Why is it in the News?

Around 70 persons belonging to AP special police have lost nearly Rs 12 crore in a chit fund scheme in Mangalagiri, said the police. Mangalagiri police registered a case and launched an public sector  investigation.

What are Chit Funds?

• Chit funds, also known as Kuri and Chitty, serve as versatile financial instruments encompassing both borrowing and saving components.
  • In this financial arrangement, a group of individuals collectively contributes a fixed sum at regular intervals, with the understanding that one member will receive the total pooled amount during each interval.
  • This process repeats until every member has received their share.
• Typically managed by a chit-fund company, this financial instrument operates by having a group of contributors make regular contributions toward the chit value for a duration equivalent to the total number of subscribers.
• The recipient of the pooled money is determined through an auction or lucky draw, employing a reverse auction system where the individual willing to accept the lowest amount is chosen.
• The sum forfeited by the winning bidder is distributed among other bidders, deducting a foreman's charges and commission.
• The share each bidder receives is termed a dividend. Interestingly, a winning bidder can continue to invest in subsequent intervals, even after claiming their sum.

Types of Chit Funds:

Chit funds can be categorized into three types:

• Chit Funds Run by State Governments:
  • Managed and regulated by state governments.
  • Public sector undertakings (PSUs) also fall under this category.
  • These funds are considered safe, with limited chances of loss. Business processes are transparent and well-regulated.
• Private Registered Chit Funds:
  • Registered under the Chit Funds Act of 1982.
  • Typically initiated by well-established financial institutions or business entities.
  • While participation in these funds may not be as secure as state-run or public-sector funds, the calculated risk is manageable due to their association with reputable private-sector entities.
• Unregistered Chit Funds:
  • These chit-funds lack legal recognition, and participation involves a higher risk.
  • Commonly found throughout India, they are often formed by a close-knit group of associates.
  • Participation in unregistered chit funds is discouraged due to the potential for disputes, which rely heavily on the integrity and honesty of the members involved.

What is Saradha Chit Fund Scam?

• The Saradha scam, also known as the Saradha Group financial scandal, was a major financial scam that surfaced in 2013.

The Saradha scheme: 

• The scheme, run by Saradha Group (an umbrella company with 200 private players), was launched in the early 2000s by businessman Sudipto Sen.
  • Aimed at small investors, the scheme became popular in a very short time as it promised high returns.
  • The money was collected through a wide network of agents, who were paid commissions of over 25 per cent.
• The Saradha Group raised about Rs 2,500 crore in a few years time.
  • The company used varied marketing means to build its brand.
  • Apart from popular marketing techniques like celebrity endorsements, the company used to sponsor cultural events such as Durga Puja and invest in popular football clubs to attract more investors.
•  The scheme soon expanded to Odisha, Assam, and Tripura, and the number of investors reached close to 1.7 million.