The Chit Funds concept has emerged from the most simple and common form of savings group called the Rotating Savings and Credit Association (ROSCA) which means to “Save and Borrow” simultaneously

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Chit Funds 101
Chit Funds is a very innovative financial tool that let people to save and
borrow at the same time. The Chit Funds concept has emerged from the
most simple and common form of savings group called the Rotating Savings and
Credit Association (ROSCA) which means to “Save and Borrow” simultaneously.
In this article we will explain how a Chit Funds work and the basics involved
while you participate in a registered chit group.
For ease of understanding let us assume
that a new chit group is commencing
and the value of the Chit also known as
Chit Value is 10,00,000 (10 Lakhs).
Now let’s assume that the duration of the
chit is 50 months and this is equivalent to
the number of members participating
in that group as well. The Chit Fund
Company otherwise known as a Foreman
has to gather 50 people who are
interested in investing in this chit group.
These 50 persons are called Subscribers.
Now this determines the monthly subscription, which is Rs. 20,000 (20,000 X 50
= 10,00,000). The total amount that is collected from all the subscribers i.e 10
Lakhs is called the POT.
Monthly
Subscription
20,000
Chit value
or
POT
10,00,000
Duration
of the chit
50
months
50people
(Subscribers)
= =
SAVE BORROW
Once the Chit Fund Company decides to
announce / commence a new group they have
to deposit 100% of the chit value as Fixed Deposit
with the Registrar of Chits as Security. This
amount can be withdrawn only after the chit
group closes and every subscriber is paid in
full. This regulation protects the interest of the
Subscribers. In receipt to the deposit the
Registrar provides a PSO (Previous Sanction
Order)tocommencethechitgroup.Whenyoujoina
Chit ask for a copy of the PSO,
“It’s your Right!!!”
Chit funds 01

2. During the first month all the Subscribers will pay 20,000 as subscription and
contribute to a pot of 10,00,000 (10 Lakhs). Now this pot will be auctioned.
As per chit funds act the minimum bid has to be 5% which is equivalent to
the Chit commission and the maximum bid can be 40%. The bidders are
bidding for the amount that they are willing to forego for other subscribers
in order to get the money based on their needs. In our illustration let us
assume Bidder 1 is bidding for 40% (i.e. 40% of 10 Lakhs = 4 Lakhs, He is
willing to forego 4 Lakhs to others and take 6 Lakhs as the Prize Amount).
The 4 Lakhs is known as the Discount and the 6 lakhs is known as the
Prize Amount.
PRIZE AMOUNT
Now let’s see how this discount is distributed. The chit Foreman takes 5% chit
commission each month as their fee (i.e 5% of 10 Lakhs = 50,000). Now 4 Lakhs –
50,000 = 3.5 Lakhs, this 3.5 Lakhs is distributed equally among the 50 subscribers
(i.e 3.5 Lakhs/ 50 = 7000). This 7000 is known as the Dividend.
1 2 3 4 5 6 7 8 9 10 50
. . . . . . . . . . . .
Subscribers
Subscription
Month 1
Rs.20,000
(50 x Rs.20,000)
Rs.10,00,000 (POT)
This POT is auctioned
Auction
Min auction value = 5% of POT
Max auction value = 40% of POT
Bidder 1 = 40% of 10 lakhs = 4 lakhs
(Highest bidder)
Bidder 2 = 35% of 10 lakhs = 3.5 lakhs
Bidder 3 = 25% of 10 lakhs = 2.5 lakhs
Bidder 4 = 25% of 10 lakhs = 2.5 lakhs
.
.
.
Bidder 50 = 5% of 10 lakhs = 50,000
For e.g.
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Chit funds 02

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So next month all the subscribers have to pay only 13,000 as subscription (i.e
20,000 – 7000 (dividend) = 13,000). Now 50 X 13,000 = 6.5 Lakhs and 3.5 lakhs
is available with the Foreman as Distributed dividend and hence 6.5 Lakhs +
3.5 Lakhs = 10 Lakh, hence the 10 Lakhs pot is available for auction again. This
process continues till people bid for the pot.
The pot may go on auction based on the need of the subscriber and hence
the dividend defers every month for the subscriber.
If no one bids on a particular month then
the foreman deducts his commission
(in this case 50,000) and selects a non
prized subscriber through a Lot system
and deploys the money to that prized
Subscriber who is selected through lot.
To illustrate how the data would look like
at the end of 50 months let’s assume few
scenarios and see what happens.
There is also a formula to calculate the Rate of Interest at which you borrow
when you bid and get the prize amount:
Formula
The below formula helps you to derive the annual interest rate at which you
borrow in a chit scheme
Bidder 1 wins the Bid
Dividend Distribution
Dividend = Discount - Foreman commission
3.5 Lakhs = 4 Lakhs - 50,000
Dividend per Subscriber = 3.5 Lakhs/50 = Rs.7000
POT - Discount = Price Amount
10 Lakhs - 4 Lakhs = 6 Lakhs
What does he get?
Payment
Every time when the Prize Amount is dispersed to
the Subscriber,The foreman demands a security /
Surety from them for the future dues. This could
be in the form of Bank Guarantees, fixed assets,
personal surety..etc.This ensures the recovery of
the future dues from the subscriber at the event
of default “At MFC we follow this methodically
and this has ensured a minimal customer
defaultrate which is way less than the Industry
Average”
Discount – Office Commission
Balance Period X1200 = Annual Interest rate
Prize Amount
((Discount – Office Commission)/ Balance Period/Prize Amount)X1200 = Interest
rate
Annual
Chit funds 03

