Story Highlights

• A bunch of startup founders believe disruption can save chit funds and are investing all they have to digitise them
• About 72% Indians have used chit funds, despite the fact that gullible depositors have been duped of at least Rs 80,000 crore
• Entrepreneurs should use the India Stack to make it affordable to run chit funds and ensure that they comply with the law

The demonetisation is unarguably the best thing to have happened to India’s cashless payments sector. Digital payments have seen a 300% spike (till December last year), investors are eyeing fintech startups with new interest and banks are expanding their digital operations and services.

But there has been very little conversation around chit funds — which comprise a substantial part of India’s parallel economy — and the impact of the government’s cashless thrust on them. The informal savings scheme is hugely popular among individuals, shopkeepers and small businessmen, especially in rural India. They swear by chit funds despite the sector having been rocked by large-scale scandals, like the Rs 60,000 crore Rose Valley scam or the relatively smaller Saradha chit fund scam.

So, can digitisation save chit funds? Well, yes, according to a bunch of startup founders who believe disruption can save chit funds and are investing all they have to start companies focused on digitising them.

But, given the bad rap they’ve got, do we even need chit funds, leave alone digitise them? Priya Surya, the founder of Pareto, a technology enabler for peer-to-peer lenders, says. “All markets have multiple financial services. It is important to innovate for those who want to use chit funds.” Priya is working on a tech platform where people can create and participate in chit funds.

She’s seems to be on the right track — an estimated 72% Indians have used chit funds. And despite the fact that chit fund companies have duped gullible depositors of at least Rs 80,000 crore in India (according to this report), people continue to invest in them.

Take the instance of Hemalatha Harish’s mother, who’s been investing in chit funds since Hemalatha was a child. The 34-year-old IT technician from Bangalore says her mother would use chit funds “to save money for a gift, or as insurance in case of a medical or family emergency.”

Once, someone ran off with an auction pool of Rs 55,000. Another time, someone withdrew money using Hemalatha’s mother’s name. Despite this, she continued to invest in chit funds. “Chit funds were run by managers who knew her personally,” Hemalatha explains. “My mother had the assurance that they’d knock at her door if she hadn’t paid. They promised her immediate loans without having to build up credit or open a bank account,” she adds.

Changing the chit fund game

It’s this stickiness — registered chit funds have an annual turnover Rs 35,000 crore and unregistered an estimated turnover of 10 times that amount — where entrepreneurs like Priya see potential.

The financial scheme has managed to capture the hearts of millions of Indians. Instead of creating something new, why not make them work better?

Pavan Randhawa, founder of ChitMonks, is another believer. He wants to create “a neutral marketplace for promoting chit funds of registered chit fund companies.” ChitMonks lets users search for registered, trustworthy chit funds in their area. They can then view pool sizes, monthly deposits and auction amounts.

Chit funds have worked just fine without technology until now, so it was difficult to convince fund managers to use his app at first, says Pavan. “I had to prove that I wasn’t starting my own online chit fund,” he laughs. But, once he had signed on one reputable chit fund, it became easier to onboard the next.

In order to build ChitMonks’ reputation and make it an attractive financial option, it was important to work only with registered chit funds, he says. “Our goal is to onboard the best 10 chit funds in each state. I’ve done extensive research and visited every state to meet them,” says Pavan.

He plans to use the data he collects about borrowers to create a system that will generate continued interest in chit funds. “Let’s say after the 50th month, you decide to move to another chit fund, you will be eyed with suspicion. But, if your history of reliability is on ChitMonks, it’s different,” he says

Still, there are problems. New users start from scratch, and it’s not possible to upload past chit fund histories. “More than 80% people we sign on are new chit fund users,” he tells me. “Education is an important part of our service.” Also, regulations remove the possibility of transacting on the app, which is a big downer.

Pavan has big plans for his startup. He lists out several revenue models. They’re currently charging what he claims is the “lowest hanging fruit,” where ChitMonks takes a small fee for connecting borrowers to chit funds. Next, he has plans to monetise by telling customers the best time to take out money, and when it’ll be worth to take out less for a higher sum.

