ANNEXURE - I11

METHODS OF CHITTIES

Informal savings and loan associations are mainly two kinds, viz., fixed-

income associations and rotating funds. The most common form of informal savings

and c red~t association is Rosca (Rotation of Saving and Credit Association). The fixed

- iund association which are mostly like banks of the formal sector, in which

part~cipa~ir gives savings at regular intervals to a treasurer who i n turn holds them for

safe keep~ng them, return the sum at the end of the year or what ever period the group

has decided on. (Miracle et.al. 1980)

Most commonly officers of the group lend money held on deposit to members

sornerllne; at interest and possibly to non-members as well. If loans are made to non-

menlbers Interest seemed to be charged and at a higher rate than to the members

(Delancek. 1978: Savings and Credit Institutions in Rural West Africa: An

Introduction Rural Africans, No.2). Interest income ultimately is distributed among

the members. When loans are made to non-members savings and loan associations

may be much like formal sector banks.

3.1 Rotating Funds

In )he case of rotating funds each participant contributes a fund that is then

glven [o one member each time the group meets. The right to the fund rotates until the

fund has been received by every one. This is also called as Rosca. The way

participant:, are affected as savers, borrowers and lender creation of a fund that

rotation perhaps can be seen most readily by examination of a group with only a

rotat~ng fund. As borrowers participants in association with a rotating fund get loans

at Lero rate of interest for a duration that could be predicted only after the cycle

started and \equence of rotation was determined, if they had the fund before their turn.

they frequently paid something for the privilege whether as an amount negotiated with

the ~nd~v idus l whose turn they take, by auction or by some other device. Hence they

p,iid inrerehi bhether it hears that name or not.

3.2 Membership

Members participating in Roscas are selected by the organiser on ethnic lines

or geographical limitations such as same place of origin, same native language,

speaking person etc.

3.3 Contribution Amount

The amount to be contributed in each cycle is decided on the number of

participating members the total winning amount that each member can get and other

socio-economic factors. contribution can also be in the form of shares thus allowing a

member to have more than one share or contribution in a particular cycle. Increasing

his chances of winning the lump sum, but also increasing the regular contribution he

has to make. (Souman, 1979)

3.4 Cycle Period

Cycle period is frequency with which contributions have to be made. This can

be daily, weekly, bi-weekly, monthly, and half yearly depending on the amount to be

contributed, u!;ually smaller the amount shorter the cycle periods.

3.5 Mode of Selecting the Winner

The basis of deciding the winner of the lump sum is decided in any one of the

three ways. By consensus- whereby common agreement between members and the

amount is usually given to a member who needs finance urgently. By lot- where a

lottery determ~nes who gets the lump sum in a particular cycle members who have

received the lump sum do not participate in subsequent lotteries but continue their

contribution. In some cases after getting the prize amount the member need not pay

the subsequent amounts. By bidding- where the lump sum amount is bid for by the

members during each cycle. Thus the member who wins the bid will receive the lump

sum minus the bid amount.

Different methods of chitties are listed in the following Charts as found in the

study area with normally transacted amounts.

3.6 Methods of Chitties

*After 40 months 40 subscribers would be paid their prize amount. The major feature

of this chit is that once the member got their prize amounts they need not pay further

~nstalments. So after 40 months (with the assumption that no defaults) there would be

260 (300-40) subscribers. The following chart shows the process of the chit.

Chart 3.1

Type 1 ;" Periods Subscription Prize Amount

4o*t+,lX1 50 2000

At the end of the chit the remaining members (41 number onwards 260

subscribers) are to be given Rs.2,500/- each agreed to pay at the beginning of the chit.

So a total of Rs.6, 50, 1300/- (2,500 x260) has to be mobilised by the foreman to pay

off the prize amounts. From the above table it is clear that the foreman got

Rs.4,69,050 from the subscribers of the 40 instalrnents, and the balance to be found

out is equal to Rs.6,50,000 - Rs4, 69,050 = Rs. 1.80.950. In order to raise the money

needed to payoff the prize amounts, he lend out the amounts that he got from

subsequent instalments t i l l 4oLh one.

amounts* Months Total Amount

Rs.2500 1-20 50,000

No. of Subscribers

I I * Includes commission

1 50 months 1 100 I Rs.2.500 - Rs.5,500

Period

Rs.3500

Rs.4000

Rs.4500

Rs.5000

Rs.5500

Within 50 months 50 subscribers are paid their prize amounts. The distribution

of prize amount is shown in the following chart. Once they got the prize amount, they

need not pay further subscription.

