Institute for Financial Management and Research
Small Enterprise Finance Centre
Working Paper Series
January 2007
Chit Funds - A Boon to
the Small Enterprises
Preethi Rao
Under the Guidance of
Prof Mudit Kapoor, Indian School of Business
Prof Antoinette Schoar, Massachusetts Institute of Technology
Preethi Rao preethi.rao@ifmr.ac.in is a Research Associate at the Small Enterprise Finance Centre
in IFMR. The views expressed in this note are entirely those of the author and should not be
attributed to the Institution with which she is associated.
.
Preethi Rao : Chit Funds - A Boon to the Small Enterprises
Contents
1 Introduction
1
2 How Do Chits Work?
2
3 General Characteristics of the Chit Funds Interviewed
3
4 Regulations and Costs of Registration
4
5 Defaults - How Are They Handled?
5
6 Auctions
6
7 Source of Income to the Chit Manager
7
8 Use of the Chit Money
7
9 Chit Funds and Small Businesses
8
10Scope for Future Research and Preliminary findings
9
11Conclusion
12
12References
13
13Appendix
14
14Glossary
17
Preethi Rao : Chit Funds - A Boon to the Small Enterprises
Acknowledgement
We are extremely grateful to Kapil Chit Funds Pvt. Ltd. for providing us with data on their
chit members’ bidding patterns for the final research project. Kapil Chit Funds is a 25
year-old private limited company with over 90 branches in Andhra Pradesh. It is among
the top chit fund companies in India. We would like to personally thank Mr. Vaman Rao,
Chairman, Kapil Chit Funds and Mr. Venu Gopal Rao, Assistant General Manager (I.T.),
Kapil Chit Funds, for their unwavering support to our research.
Preethi Rao : Chit Funds - A Boon to the Small Enterprises
1 Introduction
Chit funds are the Indian equivalent of the Rotating Savings and Credit Associations
(ROSCA) that are famous throughout the world.1 ROSCAs are a means to ’save and
borrow’ at the same time. It is considered one of the best instruments to cater to the
needs of the poor.
The concept of chit funds originated more than 1000 years ago.2 Initially it was in the
form of an