Raising money with committee system| Chit Fund . Should you prefer it over bank loan in 2022?

In India their are a lot of Small scale businesses who are currently running or are starting up in 2022 because of shark tank era. So definitely to run the business they will need funds, now one way is to take it from banks or other financial institution who take something from you as a collateral and give funds on some interest or the next way is raising money with committee system which is far more easier and sometimes lesser interest rates as compared to banks but to start it you need to trust the members whom you are starting with as their are no legal documents involved in it, So chances of scams are high but if you have a good relation with the person then it is best to raise funds as compared to banks.

What Actually is Raising money with committee system ?

Raising money with the committe system is very different from the banking sector, because their is no need of collateral in this system. Their is a group of people and a leader who runs the committe and collects the money from each individual each month and every time the total amount is given to somebody selected and this continues till all the member get full payment one time(which is the goal)

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Maths Behind Committee System

Now let’s Understand the indepth functioning of committe system and how to play Raising money with committee system in numbers. Let’s assume their are 12 members(Including leader) and committe amount is 12 lakhs and each member has to pay for around 1 lakh every month for 12 months so that every person could get the total principal amount.

Now who will get the committe each month will be decided by auction strategy each member has to claim a discount at which he can take the amount. More discount a person can handle chances of taking that amount home are high.

Now initially everybody has to pay 1 lakh (Total principal amount becomes 12 lakh for first month) Now for giving the money in the auction everybody gives a bid who is interested for e.g. let’s assume 3 persons A,B,C are interested in the bid for this month.

Person A is ready to get the amount at discount of 20k, B at 40K, C at 1 lakh so the bid closes with C and C will get an amount of 12lakh-1lakh=11 lakh and the 1 Lakh left will go to next month investment, which means total amount to be collected for next month becomes 11 lakh rather than 12 lakh so it gives the total discount of 1 lakh(1/12= 8.3k per person) so the next month installment for each person is now 1lakh-8.3k i.e. 91700 and this continues for all months and person will get the amount less than equal to 12 lakh one time in each committee without giving any collateral and that too at similar or lesser interest rates as compared to banks.

Raising money with committee system

Risk Involved in Raising money with committee system

Now the Biggest drawback of Raising money with committee system is the scams, because sometimes the leader runs with your money and you can’t do anything because their are no legal work involved.

Sometimes a person who gets the principal amount refuses to pay the future installments.

Sometimes the people involved are not of good ethical behavior, they may be goons who tries to blackmail you.

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How to Avoid those Risks?

To Avoid those Risks you must ensure that you are doing with trustworthy people. Do a background research of all the members, start initially with small amount. If possible always do it among relations or friends. Look for the image of that person in society and give it a rating so that you may ensure that the person will not do something that lowers his/her dignity.

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