Rajesh Kumar (name changed), a state government employee from an economically weak family in Kottayam was quite unfamiliar with chit funds or chitties until a few years ago when one of his colleagues introduced him to a chit fund collection agent from a newly-opened private finance firm in Alappuzha.

Attracted by the offer of the monthly chit fund scheme and the fact that he would get a lump sum any month after the fifth instalment, Rajesh joined the scheme.

Things went smoothly for eight or nine months until Rajesh demanded the lump sum. And from then onwards, to his surprise, the agent stopped coming for the monthly collection.

Though Rajesh planned to take this up legally, he was advised that there was little scope as there was very little solid evidence to prove that money had been collected from him.

Chit funds, which date back to several decades, have been instrumental in helping many make considerable savings. However, there are numerous untold stories of misery like in the case of Rajesh who was duped by a fictitious chit fund. Many even lost their landed properties to private chit funds and others faced threats from collection agents.

It is in the wake of this that the state intelligence agency sounded an alert against the dubious chit funds operating in Kerala. Many chit funds that do brisk business in the state have their registered offices in Haryana or Jammu and Kashmir. However, their offices in these states are in name only. This in itself exposes the malicious intent behind such firms.

According to a report submitted by the intelligence wing to the government recently, about 750 chit funds that function in Kerala have dubious track records.

Many of these firms are registered either in Faridabad or Srinagar. The intention behind such a modus operandi is to bypass the rules prevailing in Kerala.

Meanwhile, managing director of Kerala State Financial Enterprises P. Rajendran said that the strict enforcement of the Central Chitty Act would curb the operation of chit fund firms registered in other parts of Kerala.

“Already many private chit funds have started feeling the heat and are scaling down their activities,”
he said.

The norms prescribe that if a chit fund has more that 20 per cent of its members from Kerala then it should be registered in the state.

Similarly, the first instalment collected from all the members in a chit fund should be remitted to a bank account as security. These norms are being blatantly violated by many chit fund companies. But, hundreds of persons join the chit funds as they are ignorant of these violations.

Fund diversion drove crash

It was last year that four chit fund firms crashed, leaving nearly 3,000 depositors in the lurch. But, according to members of the All Kerala Kuri Foremen’s Association, several directors of these firms were the same and it was because of their investments in other businesses and the failure to manage the chit funds properly that the crash happened.

This business has a tradition of more than two centuries, says Davies K., secretary of the association. Cases of failure have been just one per cent. If a particular company fails, the effect will be felt in other companies cross-held by this one company.

The firms are registered and it is not easy to dupe people, Davies asserts. This is a legal registered business, he adds. What is often mistaken as failure in the business is those unregistered and run illegally.

“Often failures happen in neighbourhood collections that are unregistered and run by a particular individual. This is because the individual who has earned the faith of the locals collects money and diverts it to other business like real estate trade. Unable to get timely funds from these new businesses leads in failure to meet the demands of investors, leading to further failures. This is often highlighted as the failure of chit funds as a whole,” he argues.

Failures have happened when money has been diverted into real estate or construction businesses from where returns may take some time to come.

Chit funds were made legal through the Cochin Kuries Act, 1932 and the Travancore Kuries Act, 1945.

These were then brought under one rule, the Kerala Chitties Act. It was only recently that the supreme court ruled that all such chit funds were to be brought under a single central law.

Chit fund managers admit that there are instances when there are not enough depositors and that the fake registration of investors is made for a particular fund and that draws for the prize money are manipulated and diverted.