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Chit Fund Business Online October 13, 2006

Posted by Laxmi Goutham Vulpala in Ebusiness.

I have been thinking about some ebusiness Ideas and am trying to see  if the chitfund business  this business can be implemented on-line. It is one of the famous businesses in south India with the total turnover runnig into several hundred crores of rupees. Several companies(Margadarshi, Shriram Chits)  are making a ton of money using the basic idea. For millions of poor and middle class investors this was the primary source of savings in India for a long time.

This is how its supposed to work ( a simple explanation from margadarshi website)

“Chit is a mutually beneficial scheme where in a group of people contribute towards the chit value and one member from the group is given the prize amount and the dividends are distributed to all the other members. For Example if we consider a chit value of Rs.100000/- with 50 members in the group each member has to contribute Rs.2000/- where by (50 X 2000) Rs.100000/- is collected.

The auction is conducted in which the members participate and the person who discounts the maximum is declared as the prized subscriber. If there are more than one participant for maximum discount the Successful Bidder will be determined by way of lottery. Where in, the tokens bearing the numbers allotted to the members is put into a box and one token is drawn by any of the member present in the auction and thus, the member whose number is mention on the drawn token will be declared as the Successful Bidder.

45% is the maximum bid allowed, which means a person foregoes Rs.45000/- and the balance Rs.55000/- is paid to the prized subscribers. Out of 45% discount 5% goes to the company towards company’s commission for conducting the chit and balance of the discount amount is distributed equally amongst all members of the group. That is 40 % is distributed to all the members by which next month they have to contribute (Rs.2000/- – Rs.800/-) = Rs.1200/- only and Rs.800/- is declared as dividend for that month.

When there are no maximum bidders, then the members will bid in the open auction that is conducted within 5 minutes for each group and the person who bids the highest is declared as Successful Bidder. For Example: Suppose, in the 10th month the Successful Bidder was declared at 40%, then all members of the group will get a dividend of Rs.700/-each i.e. (Rs35000/-divided among 50 members) and each member has to pay Rs.1300/- towards Installment.

Therefore the members have to pay the installment amount less the dividend, the dividends earned workout to be the interest on the Installment payments made by the member. Successful Bidder is supposed to give the required sureties depending on the future liability of the chit. Only Non-Prized Subscribers whose payments are up to date can participate in the auctions.

Every month there is a Successful Bidder who gets his prized amount on submission of required Guarantors. The company is prepared to disburse the prized amount within 72 hours provided the sureties are satisfactory and documentation is verified and approved. The prized subscriber has to continue to pay the monthly installments till the termination of the chit.

Those members who do not want to borrow funds contribute to the chit and after the 40th month if there are no bidders for the auction, lot declares one of the remaining members as Successful Bidder and the prized amount is paid to them. They either have options to submit sureties or prefer Future liability deducted upon which balance amount is paid from the Prized amount. The dividend accrued for the 50 months are the returns on investment for the monthly deposit made to their accounts.”

With social networks so prevalant online  these days and sucess of online financial sites  like  prosper.com,  may be this is a viable idea. I am not sure what else can be done to sell this idea in the american market?

This business will broadly supposed to work something like this: A group of members enroll into a scheme, for enrollment they provide their ACH account number’s so that their installment in automatically collected on the due date. the bidding process will be totally transparent once the the bidding is complete the dividends will be distributed to the members of the group via ACH. The commision amount in this case goes to the service provider.

 Dr.Stefan Klonner seems to have done a lot of research in this area. Will post more on this topic as I  learn more.



1. thiru - August 8, 2007

i like your idea, did you get any further on this?

2. goutham - August 9, 2007

Nope, I havent gone any further

3. JC - October 22, 2007

I have a great supplemental idea
Need some thoughts on this
also whata re the Govt Regulations for this business?

4. -shankar - January 23, 2008

let me know where yhis co. is registered as per RBI norms and then v can decide of entering into this venture, along with safetiness and other calculations like documentation, guaranty from??? so on this ground let us know in full like FAQ . awaiting ur reply

5. vinod - May 20, 2008

I want to know about your Chit company as Iam interested to open a chit

6. vinod - May 20, 2008

I want to start an chit in your company

7. rahul - June 24, 2008

Please check out http://www.kuberamoney.com, the site will be launching soon! for more info contact me at rahul [at} the above domain.

8. Suresh - July 5, 2008

Why the heck you want to publish full details here. Do you have patent registered for this idea. Anyway, this is very known business model in South Asia. In India there are lots of Federal regulations. Moreover this Microcredit scheme works well within a community where everyone knows every other person in the group very well. It operates based on trust. I’m not sure how this will fit into US market and US IRS and Federal regulations may be different from Indian regulations. You need to check them out in detail. Cash advances on credit cards and pay day loans will work out much cheaper than this chit fund scheme. As per one of the regulation, here in US, you have to tell the consumer the APR if it is somekind of loan. Calculate the APR for person who forges 30% of the amount, the APR will run into 1000’s.