Chart 3.2

Subscription (Rs)

26-30

31-35

36-40

41-45

46-50

Prize Amounts (Rs)

17,500

20,000

22,500 -

25,000

27,500 -

Total 1,77,500

After 50 months, the rest of the subscribers have to be given Rs.5, 500 each

(500 more than what is actually paid). So the total amount the organiser requires at the

end of the chitty is equal to 110~5,500 =Rs.6,05,000. The total amount collected over

the years is equal to Rs.5,04,950. Total amount advanced to the subscriber over 50

months 1s equal to Rs. 1.77, 500. So at the end of the chitty, the foreman requires:

Rs6,05,U00 - 5,04,950 = Rs.1,00,050

It was found that the balance amount the foreman gets after each chitty was

lend out on daily, monthly and 100 day's loans at high rate of interest in order to raise

Special features

1) Only a few subscribers (only close friends)

2) First prize amount (chitty) belongs to the foreman as commission

3) Winner is selected in advance by consensus

4) Each subscriber has 3 chitties at a time

the needed money at the end of the period.

Type 3 (Offer Chitties)

Period

25 months

Subscription (Rs)

4000

Prize Amount (Rs)

100,000

5) Other than the first chit as the commission foreman earns 5 % commission on

each chit

The turn or months of getting the chitties for each clients is outlined in the following

chart.

Chart 3.3

No. of Subscribers Period

24 months

Subscription

(b.)

5000

Prize 1

Amount (Rs.)

1,20,000

Chart 3.4

Total amount collected over 24 months =Rs.98,880 x 24 = Rs.23,73,120

Total amount of money disbursed over 24 months =Rs.21,93,000. The difference

between the two is profit.

Rs.23,73.120-Rs.21,93,000=Rs.1,80,120

Type 5

Chitty is drawn 1 auctioned on every 15" day. The maximum prize amount is

Rs.1,12,500-Rs.7,500=Rs1,05,000

m

The method is given in the following chart

Chart 3.5

* Rs.3750115 = 250 Rs.per day will be collected.

3 L

&

- h X

5 s 3 2 $ 5 m .A = E!

8

9 .

10 -

2. - 5 .- - a .- I. u 2 3 V1

2: F m

1 12500

73500

1 12500 .

aJ - 5 o m 3

* 2 2 r d S 0) V1

. 3 .s

g 3

73500

105000

73500

s - .- O .9 - a z .= 5 = $ 2 6 %

vl

* 2 . 0 c r; '= 6 i? -

OU

a - a V1

3 G

o 8 :: 2 m - r' ' ?

2 2 -

7500

7500

7500

Auction

Draw

Auction

39000

-31500

39000

69000

37500

76500

Total profit at the end of the chitty Rs. 1,51,500

I I 1 I

40 1 41 months I 5000 (initial) I Auction 200000

xlviii

Total Amount Subscribers

Period Subscription

(Rs.)

Mode of Selecting

the Winner

Features: - I . The first chit belongs to the foreman

2. The lower ceiling of auction is Rs1,40,000 (Rs.2,00,000 - 30 % of Rs.2,00,000)

3. Instalment depends on the auctioned amount Rs.3.500 x 40 = Rs.1,40,000

4. 5 % commission will be deducted from the auctioned amount.

5. If there are more than one person for auction, lottery I draw method will be used

The method is given as follows

Chart 3.6

Install.

No.

I

2

3

4

5

6

7

8

9

10

I I

12

13

14

15

16

17

18

19

* It is assumed that prize amount is auctioned at minimum rate

The total profit obtained by ICM Rs.5.41,000 over 41 months.

