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 r e d ~ association
t is Rosca (Rotation of Saving and Credit Association). The fixed
- iund association which are mostly like banks of the formal sector, in which
gives savings at regular intervals to a treasurer who i n turn holds them for
part~cipa~ir
safe k e e p ~ n gthem, 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 t o 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 ) h e 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~ngfund. 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 ~ n d ~ v i d u whose
sl 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~neswho 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

;
"
Type 1

Periods Subscription Prize Amount

4o*t+,lX1 50 2000

*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
 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 till 4oLhone.

No. of Subscribers Period Subscription (Rs) Prize Amounts (Rs)

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

amounts* Months Total Amount

Rs.2500 1-20 50,000

Rs.3500 26-30 17,500

Rs.4000 31-35 20,000
Rs.4500 36-40 22,500
-

Rs.5000 41-45 25,000

Rs.5500 46-50 27,500
-
Total 1,77,500
I I
* Includes commission
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
 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
the needed money at the end of the period.
Type 3 (Offer Chitties)
Period Subscription (Rs) Prize Amount (Rs)
25 months 4000 100,000

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
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

1
Subscription Prize
No. of Subscribers Period
(b.) Amount (Rs.)
24 months 5000 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

3
-5
2.
-
.-
-
o
aJ
5
m 3
-z
O
.9 .-
a -.=s -
a
a
V1

&
L
.-
a * 2 2 3
u
I.
23
r d S 25 6= %
0) $ G
V1 vl
V1

- h
X
. *
8
o^

- ::
5s 3 2: 3 .s r;
c
2.0
'= 2
5 m2 .A$ 6 i-?
m m
F
m
g 3 r'

= E! OU 2 2
'
-
?

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

Chitty is drawn 1 auctioned on every 15" day. The maximum prize amount is
Rs.1,12,500-Rs.7,500=Rs1,05,000
The method is given in the following chart
Chart 3.5

8 1 12500 73500 7500 Auction 39000 69000

9 73500 105000 7500 Draw -31500 37500
.
10 1 12500 73500 7500 Auction 39000 76500
- .
Total profit at the end of the chitty Rs. 1,51,500

Subscription Mode of Selecting

Period Total Amount
Subscribers (Rs.) the Winner
I I 1 I
40 1 41 months I 5000 (initial) I Auction 200000

xlviii
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
II
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.5.41,000over 41 months.
 Method of Total
No. of
Period Subscription Selecting Amount
Subscribers
Winners (Rs.)
Alternate Draw /
40 5000 200000
Auction

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

[ C h i tties % deduction in Auction

Chart 3.7

I I
IOOOO ( Draw ( 1
10000
I
10000

1- 10000

10000
I

I
Auction

Auction
1 86000 1

I
86000
I
96000

106000
10000 II Draw 1I -76000 (I 30000
10000 1 Auction 1 86000 1 116000
I I I
10000 1 Draw 1 -76000 ( 40000

1 - IOOOO Auction 86000 126000

1'01

"
5000

2850
1 200000
114000
200000
114000
200000
114000
( 114000
190000
114000
190000
114000
190000
1 10000
10000
10000
lOOOQ
10000
10000
I Auction (
Draw
Auction
Draw
Auction
Draw
86000
-76000
86000
-76000
86000
-76000
( 136000
60000
146000
70000
156000
80000
(

200000 133000 10000 Auction 67000 147000

3325 133000 190000 10000 Draw -57000 90000
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
21 3325 133000 190000 10000 Draw -57000 110000
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
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
I I I I I I
1 200000 1 171000 ( 10000 I Auction ( 29000 ( 189000
A total amount of Rs.2.29.000 has been collected as profit over the 40 month
assuming no defaults.

Total Prize
Period Subscription (Rs) Method
Subscriber (Rs)
40 Months 2500 All Auction 1OOOOO

Chart 3.8
Instalm
No.
I
2
3
4
5
6
7
8
9
10
II
12
13
14
15
16
17
18
19 2075 83000 78000 5000 95000
20 2100 84000 79000 5000 100000
-
 21
22
23
24
25
26
27
28
29
30
31
32
-
33
34
35
36
37
38
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 II Period I
I
Subscription (Rs) I
I
Prize Amount (Rs) I
1 40 Months I 1250 50,000
Features: -
I . Even though maximum period is 40 months, the prize amounts will be distributed
w~thtn10 months (4 per month). The clients are unaware of this settlement.
2 They deduct 3 0 % from the total prize amount Rs.50,000 - Rs. 15,000 = Rs35.000
 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

Total Collection Requirement

Prize amount Months Additional
(Rs.) (Rs.)
1- 10 350000 1400000 - 1050000
11 -20 425000 425000
-
21 - 3 0 475000 475000
100 96 31 -40 500000 500000
Total Profit 350000

Type 10

Period Subscription Prize Amount

30 2000 60000

Chart 3.10

I Instalment
I Subscription
Total Amount
Collected I Prize
Amount I Commission
I Total
Balance i
 6
7
8
9
10
II
12
13
14
15
16
17
18
19
20
21
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