Naresh - March 10, 2010

Suresh said is correct.Absolutely . this is a type of business depends completely on trust of each other in a local group of people, who are known to each other.Chit is a good business ofcourse.

9. goutham - July 7, 2008

Whats the problem with publishing an idea? Its not like I am starting this business

There could possibly be some federal banking regulations but a lot of P2P lending firms like prosper and kiva seem to have gotten around them and this is no different

I cant imagine APR running in to 1000’s thats a baseless statement.

10. Rupesh - July 29, 2008

Issue with this is the winner of the bid fails to pay the amount .
It will be hard to track down with this online system.Banks do this by collecting security or bond.The SSN and credit history fear is not there in india to track the defaulters.

11. vijai - September 25, 2008


I been thinking about this idea for long and trying to find the integrity details about it. Having an experience in chits, it will be a tough deal over internet unless there are rules put in place. But its doable. We can talk about it more.. I have pretty good information which we can discuss.


12. Mahesh - September 28, 2008

Keeping aside rgulations for a min!

1) The Main issue is how can one cover a default?
Have you though about it?
What happpens in India if one does not pay up the instalment?
2)Also this will only work if enough peopel in the group need money/loan at 30-40% interest…
What if no body is ready to bid? (all savers) what happens then?
3) Optimal size of the group? too small = APR too high, too big = very long wait to draw down!

13. vijai - October 8, 2008


You got covered the same questions which I been trying to get answers.

1. You can have their SSN and credit card info, deduct from their card or bank account monthly. Or have the agreement in writing as you go to arbitration.

2. That is a problem and system won’t work well. For that you need some small business people who needs money should in the fund.

3. 10-20. works well.

14. sam - October 28, 2008

The americans have not got to where they are today by saving, rather by spending. The mentality is not their to begin with so wont change in the future. Its the rest of the world that saves for them so it wont work in america.

15. Nagesh - November 10, 2008

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16. Krishna - November 20, 2008


This is a good thought. I have done some thinking combining microfinance and credit cards. I am sharing my email here and also seems like there are 3/4 other people interested. Lets see if we all can connect.


17. Chuck Zimmer - August 17, 2009

A friend suggested this to me and I got the site built. Please see link. Have not started running them yet, but interested in starting.

18. Sudheer - October 16, 2009

hello ,

I believe this is doable in US , though you cannot expect 30-40% kind of stuff , but it can work out even with less than 10% for the successful bidder as the saving rates here are not that great and at the same time , there are many people barrow from pay day loans , credit cards etc..
I was thinking about this idea and got to this site while searching on the net, if any one really has interest can contact me we can talk further.


19. boss - October 31, 2009

it will work out where there are poor people contribute more, its suitable for indian outskerts, not for us economies, also online , what a fool to think a chit fund online with out local employies,

there are 100 of questions to covers .

incase of default.

20. Srinivas - December 29, 2009

The main reason that this concept works in India is because getting credit in India is lot difficult, atleast it used to be that way when I was in India. Things might have changed now. When I was in India, getting an education loan , marriage loan, loan for buying land were never even heard. So, chit was the only source of loan. The only person that makes money in a chit is the organizer. Everybody else is a looser. Usually, the organizer will charge 5% every month for service fee. So, he makes 60% per year (not compounded). Apart from this, usually he gets the whole chit amount in second or third month. This is a interest free loan to him.

But in US it is lot easier to get a loan on credit card or from the bank. Actually I am in a chit in India right now. I am planning to keep it until the end. If I run the numbers, it will work out with the interest rate of 11.75%, not worth considering the risk that I am taking.

21. PRAT - February 15, 2010


22. robert - February 20, 2010

mm i don’t know i prefer make real product to real people, rather than put the money to work, like seinfield said, i prefer let my money in vacation mode and myself put into work.

23. PRASAD - March 27, 2010

I appreciate your idea. interested to learn more about this venture.

24. Chuck Zimmer - May 19, 2010

see our site: chitpool.com We agree

25. echit - August 11, 2010


Best idea, we have similar type of concept implemented, it is not exact same, but we have online chitfund web portal which u can integrate with your existing website and can start online chitfund businnes. It provide secured online access to it members. Members can see next payment information, amount to be paid along with Loan details etc. can send auction dates and prize info through SMS & email..

26. Sumith - October 7, 2010

Hi !!

I am planning to launch an online chit fund. working on it, yet not finalised. If someone can help how can be defaulters taken care of? It would be of great help. AS online we may not know the client.