First draw Rs.2.00.000 - 5 % of Rs2,00,000 = Rs1,90,000

Second draw Rs.2,00,000 - 5 % of 2 Lakhs

= Rs. 1,90,000 - 40 % of Rs. 1,90,000 = 114000

No. of

Subscribers

[ C h i tties % deduction in Auction

Chart 3.7

Period

40

I I I

IOOOO ( Draw ( 10000 1 10000

10000 I Auction 1 86000 1 96000

Subscription

5000

-1 10000 Auction 86000 106000

I I I

10000 I Draw 1 -76000 ( 30000

Method of

Selecting

Winners

Alternate Draw /

Auction

I I I 10000 1 Auction 1 86000 1 116000

Total

Amount

(Rs.)

200000

I I I 10000 1 Draw 1 -76000 ( 40000

IOOOO Auction 86000 126000 -1

1 ' 0 1 5000 1 200000 ( 114000 1 10000 I Auction ( 86000 ( 136000 (

200000 114000 10000 Auction 86000 156000

114000 190000 10000 Draw -76000 80000

200000 133000 10000 Auction 67000 147000

3325 133000 190000 10000 Draw -57000 90000

" 2850

I I I I I I 1 200000 ( 133000 ( 10000 1 Auction 1 67000 1 157000

133000 190000 1OOOO Draw -57000 100000

200000 133000 10000 Auction 67000 167000

2 1 3325 133000 190000 10000 Draw -57000 110000

114000

200000

114000

200000 142500 1OOOO Auction 57500 167500

142000 190000 10000 Draw -47500 120000

5000 200000 142500 10000 Auction 57500 177500

142500 190000 10000 Draw -47500 130000

200000 152000 10000 Auction 48000 178000

152000 190000 10000 Draw -38000 140000

190000

114000

190000

I I I I I I

1 200000 ( 152000 ( 10000 ( Auction ( 48000 ( 188000

152000 190000 10000 Draw -38000 150000

200000 152000 10000 Auction 48000 198000

3800 152000 190000 10000 Draw -38000 160000

10000

10000

lOOOQ

I I I I I I 1 200000 1 171000 ( 10000 I Auction ( 29000 ( 189000

Draw

Auction

Draw

-76000

86000

-76000

60000

146000

70000

A total amount of Rs.2.29.000 has been collected as profit over the 40 month

assuming no defaults.

Subscriber

Chart 3.8

Instalm

No.

I

2

3

4

5

6

7

8

9

10

I I

12

13

14

15

16

17

18

Period

40 Months

19

20

Subscription (Rs)

2500

-

2075

2100

Method

All Auction

83000

84000

Total Prize

(Rs)

1OOOOO

78000

79000

5000

5000

95000

100000

2 1

22

23

24

25

26

27

28

29

30

3 1

32 -

3 3

34

35

36

37

3 8

39

40

Tota I

Total amount remitted by the client equal to Rs.62,250 and it is found that from the

fourth number prize amount is remunerative.

INo.ofubscribers I Period I Subscription (Rs) I Prize Amount (Rs) I

Features: - I . Even though maximum period is 40 months, the prize amounts will be distributed

w~thtn 10 months (4 per month). The clients are unaware of this settlement.

2 They deduct 30 % from the total prize amount Rs.50,000 - Rs. 15,000 = Rs35.000

I I I 1 40 Months I 1250 50,000

3. Prize amounts are given in advance after keeping sufficient security (collateral /

collaleral substitute)

4. In order to pay off all the clients they need Rs.35.000 X 40 = Rs. 14.00.000 within

10 months

5. After the loth chitty they subsequently raise the prize amount saying that

auctioned amount has been reduced. The following chart shows the details.

Chart 3.0

Prize amount

Type 10

100 96

Months

Chart 3.10

1- 10

11 -20

21 -30

31 -40

Total Amount Prize Total Instalment Subscription I I Commission

Collected I Amount I I Balance i

Total Collection

(Rs.)

Total Profit

Prize Amount Period

350000

425000

475000

500000

350000

Subscription

Requirement

(Rs.)

30

Additional

1400000 - 1050000

425000 -

475000

500000

2000 60000

6

7

8

9

10

I I

12

13

14

15

16

17

18

19

20

2 1

22

23

24

25

26

27

28

29

30

Total commlsslon Rs.83,400

Totdl amount of profit Rs 83,400 + Rs.60,000 = Rs. 1.43.400