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Amidst the dark and grey shades increasingly engulfing, invading and piercing deeper and deeper, let me try to enjoy the little smiles, genuine greens, and the gentle breeze. Oh! Creator! If you don't exist, my vain!
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Chit funds, my mother and the Saradha scam

My life centered around the word and world of Chits since my childhood. Whenever I asked my mother to buy any toy or ice cream, the answer would be, ‘No money, we need to pay for the chits’. My sister and me hated chits so much, as most of my mother’s salary was drained as subscription to chits. But later we realized that it was a very good investment strategy. My mother bought every consumer durable of the house like TV, Refrigerator, Water pump, furniture etc. through her chit savings. She renovated the house and invested in jewellery through careful and calculated bidding at chit auctions. In fact, there used to be tacit understanding between her teacher colleagues at the time of chit auction. They would have discussed and decided who was in dire need for funds at that point of time so that others would never jack up the bid. Even today, after several decades, she continues to invest in chits. But she has been wise enough to invest only in the chits promoted by the government companies and co-operative banks. She forces my professor sister and me to subscribe to the chits of the Kerala State Financial Enterprises (KSFE). I agree, but boldly default on the monthly subscriptions. I know, my mum will pay on my behalf promptly! KSFE, which is state-run has a blemish-free record. 

Millions of people use chit funds, a rotating savings and credits association, as an avenue for savings, meeting expenses and for making investments. This is because the chit sector is less sophisticated, more transparent and easily accessible. This is one of the oldest financial sectors, unique to India. However, after the Saradha scam, there is a lot of hue and cry against chit fund companies. Thousands of people from the lower middle class invested their hard earned money in the group and shocked to hear the news that the company has been closed. Incidents of suicides were reported from various parts of West Bengal as many lost their entire life savings.

Why chit companies became cheat companies?

Blame it on our regulatory enforcement. We are very good at making rules. But fail in our enforcement. Apart from the Central Chit FundsAct (1982), most of the state governments have their own chit regulations. For example, Kerala state enacted the regulations as early as in 1914. Thus, there is no dearth of sector specific regulations. The rules and procedures of Registrar of Companies, though not fully equipped to curb proliferation of ‘paper’ companies, are not complied. This has resulted in having multiple companies registered from a single address with all possible permutations and combinations in the names of Directors. Thousands of companies vanish every year after collecting huge sums of money from millions of people.

(phooto source: PTI-New Indian Express)

Where were the auditors of these companies, who were supposed to be the watchdogs? Laugh with me! Most of these auditors are nothing but predators that suck the blood of their clients. None to regulate them, as they are ‘self-regulators’! (See my article). There are a few sincere and committed auditors and audit firms. But they are side-lined by the mighty audit firms, who never want to leave their large clients to whom they are more eager to offer consultations than audit. 

The need for stringent enforcement

In a greedy, unethical and lax environment that nurtures shameless competition to amass wealth adopting any means, the hapless and financially illiterate common people suffer the most. In India, though investigations were conducted on hundreds of fraudulent banking companies, only a microscopic minority of investors have got their money back. Then what is the use of such investigations, when the victims have not been compensated and the scams continue to happen at regular intervals across the country?

 Authorities need to enforce the rules stringently and ensure that every rupee invested by common man is repaid back with interest. No individual or agency should be allowed to engage in chit business without following the procedure. It is true that there are thousands of genuine chit funds, both in private and public sector catering to millions of people. These ventures need to be encouraged as they create the habit of saving and also provide financial security. 

                                                                                (c) Sibichen K Mathew
Views are personal. Comments are welcome. 

Click links below to read other articles in Cyber Diary on related subject

Satyam: A case of worst audit failure

Frauds, Scams and a Corporate Lokpal

Click HOME to see all articles in Cyber Diary


  1. well.. cheat fund because its a govt pvt illegal venture of the date .. i dont wish to take names .. but West Bengal has seen businesses flourishing out of these cheat fund businesses only... and while 90% of the companies are ok 10 % do the wiping out of people's money ...
    Sraddha was just too big hence caught the limelight !!
    Nice analysis !!

    1. Thanks a lot! Such businesses flourish through political patronage!

  2. Agree with you,laxity in enforcement of rules lead to such fraud. There was a guy from Kerala who used to run a chit fund in Dubai. One day he fled with all the money back to India. His justification was that most of the investors were Pakistanis.

    1. Very interesting incident Shiju. I never knew that there were chit funds in Dubai. Since there are no chit regulations, people must be engaging in this business illegally there.

  3. Good post. These will keep on happening until some stringent actions are taken. It reminds me the Vinivinc scam in Bangalore. Ultimately common man is going to suffer.

    1. Though the people behind the Vinvinc scam were arrested, the investors have not got the money back. As you said, ultimately, common man is going to suffer. Thanks Ranjana

  4. My lack of knowledge about chit funds brought me here. Good eye opener about the sad state of affairs, but I also think a couple of lines about how chit funds actually work would be very useful too.

  5. Thank U Sir,
    Sharada keyman sudipto has admitted- out of hundred rupees collected investable amount left was about ten which can never earn promised return
    To run the business he spent lot for keeping the monitoring authorities in good humor more over cost of Political patronage was high so there was no money to pay All are equally responsible

    Urban people are greedy so they took chance
    Money earned through Corruption were invested
    Rural people has limited knowledge and avenue of investment.
    Nationalised Banks are non cooperative and harass even for opening an account. Deposit in Post Office was easier which was used.
    But Post Office interest rate has been reduced for whose interest ?
    Money collected through small saving ( through Post Offices) are utilized by collecting State Govts, but downwards trends of small savings collection was never noticed
    So the saving was channeled in this way and masters got share and remained silent spectator knowing fully well the future catastrophe

    1. Thanks a lot Sukumar for updating with real facts directly from the field. Policy failure and poor enforcement are evident in all such type of scams.

  6. I have a fear of chit funds too, because many people I know lost a lot through it -- this was way back in the mid 80's or so.

    1. You are right. Many people have lost money invested in small unregistered chit funds too.


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