Union Government decided to include Chit Funds under the Chit Fund Act of 1982 in Six States

The Union government decided to include Chit funds, an informal pooling of funds from individuals for lending under the Chit Fund Act of 1982 in six states including Gujarat and Kerala. The decision was meant to help people access the dispute settlement mechanism. Nagaland, Haryana, Tripura, and Arunachal Pradesh are the other states to come under the Act, providing a cushion for small savers who are at the mercy of local operators. Of the six states brought under the central ruling, only Kerala operated under the Kerala Chit Act of 1975. The other five states had no laws to regulate chit fund operators.

Registered chit funds have to follow rules laid down by the Reserve Bank of India. Industry sources say the legislation will force several unregistered chit funds to shut shop across the country.

Given that the chit funds are not managed professionally, investors face difficulty in getting disputes resolved. As per the estimates projected by the chit fund industry, over 12000 registered chit funds manage in excess of Rs 35000 crore a year. The share of unregistered funds is possibly 80-90 times more than registered funds. The move is expected to bring about level playing field among registered and unregistered chit fund operators and make chit funds a safer product for investors.

A chit scheme generally has a pre-determined value and duration. Each scheme admits a particular number of members (generally equal to the duration of the scheme), who contribute a certain sum of money every month (or everyday) to the ‘pot’. The ‘pot’ is then auctioned out every month. The person bidding lowest sum gets the bid amount.

The initiative to bring chit fund operators under registration is being considered a positive move as it will set systems and processes in the chit fund industry. If chit funds are registered and bound under a central Act, it will improve (legal) the recourse mechanism for investors.