Chit Funds

Name Shreeya Bhagyashree Sandhya Rupal Navin Jyoti Bhagyashree Shweta Komal Urvashi

Roll no. 21 22 10 20 23

Topics  Chit funds  Hire-purchase  NBFC (Non Banking Financial Companies) The Chit Fund Department was set up by the Government with the main objective of controlling the activities of Chit Fund Companies of Delhi through the Madras Chit Fund Act, 1961 extended to Delhi and Delhi Chit Fund Rules, 1964 Chit Funds  A Chit Fund is a kind of savings scheme practiced in India. In a chit scheme, a specific number of individuals come together to pool a specific amount of money at periodic intervals. Usually the number of individual Chit funds and the number of periods will be the same.  At the end of each period, there will be an auction of the money. Members of the chit will participate in this auction for the pooled money during that interval. The money will be given to the highest bidder.  The bid amount will be divided by number of members, and thus determining per head contribution during that period.  Usually the discount will continue to decrease over periods. The person getting money in the last period will receive the full scheme amount. Example  This way it goes like an auction with the organizer repeating the bid amount 3 times before closing the deal. Suppose someone bids 1000 rupees and the deal is closed. Now the bidder would be awarded 19,000 (His bid-amount would be deducted). The 1000 rupees deducted from the bidder would be shared equally among the members. So for that month each person will pay only 950 (20,000-1000/20).This saving can be considered equivalent to the interest provided by banks.  Once a member wins a bid he can't participate in future biddings. So after the first month only 19 members would be eligible for bidding.

 One particular month (typically second month) there would be no bidding, so the members should pay their share (1000 rupees) in full. That month collection amount would go the organizer as salary for organizing, coordinating and bookkeeping the chit-fund.  And the bidding goes each month comes there would be only 1 person eligible for bidding. Hence that month’s money would be given in full (20,000 rupees) to that person. Special purpose chit funds  Some chit funds may be conducted as a savings scheme for specific purpose. An example is the Deepavali sweets fund, which has a specific end date about a week before Deepavali. Neighbourhood ladies will get together to pool their savings each week. This fund will be used to prepare sweets in bulk just before the Deepavali festival, and the sweets will be distributed to all members. Preparation of Deepavali sweets may be a time consuming and costly activity for individuals. Such a chit will reduce the cost, and relieve the members from excess work from an already tense festival season.  Nowadays, such special purpose chits are conducted by jewellery shops, kitchenware shops, etc. to promote their products. Hire-purchase  A method of buying goods in which the purchaser takes possession of them as soon as an initial installment of the price (a deposit) has been paid and obtains ownership of the goods when all the agreed number of subsequent installments have been paid. A hire-purchase agreement differs from a creditsale agreement and sale by installments because in these transactions ownership passes when the contract is signed. The seller and the owner If the seller has the resources and the legal right to sell the goods on credit (which usually depends on a licensing system in most countries), the seller and the owner will be the same person. But most sellers prefer to receive a cash payment immediately. To achieve this, the seller transfers ownership of the goods to a Finance Company, usually at a discounted price, and it is this company that hires and sells the goods to the buyer. This introduction of a third party complicates the transaction. Suppose that the seller makes false claims as to the quality and reliability of the goods that induce the buyer to "buy". In a conventional contract of sale, the seller will be liable to the buyer if these representations prove false. But, in this instance, the seller who makes the representation is not the owner who sells the good to the buyer only after all the installments have been paid.  Warranties to protect the hirer  The extent to which buyers are protected varies from jurisdiction to jurisdiction, but the following are usually present:

 The hirer will be allowed to enjoy quiet possession of the goods, i.e. no-one will interfere with the hirer's possession during the term of this contract  The owner will be able to pass title to, or ownership of, the goods when the contract requires it  That the goods are of merchantable quality and fit for their purpose, save that exclusion clauses may, to a greater or lesser extent, limit the Finance Company's liability  Where the goods are let by reference to a description or to a sample, what is actually supplied must correspond with the description and the sample. Rights of the hirer  The hirer usually has the following rights:  To buy the goods at any time by giving notice to the owner and paying the balance of the HP price less a rebate (each jurisdiction has a different formula for calculating the amount of this rebate)  To return the goods to the owner — this is subject to the payment of a penalty to reflect the owner's loss of profit but subject to a maximum specified in each jurisdiction's law to strike a balance between the need for the buyer to minimize liability and the fact that the owner now has possession of an obsolescent asset of reduced value  With the consent of the owner, to assign both the benefit and the burden of the contract to a third person. The owner cannot unreasonably refuse consent where the nominated third party has good credit rating  Where the owner wrongfully repossesses the goods, either to recover the goods plus damages for loss of quiet possession or to damages representing the value of the goods lost. The hirer's obligations  The hirer usually has the following obligations:  To pay the hire installments  To take reasonable care of the goods (if the hirer damages the goods by using them in a non-standard way, he or she must continue to pay the installments and, if appropriate, compensate the owner for any loss in asset value)  To inform the owner where the goods will be kept. NBFC A non-banking financial company (NBFC) is a company registered under the Companies Act, 1956 and is engaged in the business of loans and advances, acquisition of shares/stock/bonds/debentures/securities issued by government or local authority or other securities of like marketable nature, leasing, hire-purchase, insurance business, chit business, but does not include any institution whose principal business is that of agriculture activity, industrial activity, sale/purchase/construction of immovable property. What are the salient features of NBFCs regulation which the depositor may note at the times of investment?

Some of the important regulations relating to acceptance of deposits by NBFCs are as under: •

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The NBFCs are allowed to accept/renew public deposits for a minimum period of 12 months and maximum period of 60 months. They cannot accept deposits repayable on demand. NBFCs cannot offer interest rates higher than the ceiling rate prescribed by RBI from time to time. The present ceiling is 11 per cent per annum. The interest may be paid or compounded at rests not shorter than monthly rests. NBFCs cannot offer gifts/incentives or any other additional benefit to the depositors. NBFCs (except certain AFCs) should have minimum investment grade credit rating. The deposits with NBFCs are not insured. The repayment of deposits by NBFCs is not guaranteed by RBI. There are certain mandatory disclosures about the company in the Application Form issued by the company soliciting deposits.

Difference between NBFC and Banks  NBFCs are doing functions akin to that of banks, however there are a few differences:  A NBFC cannot accept demand deposits (demand deposits are funds deposited at a depository institution that are payable on demand -immediately or within a very short period -- like your current or savings accounts.)  it is not a part of the payment and settlement system and as such cannot issue cheques to its customers; and  Deposit insurance facility of DICGC is not available for NBFC depositors unlike in case of banks. What are the different types of NBFCs registered with RBI?  The NBFCs that are registered with RBI are:  equipment leasing company;  hire-purchase company;  loan company;  Investment Company.  With effect from December 6, 2006 the above NBFCs registered with RBI have been reclassified as  Asset Finance Company (AFC)  Investment Company (IC)  Loan Company (LC)