How Chits Work

Chit value

There is a new chit group that is commencing. The value of the chit is 500,000. This amount is known as the Chit Value.

Chit period

For the purpose of this illustration, we will consider the duration of the chit to be 50 months. This is known as term period for the chit group.

Subscribers

The Foreman or Chit Fund Company has to gather 50 people who are interested in investing in this chit group. These 50 persons are called Subscribers.

Foreman responsibility (Kapil Chits)

Once the chit group commences

  • The foreman has to register the chit with the registrar of chits.
  • The foreman has to pay 100% of the chit value as security.
  • This amount can be withdrawn only after the said chit group closes and every subscriber is paid what is due to him or her.
  • This regulation protects the interests of the subscriber to a certain extent.

Monthly subscriptions

Once the chit group commences

  • The amount to be saved every month by the Subscriber is Chit value/No of person’s i.e. 500,000/50 = 10,000.
  • This is also known as Monthly Subscription. It may be noted here that the number of persons investing in a chit and the duration of the chit is always the same.
  • The maximum monthly contribution or Subscription Amount that a Subscriber will pay is 10,000.
  • The Subscriber does not always pay the entire Subscription amount every month

Chit Discounts

The Subscriber does not always pay the entire Subscription amount every month. Let us find out how and why he does not have to pay the entire amount.

The maximum discount or maximum bid permitted ranges from 30-40%. For the purpose of this illustration we will assume that a Subscriber has bid 35% of the chit value. 35% of 500,000 is 175,000. This amount is known as Chit Discount.

Chit Discount example

The foreman charges 5% of chit value as commission. In this illustration, that would amount to 25,000. This is deducted from Chit Discount i.e. 175,000-25000=150,000. This amount is available for equal distribution among the subscribers.

In our example, 150,000 would be divided equally among 50 subscribers. Each subscriber would get a discount of 150,000/50 = 3000. This amount is known as Dividend.

In the following month, all subscribers would have to only pay 7,000 instead of 10,000. This is because they have earned a chit discount of 3000.

Conclusion

The Subscriber does not always pay the entire Subscription amount every month. Let us find out how and why he does not have to pay the entire amount.

The maximum discount or maximum bid permitted ranges from 30-40%. For the purpose of this illustration we will assume that a Subscriber has bid 35% of the chit value. 35% of 500,000 is 175,000. This amount is known as Chit Discount.