The following illustration will explain how a chit works.

There is a new chit group that is commencing. The value of the chit is 100,000. This amount is known as the Chit Value.

The company conducting the chits must deposit by way of Fixed Deposit with the Registrar of Chits an amount equal to the Chit value proposed to be conducted by it. Only then permission to start the Chit Group will be granted.

First two installments are to be paid in full. The dividend starts from the 3rd installment. An intimation card containing details about the chit, is sent to the subscribers to enable them to know the results of the Draw / Auction and to facilitate remittance of the subscription in time.

For the purpose of this illustration, we will consider the duration of the chit to be 25 months. This is known as term period for the chit group.

The Foreman or Chit Fund Company has to gather 25 people who are interested in investing in this chit group. These 25 persons are called Subscribers.

Once the chit group commences, the foreman has to register the chit with the registrar of chits. He has to pay 100% of the chit value as security. This amount can be withdrawn only after the said chit group closes and every subscriber is paid what is due to him or her. This regulation protects the interests of the subscriber to a certain extent.

The amount to be saved every month by the Subscriber is Chit value/No of person’s i.e. 100,000/25 = 4,000. This is also known as Monthly Subscription. It may be noted here that the number of persons investing in a chit and the duration of the chit is always the same. The maximum monthly contribution or Subscription Amount that a Subscriber will pay is 4,000. The Subscriber does not always pay the entire Subscription amount every month. Let us find out how and why he does not have to pay the entire amount.

The maximum discount or maximum bid permitted ranges from 30%. For the purpose of this illustration we will assume that a Subscriber has bid 30% of the chit value. 30% of 100,000 is 30,000. This amount is known as Chit Discount.

The foreman charges 5% of chit value as commission. In this illustration, that would amount to 5,000. This is deducted from Chit Discount i.e. 30,000-5000 = 25,000. This amount is available for equal distribution among the subscribers. In our example, 25,000 would be divided equally among 25 subscribers. Each subscriber would get a discount of 25,000/25 = 1000. This amount is known as Dividend.

In the following month, all subscribers would have to only pay 3,000 instead of 4,000. This is because they have earned a chit discount of 1000. Depending upon the competition within the chit group the discount percent would vary. The least discount would be 5% which is the foreman’s commission. The bidding process will continue until the end of the chit period. In this manner, the subscribers can borrow more than what they paid in the first half period of the chit term and save their money if they decide wait further into the chit period.