What is a chit fund?

Twenty people agree to pay ₹5,000 a month for twenty months. Each month the twenty contributions are pooled, and one member takes the pool. After twenty months everyone has taken a turn, and everyone has paid in roughly what they took out. That is a chit fund, and it is the same shape as a njangi, a tontine or a susu.

What makes it a chit fund rather than any of those is the next sentence: nobody is assigned a month. The group decides, every month, by auction.

Say it is month three of that twenty-member chit. The pool on the table is ₹100,000 — twenty members at ₹5,000 each. Three people want it this month: one is restocking a shop before a festival, one has a hospital bill, one simply would not mind having it.

They bid by saying what they are willing to give up. The shopkeeper offers to take ₹85,000 instead of ₹100,000. The person with the hospital bill offers to take ₹82,000. Nobody goes lower. The hospital bill wins the pool at ₹82,000.

The ₹18,000 they gave up does not vanish. The foreman takes their commission — the law caps it at seven per cent of the pool; say five per cent here, ₹5,000 — and the remaining ₹13,000 is shared equally among all twenty members, the winner included, so each gets ₹650 back. In practice that is deducted from what they owe next month, so their next contribution is smaller.

Members who have already taken the pool keep paying every instalment and can no longer bid.

Two quite different things go by the name. A registered chit fund is run by a foreman, usually a company, under the Chit Funds Act, 1982. There is a written agreement, the group is filed with a state registrar, the foreman must lodge security, and their commission is capped. Kerala’s state-owned operator is among the largest in the country, which is unusual — a government running the local ROSCA.

An informal chit is a dozen colleagues in an office, or traders in one market, running the same arrangement on trust with no paperwork and often no auction at all — just a draw. This sector is thought to be far larger than the registered one and is much closer to how a committee in Pakistan or a paluwagan in the Philippines works.

The distinction is worth holding onto, because the protections people associate with chit funds — the registrar, the capped commission, the lodged security — apply to the registered sector only.

The name comes from chitthi, a written slip, and a lottery form still exists alongside the auction. The shift from drawing lots to bidding is what gives the chit its character, and today it is most common in the south — Kerala, Tamil Nadu, Andhra Pradesh, Karnataka.

Parts of India regulated chits decades before the 1982 Act, which is why the chit fund is among the best-documented rotating savings traditions anywhere. Most of the others on this list were never regulated, so there are few official figures on them, which is precisely why nobody can tell you how large the global practice is.

Indian communities carry chits to the Gulf, Singapore, Malaysia, the United Kingdom, the United States and Canada. Among Gulf workers they are a common way to turn a steady monthly wage into an occasional lump sum worth sending home.

That is also where the arrangement strains hardest. Members sit in three or four countries on different pay cycles, contributions arrive through remittance services with their own fees and delays, and the person holding the money is holding it somewhere most of the group cannot see. The schedule and the record are the first things to break, long before anyone’s intentions do.

Is a chit fund legal?

In India, yes, and it is specifically regulated. Under the Chit Funds Act, 1982, a chit needs the state government's sanction and registration with the state's registrar, and the Act caps the organiser's commission and requires the foreman to lodge security. Alongside the registered sector sits a very large informal one — workplace and neighbourhood chits run on trust — which mostly runs without registration, and so without the Act's protections.

What is the difference between a chit fund and a ROSCA?

A chit fund is a ROSCA. Rotating savings and credit association is the general term economists use for the whole family; chit fund is what the Indian version is called. What makes the chit fund distinctive within that family is the auction: most rotating circles fix the turn order once, while a chit fund re-decides it every month by bidding.

How does chit fund bidding work?

Each month, members who want the pool early state the discount they will accept — they take less than the full amount. Whoever offers to take the least wins that month's pool, and the sum they gave up, after the organiser's commission, is shared equally among all the members, the winner included. A member with an urgent need can move to the front of the queue by accepting less; a member who can wait is compensated out of other people's discounts.

What does the foreman do?

The foreman is the organiser of a registered chit. They assemble the group, run the monthly auction, collect contributions, distribute the pool, and are legally required to lodge security with the state registrar. In exchange they take a commission on each pool, capped by the Act at seven per cent since a 2019 amendment (five per cent before).

Is a chit fund the same as a chitty or a kuri?

Yes. Chitty and kuri are both Malayalam names used in Kerala, and chit or chit scheme appears in official and company names. They describe the same arrangement.