Loan vs Chitty

#1
I found it interesting that some of my friends when they need money, instead of going for a loan they open a chitty account. for example a chitty with monthly subscription for 2 lakh amount, the subscription is 5000*40 months. an average you have to pay rs.4500 monthly. that means you pay a total of 180000 in 40 months. the craze is that suppose you need money, even after paying one month subscription you can go for drawing the total amount. in that case you may get around 1.5 to 1.6 lakh rs.

If you go for a loan for rs.1.5 lakh in any nationalized/pvt bank then you may have to pay more than 2 lakh as amount & interest etc. What you say about this?
 
#2
I found it interesting that some of my friends when they need money, instead of going for a loan they open a chitty account. for example a chitty with monthly subscription for 2 lakh amount, the subscription is 5000*40 months. an average you have to pay rs.4500 monthly. that means you pay a total of 180000 in 40 months. the craze is that suppose you need money, even after paying one month subscription you can go for drawing the total amount. in that case you may get around 1.5 to 1.6 lakh rs.

If you go for a loan for rs.1.5 lakh in any nationalized/pvt bank then you may have to pay more than 2 lakh as amount & interest etc. What you say about this?
You need to re-write your post. I did not understand it at all :embarassed:.
 

Alchemist

Administrator
Staff member
#4
I found it interesting that some of my friends when they need money, instead of going for a loan they open a chitty account. for example a chitty with monthly subscription for 2 lakh amount, the subscription is 5000*40 months. an average you have to pay rs.4500 monthly. that means you pay a total of 180000 in 40 months. the craze is that suppose you need money, even after paying one month subscription you can go for drawing the total amount. in that case you may get around 1.5 to 1.6 lakh rs.

If you go for a loan for rs.1.5 lakh in any nationalized/pvt bank then you may have to pay more than 2 lakh as amount & interest etc. What you say about this?
You need to re-write your post. I did not understand it at all :embarassed:.
smita is referring to "Chit Funds".

It's a collective savings cum finance scheme run by a group of individuals.

It is popular in South India, especially Kerala.

First, there is a foreman or agent who is responsible for the administration of the "chitty".

Then there are subscribers of this chitty.

Each subscriber makes an equal contribution to the fund every month and the contributions are made for a fixed period.

In the example given by smita, the contribution is Rs 5000 per month.

Suppose the fund has 40 subscribers, who contribute Rs 5000 every month. The duration of the fund will be 40 months.

(Note the number of subscribers and number of months is same to each member will be withdrawing money from the fund once and only once).

Every month, the total amount collected is Rs 200000.

Every month all subscribers make a bid to withdraw the collected amount.

A person can withdraw money only once from the chitty.

The person who bids the lowest is given an amount equal to his bid. Obviously the person who needs the money the most will bid the lowest.

The difference between the amount collected and amount withdrawn is distributed equally among the 40 members.

If Rs 180000 is withdrawn, each of the 40 members would get back Rs 500.

Hence the figure given by smita, Rs 4500.

The agent/foreman takes some money from the fund too. which is around 5% of the total amount collected.

The net contribution will be Rs 4750 after foreman's commission.

For a person who wants to use a chitty as an investment option, his returns depend on how desperate others are to withdraw funds from the chitty. If no one bids lower than the collected amount, no one benefits except the foreman.

For a person who wants to use a chitty as a financing source, his returns depend on how low he has to bid to withdraw money from the fund as well as how low others bid in other months.
 
#5
Mr. Sachin Asher, thank you. You explained it very well. Kerala state financial enterprise, under govt of Kerela is also doing this chit business which you can trust. You do not wait for a lowest bid amount every time. there is an option of lucky draw also.
 

Alchemist

Administrator
Staff member
#7
Never heard about it before. Pretty interesting stuff.

Do similar chitti happens (or available) in Maharashtra?
Chit funds do operate in Maharashtra, but are not very popular.

I searched a lot but was not able to find any recent data on chit funds in India.

I found one report on chit funds published by "The Institute for Financial Management and Research".

Quoting from the report:

We concentrated our research on five states in India – Tamil Nadu, Andhra Pradesh, Karnataka, Delhi and Kerala – where the Chit Fund industry is more prominent.
According to the report, Kerala has the highest percentage of households participating in chit funds - 10% as per 2006 data.

However, the amount of money invested in chit funds in Kerala is very small compared to other states.

In Andhra Pradesh, average investment per household is $1003 and in Delhi, the average investment is $1555, but for Kerala, the figure is just $45. This is all based on 2006 data.

The report can be found here:

http://www.ifmr.ac.in/sefc/publications/Chit-Funds-Innovative-Access-to-Finance.pdf

IFMR has also published other reports on chits funds. Please search the site if you want those.
 

magnet

Active member
#8
Never heard about it before. Pretty interesting stuff.

Do similar chitti happens (or available) in Maharashtra?
It's common here today mostly practiced amongs marwadi and gujaratis communities.

It's mostly call B.C. here (don't know what's the full-form is).

Also these day more innovation too have happened into it as my father is part of it. I'll try to understand from him about new product and share but that one is more risky and turning into ponzi one.He had explained me earlier but since it involves money sharing on personal basis and i don't trust anyone for money i didn't gave hard to understand it.
 
#9
It's not "B.C." it's "Bhishi" which is the Marathi word for funds similar to chit funds.

However it also refers to "Pot-Luck" or "Kitty" funds where ladies get together and pool money and a lucky draw is held each time to determine the winner.
 

magnet

Active member
#10
It's not "B.C." it's "Bhishi" which is the Marathi word for funds similar to chit funds.

However it also refers to "Pot-Luck" or "Kitty" funds where ladies get together and pool money and a lucky draw is held each time to determine the winner.
:embarassed: Thanks for that detail. But as I deal with Marwadi people they say it BC.
 
#12
Loans are a better option. Chit funds have a lot of risk involved with them. The institutions behind loans are far more legitimate and dependable than chit fund managers.
 
#13
Chits, "Bheeshi" in marathi - Social good or finance scam?

The concept of chits or in marathi called as "Bheeshi" started with the social cause of a group of ladies/gents getting together once a months on a cup of tea/snacks for general discussion and sharing the good/bad happenings in their families. Anyone facing hardships or any forthcoming events (marriage/pregnancy/medical emergency/business loss/kids education..etc) who needed the money would get the lump-sum amount at a discounted price.
The above was done since micro-financing and banking were at a very low level in villages and small town. It also formed a social bond and togetherness within the group.

The moment this concept entered the city (Mumbai/Ahmedabad etc) social circle
- the amounts increased from thousands to lakhs/crores
- the need for money was - buying luxury cars/diamond necklaces etc
- Get together became kitty parties/page 3 parties
- the head/administrator became an "extortionist" who would get money from people who did not pay
- Finally it became a source of major scams where one member collected the money and vanished...it became a racket

One can make their own decision to participate in these funds or not.
 
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