Twenty people in an office, or a lane, or an extended family, put in ₹5,000 each on the fifth of every month. Every month the whole pot goes to one of them, decided by who is willing to take the least. The person whose daughter is getting married in March takes it in February and accepts a large cut. The person with nothing particular to pay for waits until month twenty and takes almost the whole amount. Both of them describe what they are doing with the same word. One of them has borrowed money at a rate nobody wrote down, and the other has lent it.
A long queue outside a counter. A man near the back has a train to catch and offers everybody ahead of him a hundred rupees each to let him through. Nobody loses their place in any real sense — they get their turn a little later and are paid for the wait. The man at the front, who was never in a hurry, ends up collecting from everyone who overtook him.
A chit auction is that queue, run once a month with money instead of hundred-rupee notes. The discount a subscriber accepts to take the pot early is the price of moving forward, and it is shared out among everybody who stays behind. The scheme itself creates no return at all. It only moves money between people who are in a hurry and people who are not.
The mechanism, precisely
A chit has a fixed number of subscribers and runs for exactly that many months. Each subscriber pays a fixed instalment. The chit value is the instalment multiplied by the number of subscribers — the size of the pot each month. Every month that pot is auctioned among the subscribers who have not yet taken it, and the one prepared to accept the largest reduction takes it. That reduction is the discount bid. The foreman keeps a commission out of it and the rest is divided among all the subscribers, which reduces what each of them pays into the next instalment.
| The subscriber who bids early | The subscriber who waits | |
|---|---|---|
| What they are actually doing | Borrowing against their own future instalments | Lending to the other subscribers |
| Where the cost or return comes from | The discount they accepted, plus the foreman's commission | The share of every discount bid by everybody else |
| What decides the number | How keenly the other members bid in the months they need money | The same figure, seen from the other side |
| The risk they carry | None once the money is received, beyond the obligation to keep paying | Every remaining subscriber's ability to keep paying, and the foreman's conduct |
| Comparable to | A personal loan, at a rate set by an auction | An unsecured deposit with twenty strangers |
Registered chits, and everything else
A chit conducted as a business in India is governed by the Chit Funds Act, 1982 and by rules made by each state. A registered chit is registered with the state's Registrar of Chits, the foreman must lodge a security deposit before the chit starts, the commission the foreman may take is capped rather than negotiated, the maximum discount that can be bid is capped as well, and the minutes of each auction must be filed. A prized subscriber who has taken the pot but still owes instalments has to give security for the balance. None of that makes a chit a good idea. It makes it an arrangement with a registrar, a paper trail and somebody to complain to.
- Registered with the state Registrar of Chits under a certificate you can ask to see
- The foreman lodges a security deposit before subscriptions are collected
- Commission and maximum discount are capped by the Act and the state rules
- Auction minutes are recorded and a written chit agreement exists
- A defaulting subscriber can be pursued, because there is a document to pursue them on
- No registration, no registrar, and usually nothing in writing
- The organiser holds everybody's money on trust alone
- The cut taken by the organiser is whatever was agreed verbally
- No record of who bid what, so disputes are memory against memory
- A member who takes the pot and stops paying leaves the loss with whoever is still in
What a chit is not
A chit takes money only from its own subscribers and returns all of it to the same subscribers, less the foreman's commission. A money circulation scheme pays you out of money brought in by people you enrol, and prize chits and money circulation schemes are separately banned under a 1978 Act of their own. The distinction is not the word on the board — several large Indian deposit-taking collapses had the words chit fund in their names while running something quite different underneath. The distinction is where the money comes from.
- Ask what is being sold. In a genuine chit you are buying a place in an auction among a closed group. If the return depends on new members joining, or on enrolling others, it is a different thing wearing the same name.
- Ask for the registration. A registered chit has a certificate from the state registrar, a chit agreement and a chit group number. A foreman running a business chit without registration is committing an offence, whatever the family connection.