Ramesh - April 9, 2011


Sounds like a great idea.

Anybody made any document on it? A formal business plan? if yes, send me one and I can put it up with a couple of investors for making it big, involving lawyers and registring it as a NBFC (non banking financial company).


Chuck Zimmer - May 24, 2011

Hi Ramesh,

Would like to discuss when you have time.

27. Raj - October 19, 2010

Lots of ways you can handle the defaulters..
ONe way is to mitigate the risk to your insurnace comapny , you pick up the defaulter’s commitment , and write it as loss / claim it with your insurance comapny
this is just one of the ways 😉

28. Kevin Jose - May 24, 2011

I have just finished my bca. Before two month, when i was going throught my main project, i put forword about the online chits to my guide. But it have failed mainly due shortage of time and less knowledge about the language which iam using. But after all still iam tring to make a rough figure of that idea with my limited knowledge

29. Ramesh - May 24, 2011

Chuck, any email where we can correspond?


30. Chuck Zimmer - May 24, 2011
31. Raj - May 24, 2011

Ramesh , Chuck

If you would like me to chime in , please do not hesitate .. I am interested to roll this project.. bridge the social network and chitfunds together to offer micro financing for rural population .. I have several Ideas and I have very strong technology/business background 16+ years .

32. Arabinda Ghosh - September 1, 2011

I want to join a chit fund business.

33. VC Sharma - October 6, 2011

Dear All,

The idea is good, however there are two three major issues, if resolved that the concept can be taken as online portal. Ready to enter into discussions privately on this with interested persons. I am into IT and running a software company for the last 10 yrs and banker by profession.

santosh sav - October 7, 2011

For me too the Idea sounds pretty good. As highlighted definately there are some major issues that needs to be taken care of. I do have some additional points that can be added to this which may be useful to fit this in US markets. Ready to enter into discussions privately on this with interested persons. I am to into IT for the last 7yrs.

34. Chuck Zimmer - October 7, 2011

what do you think of the site. http://chitpools.com/joomla/ will get the one issue sorted, so you can see the chit portion.

Raj - October 7, 2011

Some movement on this topic after several months of silence. I am all for this .but doubt if this will fly for the US Markets where the needs for small funds is dealt with credit cards. Assuming people /housewifes in a community do not want to pay high interest rates , can run a chit pool .. that being said , if you are handling the money , then you need to be a MTA ( Money Transfer Agent ) in the state your are allowing your customers to send and receive money .Every state has different requirements to become an MTA . Often times a bond for several $$$s of dollars is required by state . Have over 15 years exp in Web Applications , entrepreneur and definitely can add value .
Lot of business issues need to be nailed down and one has to deal with financial regulations etc. , building a site is fairly easy and not a big deal and that is one reason not many have ventured into this business.

Jerry - March 26, 2012

Hi Raj, I was reading your thoughts about this… I would like to discuss some thing about a donation for http://www.charitybasicneeds.org can you be able to send me your conatct details. So I can discuss offline. Jerry

Jerry - March 26, 2012

donation module for the below website…. http://www.charitybasicneeds.org ..you may just fill the contact US form at the website to avoid spam to your email.

35. Chuck Zimmer - October 7, 2011

It seems this idea would be much more suited in another country besides the US.

36. Raj - October 7, 2011

Actually , after thinking through this a little more , looks like this is not a bad concept after all , can work around the regulations .. if anyone is interested, provide me the details and lets take discussion offline.

Chuck Zimmer - October 7, 2011
37. Pavan - December 25, 2011

Excellent idea, presently in US due to recession people are realizing and understanding the importance of saving. I hope this is a good time to enter in US market and do chit fund business. The biggest challenge is to have network with trust. If the person who is already rich and has good network will easily able to set-up and start the chit-fund business.

Per my understanding first start the business with US Indian customers than slowely built the network in US market with them.

Idea - December 25, 2011

Thank you for great idea. Ofcouse I understand there is no business runs without facing challenges. If we have desire and confidence we can face any state regulation to start the business.

38. rekha - January 11, 2012

The idea is gud..The biggest challenge is to have a network with trust

39. Vishnu - March 5, 2012

Its already started in India – http://onlinechitfund.com

40. chaitanya - March 8, 2012

i wil get bid in margadarsi and am paying monthly installment continuesly and i submit 5 central governament surities and 2 it returns then also the manager wil not give the prize money
plz help me
how many surities have to submit
plz tel me

41. ramesh - June 13, 2012

first u think what ever will be happen u will bear if any pbrolems come

42. Vivek - September 8, 2012

Nice to this post & comments, Any one tried in Europe?
I am planning for it, please contact me for more detail/discussion

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