How it Works?

The basic necessity of conducting a ‘Chit’ is a group needy people called subscribers. The foreman-the company or person conducting the chit—brings these people together and conducts the chit. The foreman is also responsible for collecting the money from subscribers, presiding over the auctions, and keeping subscriber records. He is compensated by a fixed amount (generally 5% of gross chit amount) monthly for his efforts. Other than that, the foreman has no specific privileges, he is just a chit subscriber. A simple formula depicts the pattern of the chit:

Monthly Premium x Duration in Months = Gross Amount

E.g., 5000 * 20 = 1,00,000/- Where 5000 is the maximum monthly contribution needed from a subscriber, 20 is the duration of the chit in months and 1,00,000 is the maximum sum assured. The duration also equals the number of subscribers, as there must be (not more or less) one subscriber to receive the price money every month.

The chit starts on an announced date, every subscriber come together for the auction/lot. When there are more than one person willing to take this minimum sum, lot are conducted and the ‘Lucky subscriber’ get the prize money for the month. If there is no person willing to take the minimum sum, then a reverse auction is conducted where subscribers open-bid for lower amounts; that is from 1,00,000 >> 90,000 >> 75,000, and so on. The person bidding lowest sum get bid amount.

In both the cases the auction discount, that is the difference between the gross sum and auction amount, is equally distributed among subscribers or is deducted from their monthly premium. For example if the auction is settled on a sum of 75,000, then the auction discount of 25,000 (1,00,000 – 75,000) is divided by 20 (the total number of subscribers) and every one gets a discount of 1000. The same practice is repeated every month and every subscriber gets a chance of receiving some money.