Ministry of Finance approves amendment in Chit Funds’ law

By Mayank Agarwal (

The Ministry of Finance (“MoF”) has introduced The Chit Funds (Amendment) Bill, 2018 (“Bill”) on 20th February, 2018,[1] bringing in some noteworthy changes to the Chit Funds Act, 1982 (“Act”).

The Rs. 500 billion Chit Fund industry has had its fair share of ups & downs in the country.[2] While the sector emerged as a prominent alternative to established financial institutions in the country during its early years due to cheaper rates and easier access to funds, however, it has gradually lost its charm.

The Chit Funds law, which was introduced in 1982, as a counteractive measure of the Sanchaita scam in 1978, was itself subject to abusive use in the later part of 2000s as a number of chit fund related scams came to fore, notably, the Sharada scam and the Rose Valley scam.

The chit funds industry has had to travel a tumultuous path, be it the systemic breakdowns due to the scams or government reforms like demonetisation and introduction of GST. All of these took the investors away from the industry.

Given the fact that the poor and lower-middle income sector of the country still rely heavily on chit funds to mobilise their hard earned money, the MoF has brought in the Bill in order to alleviate concerns relating to its downfall and encourage systematic growth within this sector. The amendments aim at alleviating some concerns associated with this already vanishing industry and aims to increase financial inclusion by bring the down-trodden and unbanked sectors of the society within the financial fold.

In this write-up we have enlisted the amendments brought in by the Bill, its implication and the aim behind bringing in such modifications.

Amendment to Section 2(b) and 11(1): Use of the words “Fraternity Funds”

In addition to the words “chit”, “chit fund”, “chitty” or “kuri”, any business involved in running chit fund schemes must incorporate “Fraternity Funds” along with its name in order to express its inherent nature as a chit fund company and to distinguish it from a “Prize Chit”, which is illegal in nature and banned.

Amendment to Section 16(2) and Section 17: Presence of at least 2 subscribers

While presence of at least 2 subscribers to the fund was a must during the draw of chit (as per Section 16(2)) and during the time of preparation of minutes of the draw (as per Section 17), the Bill relaxes such requirements and permits the presence of 2 subscribers through video conference, which must be duly recorded by the foreman of the scheme. Further, their signatures to the minutes can be obtained within a period of 2 days from the preparation of the minutes.

Amendment to Section 21(b): Foreman’s commission

One of the most significant reforms proposed in the Bill are the increase in the foreman’s commission from the earlier ceiling of 5% to 7%. Such reform comes against the backdrop of increasing costs and overheads associated with running a chit fund, while the commissions have remained stagnant.

This is going to encourage more and more people to come forward with such schemes. However, it would also reduce the amount disbursed to the bidder post deduction of commission and hence, leave him financially dis-advantaged.

Amendment to Section 85(b): Removal of ceiling

Section 85(b) of the Act mandates that any chit fund running solely or two or more chit funds being run by the same foreman shall be exempted from the provisions of the Act provided the aggregate amount of the same does not exceed 100 rupees.

Given the fact that such meagre amount holds no relevance in today’s age, the Bill has abolished the same and granted freedom to State governments to levy a ceiling as per their choice and increase the same at regular intervals.

Right to Lien

A new provision that has been brought in by the Bill is the right to lien for dues from subscribers that has been granted to the foreman so as to allow set-off to the chit company in cases when a subscriber, who has already drawn funds, defaults.

This provision is significant as it reduces credit risk associated with such schemes. Not only does it protect the interests of other subscribers to the scheme, it also safeguards the chit company in cases of default.

Industry response to the amendments

The chit fund industry has not been entirely enthused by the proposal brought in by the Bill. The sector was already left choking when GST implementation led to a hefty jump in tax from the previous rate of 10.5% to 12%. Despite representation from the All India Association of Chit Funds (AIACF), apex body of chit fund companies in the country, the rates were not reduced and brought on par with those of other NBFCs.

Now, the Bill has also ignored the request of the association. Given the fact that the ratio of number of unregulated players to regulated ones is 100:1, the association had hoped implementation of proposals that are in line with the theme of bringing more and more players within the regulatory ambit. Relaxation of security amount from 100% to 50% of the chit value was another major plea of the industry, however, the Bill ignores the same as well.

Conclusion- A step too-little

While the Bill aims at easing compliance burden and regulatory restrictions on this fading industry, it is a step too-little too-late. Although the increase in commission fees and relaxation of physical presence of 2 subscribers is a welcome move, it is not enough to provide impetus to the industry and fails to tackle the major problem of a vast number of unorganised players.

Leaving myriad questions unanswered, AIACF says that the Bill totally ignores the pleas made by the association and has done nothing to convert un-organised sector into organised and bring them within the regulatory ambit.



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