Cabinet nod for amendments to Chit Funds Act

Why in the news ?

• The Cabinet approved amendments to the Chit Funds Act to facilitate orderly growth of the sector and provide more financial products to investors. 

More on news

• The amendments would be made to the Chit Funds Act, 1982.
• One of the amendments is use of the words “Fraternity Fund” for chit business in the Act to signify its inherent nature, and distinguish its working from ‘Prize Chits’ which are banned under a separate legislation.
• The bill also proposes to allow 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 bill proposes to increase the ceiling of foreman’s commission from a maximum of 5 per cent to 7 per cent, as the rate has remained static since the commencement of the Act while overheads and other costs have increased manifold.
• The bill also proposes to amend a Section of the Act to remove the ceiling of Rs 100 set in 1982 at the time of framing the Chit Funds Act.
• State governments are proposed to be allowed to prescribe the ceiling and to increase it from time to time.

Chit Funds

• A chit fund is an arrangement that a group of people arrive at to contribute money in a defined manner at periodic intervals into a pool or a kitty.
• During the process of collection, any member can draw a lump sum through various ways like a lucky draw, an auction or a member can even fix a payout date based on a known expenditure.
• The number of members equals the number of times a contribution is made to ensure everyone gets a turn.
• For example, if a group of say 15 people pay Rs.2,000 each a month, the total monthly pool becomes Rs.30,000. Now, in case of an auction, if three members need money at the same time, one is chosen through a process of bidding and the lowest bidder gets the deal. So if three people put in their bids (the bid amount is usually slightly lower than the total pool amount) and the lowest bid is Rs.25,000, then the bidder will get Rs.25000 immediately; the remaining amount gets divided among the remaining members at the end of the tenor.
• Chit Funds can be misused by its promoters and there are many several instances of people sunning such Ponzi schemes and then absconding with investor’s money.

Source

Indian Express, The Mint.