4. Scenario 1: Bidder 1 who Bids during the 1st month at 40% discount
In our case let us assume Bidder 1 is the highest bidder and let’s see at what
rate he has borrowed.
((4, 00,000-50,000) / 49 Months / 6, 00,000) X1200 = 14.2 %
Now let’s assume that the total dividend that he received at the end of
the chit period is 2 Lakhs. Hence the annual percentage of dividend is
((2, 00,000/50 months) X12) % = 4.8% annual return.
Also the bidder pays 5% commission for the entire tenure of the chit and hence
the annual commission that he pays is ((50,000/50 months) X12% = 1.2% annual
rate.
Hence the rate at which Bidder 1 get a loan = 14.2% (Loan rate) + 1.2% (Chit
Commission) - 4.8% (Dividend) = 10.6 %.
Bidder 1 has taken 10 Lakhs loan at an interest rate of 10.6% / annum. The
beauty is Bidder 1 has access to money 49 months before the tenure and he
has options to multiply it through various means of business / investments etc,
which can provide a return much higher than 10.6 %
Scenario 2: Bidder 5 who Bids during the 10th month at 25% discount
Discount @ 25% = 2.5 Lakhs
Prize Amount = POT - Discount = 10 Lakhs – 2.5 Lakhs = 7.5 Lakhs
Dividend = Discount - Foreman Commission = 2.5 Lakhs – 50 K = 2Lakhs
Dividend per subscriber = Dividend/No of members = 2 Lakhs/50 members=4000
Next month subscription = Subscription - Dividend/subscriber
16,000 = 20,000 - 4000
Bidder
1
49 months
Month 1
10 Lakhs
at
10.6%
Discount – Office Commission
Balance Period X1200 = Annual Interest rate
Prize Amount
((Discount – Office Commission)/ Balance Period/Prize Amount)X1200 = Interest
rate
Annual
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Chit funds 04

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In our case let us assume Bidder 5 is the highest bidder and let’s see at what
rate he has borrowed.
((2, 50,000 - 50,000) / 40 Months / 7, 50,000) X1200 = 9.7 %
Now let’s assume that the total dividend that he received at the end of
the chit period is 2 Lakhs. Hence the annual percentage of dividend is
((2, 00,000/50 months) X12) % = 4.8% annual return.
Also the bidder pays 5% commission for the entire tenure of the chit and hence
the annual commission that he pays is ((50,000/50 months) X12% = 1.2% annual
rate.
Hence the rate at which Bidder 1 get a loan = 9.8% (Loan rate) + 1.2% (Chit
Commission) - 4.8% (Dividend) = 6.2 %.
Bidder 5 has taken 10 Lakhs loan at an interest rate of 6.2% / annum. The beauty
is Bidder 5 has access to money 40 months before the tenure and he has options
to multiply it through various means of business / investments etc. which can
provide a return much higher than 6.2 %.
Bidder 1 has taken the money at higher rate but the advantage of him over
bidder 5 is that he had access to money 10 months ahead of bidder 5.
Scenario 3: Subscribe 20 is a saver and he did not participate in any bid and
just took the money at the end of the tenure.
At the end of 50th month:
Prize amount = 10 Lakhs – 50 K (Foreman Commission) = 9.5 Lakhs.
Total dividend received in this group = 2 lakhs.
Bidder
1
40 months
10 months
Month 1 . . . Month 10
10 Lakhs
at
10.6%
Bidder
5
10 Lakhs
at
6.2%
Discount – Office Commission
Balance Period X1200 = Annual Interest rate
Prize Amount
((Discount – Office Commission)/ Balance Period/Prize Amount)X1200 = Interest
rate
Annual
Chit funds 05

6. Hence this subscriber has deposited only 8 Lakhs over a period of 50 months
and he received 9.5 lakhs at the end of the tenure. This has helped him to save
in a recurrent mode which he would not have done otherwise.
Depending on the need of money one can be a saver or borrower in a Chit
scheme and that makes this as a unique financial product.
Plan … Participate… Prosper…
Author: Manoj Padmanaban
VP – Business Operations
The Mayavaram Financial Chit Corporation Limited
E: manoj@thinkmfc.com
W: www.thinkmfc.com
M o d e s t s e r v i c e s F i n a n c i a l s t a b i l i t y C u s t o m e r f i r s t
ESTD 1947
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THE MAYAVARAM FINANCIAL CHIT
CORPORATION LTD
Think Chit funds Think MFC
Running Chits ranging from
Rs.1 Lakh to Rs.50 Lakhs
Under the Central Chit Funds Act 40/82
Graphics and Design : Mithun SG
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