Chit funds to be called as Fraternity funds..

The Cabinet recently approved a new bill to ban Unregulated Deposit Schemes and amend Chit Funds Act 1982. The Chit Funds Act is here.

So what does the amendment propose?

The Union Cabinet, chaired by the Prime Minister Shri Narendra Modi, has given its approval to introduce the Chit Funds (Amendment) Bill, 2018 in Parliament. In order to facilitate orderly growth of the Chit Funds sector and remove bottlenecks being faced by the Chit Funds industry, thereby enabling greater financial access of people to other financial products, the following amendments to the Chit Funds Act, 1982 have been proposed:

  • Use of the words “Fraternity Fund” for chit business under Sections 2(b) and 11(1) of the Chit Funds Act, 1982, to signify its inherent nature, and distinguish its working from “Prize Chits” which are banned under a separate legislation;
  • While retaining the requirement of a minimum of two subscribers for the conduct of the draw of the Chit and for the preparation of the minutes of the proceedings, the Chit Funds (Amendment) Bill, 2018 proposes to allow the two minimum required subscribers to join through video conferencing duly recorded by the foreman, as physical presence of the subscribers towards the final stages of a Chit may not be forthcoming easily. The foreman shall have the minutes of the proceedings signed by such subscribers within a period of two days following the proceedings;
  • Increasing the ceiling of foreman’s commission from a maximum of 5% to 7%, as the rate has remained static since the commencement of the Act while overheads and other costs have increased manifold;
  • Allowing the foreman a right to lien for the dues from subscribers, so that set-off is allowed by the Chit company for subscribers who have already drawn funds, so as to discourage default by them; and
  • Amending Section 85 (b) of the Chit Funds Act, 1982 to remove the ceiling of one hundred rupees set in 1982 at the time of framing the Chit Funds Act, which has lost its relevance. The State Governments are proposed to be allowed to prescribe the ceiling and to increase it from time to time.

The emphasised one is interesting. There are two types of chits: conventional chits and prized chits.

The prized chits which are banned under The Prize Chits and Money Circulation Act 1978. Under this, the foremen mobilises savings and auctions the pool to select subscribers with no liability to pay in future towards the scheme.

This amendment applies to conventional chits in which there is a common pool and each member gets the pool based on auction or lottery etc. They are going to be called fraternity funds just to signal the difference to the Prized chits.

Section 2(b) says:

“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 sum of money (or a certain quantity of grain instead) by way of periodical instalments over a definite period and that each such subscriber shall, in his turn, as  determined by lot or by auction of by tender or in such other manner as may be specified in the chit agreement, be entitled to the prize amount.

Explanation.—A transaction is not a chit within the meaning of this clause, if in such transaction,—
(i) some alone, but not all, of the subscribers get the prize amount without any liability to pay future subscriptions; or
(ii) all the subscribers get the chit amount by turns with a liability to pay future subscriptions;

Section 11 (1) says:

11. Use of the words “chit”, “chit fund”, “chitty” or “kuri”.—(1) No person shall carry on chit business unless he uses as part of his name any of the words “chit”, “chit fund”, “chitty” or “kuri” and no person other than a person carrying on chit business shall use as part of his name any such word.
(2) Where at the commencement of this Act,—
(a) any person is carrying on chit business without using as part of his name any of the words specified in sub-section (1) ; or
(b) any person not carrying on chit business is using any such word as part of his name, he shall, within a period of one year from such commencement, add as part of his name any such word or, as the case may be, delete such word from his name:

Provided that the State Government may, if it considers it necessary in the public interest or for avoiding any hardship, extend the said period of one year by such further period or periods not exceeding one year in the aggregate.

What is even more fascinating is how chit funds have existed for more than thousand years now. Despite several closures and several committees pointing to their limitations, they remain popular especially in Kerala.

Will renaming these funds as fraternity funds lead to more community feeling and better business environment for the industry?

I could say names don’t matter, but in banks/financial intermediation names do matter.

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