Profitable Total No. of Respondents 50 Nil 50 Percentage 100 00 100
Profitability in investing in chit funds

0%
Profitable Non Profitable
100%
Inference : The above data reveals that all the respondents believe that investing in chit funds are very profitable.
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Table 15 : Indicates the average profit earned from chits. Profit (Range) 15% 10 15 % Above 15% Total No. of Respondents Nil 22 28 50 Percentage 00 44 56 100
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.
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Table 16 : Indicates the comparison of profit with other financial institution. Particulars Profits earned more than other financial institutions Profits earned lesser than other financial institutions Total No. of respondents 32 18 50 Percentage 64 36 100
Comparision of profit with other FI's
36%
64%
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. Babasabpatilfreepptmba.com Page 82
Table 17 : Indicates the satisfaction of the customers towards the service provided by the company.
Particulars Satisfied with the service Not satisfied with the service Total
No. of respondents 45 05 50
Percentage 90 10 100
Costomer satisfaction towards service

10%
Satisfied Not satisfied
90%
Inference:
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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. Babasabpatilfreepptmba.com Page 84
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 atitude 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 t te copmany. The members have selected chit funds because of various reasons among which following are important reasons. iv. v. vi. Money is easily available. It can be repaid in easy monthly installments. Procedural and documentation formalities are very less.
The surplus is distributed among members as dividend.
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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 customeers 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 Babasabpatilfreepptmba.com Page 86
(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.
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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., Kundan Lal. N.J. Yasaswy ; Vision Books Pvt. Ltd.
Finance and Profits Business Finance. Financial Management P.N. Reddy, H.R. Appannaiah, B.G. Sathyaprasad; Himalaya Publication House.
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Chit Fund

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Customer attitude towards investing in chit funds & Customer satisfaction measurement

9. Since when are you a member of PCPL? Babasabpatilfreepptmba.com Page 6

16. Is investing in Chit Funds profitable? Yes No

18. The interest rate on foregoing the Amount is High Low

Chit Funds - Overview

Chit Fund Procedure

Chit Value Rs. 50 lakhs Rs. 75 lakhs Rs. 100 lakhs

Monthly Subscription Rs. Rs. 2,00,000 Rs. 3,00,000 Rs. 4,00,000

Name given Name not given

Table 2 : Indicates the age profile of the respondents.

Table 3 : Indicates the qualification profile of the respondents.

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

20% 40% 2- 3 lakhs 3- 4 lakhs More than 4 Lakhs

Income 2 3 Lakhs 3 4 Lakhs More than 4 Lakhs Total

Duaration of Members with PCPL

Maximum Percentage Forgone

10 - 15. 15 - 20. Percentage

Interest rate on the forgone amount

Usage of Chit Amount

Security Demanded & Provided

Security Provide Security Not Provided

Advantages of Chit Funds

Inference: Babasabpatilfreepptmba.com Page 79

Profitability in investing in chit funds

Profitable Non Profitable

Average Profit earned from chits

Comparision of profit with other FI's

More than other FI's Less than other FI's

Costomer satisfaction towards service

Satisfied Not satisfied

The surplus is distributed among members as dividend.

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