- Ask who else is in it. In a committee your money is only as good as the twenty other balance sheets, none of which you can see. Twenty colleagues at one employer is a concentrated bet on that employer.
- Ask what happens on a default. Written in advance, it is a term. Discovered afterwards, it is a dispute among people you have to keep seeing.
- Price it before you join. Estimate the discounts you expect to bid, or expect never to bid, and run the cash flows. A chit you never bid in is a deposit; a chit you bid in early is a loan. Compare each against what a deposit or a loan would have cost you.
A colleague is starting a committee
Twenty people in your office, ₹5,000 a month for twenty months, organised by a senior colleague who has run three before without incident. Nothing is written down. You have an emergency fund in place and a running SIP.
In a 20-member chit of ₹5,000 a month, a subscriber bids a discount of ₹30,000 in month one. Where does that ₹30,000 go?
Committee mein bees log, har mahine ₹5,000. Jiski beti ki shaadi March mein hai woh February mein hi pot le leta hai — aur badle mein bada cut manzoor karta hai. Jise jaldi nahi, woh bees-vein mahine tak rukta hai aur poora uthata hai. Dono ek hi scheme mein hain, par ek udhaar le raha hai aur doosra de raha hai. Scheme khud se ek rupya nahi banati — bas jaldi walon se sabr walon ki taraf paisa khiskaati hai. Apna asli rate jaanne ka ek hi tareeka hai: dates ke saath XIRR nikaalo.
- A chit is a borrowing arrangement and a lending arrangement at once, depending on when you bid.
- The discount is a transfer between subscribers, less the foreman's capped commission.
- Registration under the Chit Funds Act brings a registrar, a security deposit and a paper trail.
- An informal committee leaves a defaulter's loss with whoever is still waiting for their turn.
- The only honest rate is the XIRR of your own dated payments and receipts.
Mark it done to track your progress through the curriculum.
Common questions
Short, direct answers to what people ask about this topic.
- prized subscriber meaning in a chit fund
- The prized subscriber is the member who wins a month’s auction and takes the pot, after accepting a discount and after the foreman deducts commission. Winning does not end the obligation — a prized subscriber still owes every remaining instalment, and under the Chit Funds Act has to furnish security for that balance. In economic terms this member has borrowed against their own future instalments, at a rate the auction set rather than a rate anyone wrote down.
- the person who conducts a chit and collects the subscriptions is called the
- Foreman. The foreman runs the chit, collects the instalments, conducts the monthly auction, pays out the prize amount and keeps a commission for doing so. In a registered chit the foreman must lodge a security deposit with the state Registrar of Chits before any subscription is collected, and the commission is capped by the Chit Funds Act, 1982 rather than negotiated.
- how much commission does a chit foreman take
- Five per cent of the chit value is the standard figure, and under the Chit Funds Act, 1982 it is a ceiling rather than an opening position. On a 20-member chit of ₹5,000 a month the chit value is ₹1,00,000, so the foreman keeps ₹5,000 out of that month’s discount. Whatever remains of the discount is divided among all the subscribers and reduces everybody’s next instalment.
- is a chit fund the same as a money circulation scheme
- No. A chit takes money only from its own subscribers and returns all of it to those same subscribers, less the foreman’s commission, so nothing in it depends on new members joining. A money circulation scheme pays you out of money brought in by people you enrol, and prize chits and money circulation schemes are banned outright under a separate 1978 Act. Several large Indian deposit-taking collapses carried the words chit fund in their names, so the label decides nothing — where the money comes from does.
- is an office committee the same as a registered chit
- No. A chit conducted as a business must be registered with the state Registrar of Chits, with a written chit agreement, a security deposit from the foreman, a capped commission and recorded auction minutes. An informal office or mohalla committee has none of that — no registrar, usually nothing in writing, and no document on which a member who takes the pot and then stops paying can be pursued. That loss lands on whoever is still waiting for their turn.