Registered vs unregistered funds

In case you didn’t know, here’s how chit funds work: an X number of people put in a Y amount of money in a fund on a monthly basis. An auction is held every month, where participants can bid against each other to win XY — the “auction pool” — until every person has won that sum. You can choose to bid more money and take home less if you require the money urgently. The remainder is either split up among the other people in the pool or given to the person running it.

Unregistered chit funds worth over Rs 100 crore are illegal. They can be created by anyone — from a group of friends to autorickshaw drivers that service a certain area. They operate on the basis of trust, but the lack of regulation makes it easy for people to steal money.

On the other hand, registered chit funds are regulated under the Chit Fund Act of 1982. Some of them are successful companies, like Tamil Nadu’s Shriram Chits. Shriram reportedly has a turnover of Rs 45 crore every time there is an auction.

Pavan says the unregistered chit industry is where most of the money lies. “In the unorganised industry, every galli, every mohalla has a chit fund. It’s easy for them to operate with groups of people coming together.”

The government has made it very difficult to register chit funds, Priya adds. The Chit Fund Act has rules on everything from how meeting minutes should be recorded to the proper way to interact with customers. “These tough rules have actually created a larger number of unregistered chit funds,” she says.

Chandan Telkar, the founder of TraChit, a chit fund account tracking app, explains that registered funds are often too controlled to tap into the real power of group saving and lending. “With registered chit funds, you end up paying a lot of taxes and also have to pay the fund manager a fee,” he says.

Which is why Trachit deals with unregistered funds. TraChit enables you to keep track of all of your investments in these funds, with details on how much money you’ll be making, when it’s safest to bid for an auction pool, and the history of your investments. He believes in the powers of algorithms. “With a little bit of help, one can make great returns off unregistered chit funds,” he says.

Investing in a bright, digital future?

Unregistered chit funds mostly transact in cash and have taken a hit after the demonetisation of old Rs 500 and Rs 1,000 notes.

Instead of letting these unregistered chit funds fade away or re-emerge in their current form once cash is freely available again, entrepreneurs should use the India Stack to make them affordable and enable their compliance with the law, writes Kunal Kashyap in a post published by Indian think tank Ispirt.

The India Stack is a set of technologies that includes biometric identification system Aadhaar and e-Sign, a service that allows Aadhaar-holders to digitally sign documents. Kunal also writes that the chit fund industry will blossom if the government makes registration easier. This includes easing regulations on how much money a chit fund should have to operate, he adds.

Despite all the digitisation interest chit funds are generating, Hemalatha is sceptical about the future of chit funds. “My mother wouldn’t touch a tech service, and I can’t see anyone in my generation being too interested in chit funds,” she says

What about lack of growth in the chit funds sector, funding for startups and their monetisation hurdles?

Pavan admits that trends point towards a lack of growth in chit funds. “Subscriber bases aren’t increasing,” he says. “The average age of a chit fund subscriber is high — 40-50 years. It’s alarming.”

Still, he is optimistic about their potential in India’s fintech future. “Chit funds give you a personalised feeling that you’ll never get with banks,” he says.

Chandan says he is yet to think of a way to monetise his startup. But, he too believes they have a bright future — especially because playing them right lets customers take out fast loans. “If you’re investing Rs 10,000 each month, you can auction and take out Rs 90,000 in just two months to start your business,” he explains.

There are some silver linings: ChitMonks has raised Rs 1 crore in angel investment from TiE-ISB Connect, an event held in Hyderabad. And in December 2016, Pavan claimed 400 customers. “That’s just since starting promotion in the last week of August,” he says.

Pavan and Chandan seem to be targeting entirely different customers — Pavan, the cautious saver who is looking to build a stable, financial history with chit funds, and Chandan, those keen on taking risks to make the most of group saving and lending.

But they have the same goal: to turn chit funds into trustworthy, modern financial services. “We want to work closely with the industry and spread the word that chit funds are legitimate and reliable,” says Pavan.

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