The word ‘Chit,’ suggests the origin of Chit Funds. ‘Chit’ means a written note on a small piece of paper. The Malayalam equal for the word ‘chitty,’ is ‘Kuri,’ which has been derived from ‘Kurippu’ (which means a piece of writing or script). The ‘Chitty’ or ‘Kuri’ is derived, the root being the ‘lot.’ The foreman writes the name of each subscriber on a small piece of paper and fold it several times with the name inside to decide the prize-winner. He calls it the ‘Kuri’ or ‘Chit’ or ‘Narukku’ and in other ways, one ‘Narukku’ also means one member.
The Chits or Kuri’es are put in a vessel, all folded and mixed well and a person is called upon to pick one Chit from the vessel. The Chit is opened, the name read out, and the member declared as prize-winner. The prized Chit is removed from the vessel, and the proceedings repeated, at the next installment. The Chit or Kuri thus plays a crucial role in the allotment of the prize amounts.
According to the Chit Funds Act of 1982, the Government of India defines a “chit” as,
“… means a transaction whether called chit, chit fund, chitty, kuri or by any other name by or under which a person enters into an agreement with a specified number of persons that every one of them shall subscribe a certain sum of money (or a certain quantity of grain instead) by way of periodical instalments over a definite period and that each such subscriber shall, in his turn, as determined by lot or by auction of by tender or in such other manner as may be specified in the chit agreement, be entitled to the prize amount.”
Or in simple words, a chitty is a contract between the foreman and the Subscribers. As per the contract, each subscriber agrees to remit a fixed amount of money every month for some months.