Chit funds move up the value chain, face testing times like never before

Chit fund, an industry that is said to be at least 1,000 years old, is facing testing times like never before. One of the earliest forms of pooled resource financing or peer-to-peer lending based on a high degree of community trust, the business has rapidly kept up with the times by going digital. But the launch of online collection process, mobile applications and e-auctions has brought with this hitherto under-regulated industry greater governmental scrutiny, taxation and regulation that now threatens its growth.

States such as Telangana (through T-Chits) are in the process of solving the complex issue of regulating and monitoring chit funds even as existing largest players like Balussery, Shriram Chits and Gokulam are taking digital initiatives for the comfort of clients and employees. “Earlier, everything used to be manual. Now, through e-KYCs and an app people can get into the website and, with just two to three clicks, gain admission into the particular chit. We are trying to provide the auction procedure also online,” said KRC Sekhar, managing director, Shriram Chits.

On the other hand, start-ups such as Noida-based Money Club (founded by IIT Kharagpur alumni Manuraj Jain and Surajit Ray) are trying to take it to the next level by going completely online. Acting as an artificially intelligent chit fund cashier in the form of an Android application, the start-up delivers a higher value proposition to savers, investors as well as borrowers. Despite this, the government machinery is extending scant support for the fintech companies to enter the chit fund domain.

Part of this reluctance may be on account of the fact that the chit fund industry has been notoriously difficult to regulate and it is so informal in nature that data is hard to come by. Based on data available with the All India Association for Chit Funds, the size of the chit fund industry in India is over Rs 75,000 crore with around 50,000 registered chit funds working in the country. Interestingly, the size of the un-registered segment is expected to be at least 50 times larger than the regulated component. The majority of these funds are based in Tamil Nadu, Andhra Pradesh, Karnataka, Kerala and Delhi. The primary challenge that the industry is facing is that there is no centralised data on the number of chits in the country. Also, other than Telangana, Tamil Nadu and Karnataka, there is less digital data available with the government nationally.

“Our competition is with an unregistered segment on how to bring them to the mainline. What the government has to do is that the registration has to be user-friendly,” said T S Sivaramakrishnan, advisor, All India Association for Chit Funds, and director of Balussery Benefit Chit Fund. Sivaramakrishnan indicated that the major challenge that the industry is facing is a perception battle with “Ponzi schemes and multi-level marketing schemes like Saradha in West Bengal” being described as chit funds.

In June this year, the government had increased the goods and services tax (GST) on chit fund services from 12 to 18 per cent. This came at a time when the industry was demanding tax reliefs. “There is a rise in demand for high-denomination chit funds. The unique selling point for the chit fund is that the savers are getting better returns and borrowers affordable costs. Now, what is happening is borrowers are benefitting and for savers there is a difference of almost about 2-2.5 per cent due to this GST,” said Sekhar. Shriram’s chit fund business has disbursed almost Rs 30,000 crore and has posted an annual turnover of Rs 4,500 crore in 2021-22, up by Rs 400 crore (from around Rs 4,100 crore a year ago). It is aiming at 25 per cent growth from this year onwards to touch around Rs 10,000 crore by 2025-26.

Sivaramakrishnan added that when interest rates go up, for a borrower chit funds are a safer option, so demand rises. “Demand has increased by 10-15 per cent in terms of turnover compared to last year. We are confident that whatever business we lost in two-and-a-half years due to Covid will be recovered in six to seven months,” he said.

As part of its transition phase, the industry is also trying to push for a credit rating process and there is already a start-up in place for this called CredRight, which provides credit check services and arranges loans for chit fund subscribers. Another start-up, which experts say, is changing the traditional sector is ChitMonks, a platform that uses blockchain technology to ease flow of information from chit fund companies to regulators.

Of course, the perception problems remain, despite the digital push. To battle this, the industry is also coming up with a campaign similar to the mutual fund industry’s “Mutual funds sahi hai”. “We are more than sahi hai,” one of the sources said on a lighter note.

Made in India

According to a report by IFMR Research, chit funds are Indian adaptations of the globally acclaimed rotating savings and credit associations (ROSCAs), where the option to “save and borrow” exist simultaneously.

A chit scheme is generally taken for a predetermined value and duration. Through the scheme, the participants contribute a certain amount on a monthly or daily basis to the “pot”, which is auctioned every month. In this auction, the bid amount is called discount and the highest bidder wins the money equal to the chit value deducting the discount and the fixed fee to the foreman. It is this discounted money that is distributed among the rest of the chit members as a dividend. In India, this mode of informal financing has been popular when institutional financing is hard to come by — so much so that there are existing chit fund players like St Thomas Cathedral Kuries in Thrissur, which is more than 175 years old.