Digital Chit Fund Opportunity
The disruption of technology has given the world new opportunities. Today, if we look at this scenario from the perspective of digital technology being a need or a want, one can strongly agree that it has become a need especially since every other brand is changing its traditional framework to become more digital in nature. Technology today as the power to reach millions of people thanks to this device called smart –phones and the financial sector is taking full advantage of its potential.
Today more and more banks are digitizing their services to be more mobile friendly and easy to use. Whether it’s the concept of Paytm’s digital banking system or the UPI technology that has online payments undertaken within a few clicks, the rise of ‘fintech’ a.k.a Financial Technology has changed the landscape of financial services. It would be hard for a financial institution to function today without having a supporting application or a website for customers.
After considering this, the question that arises is:
Why is this happening?
Well, to find answers to these questions we must look at the problems that inevitably made digital finance a solution.
- Lack of access to financial services to tier 2 and tier 3 cities.
- Lack of understanding and information about available financial services.
- Non ease-of use and complicated documentation procedures make availing services a hassle.
Naturally these problems created a gap between customers and products henceforth, creating the problem of financial inclusion. Due to this, people are not only being deprived of available financial sources but are also unaware of new products that are taking over the market.
A case in point would be chit the tradition practice of dealing in funds in India. Chit funds are one of the oldest and most popular financial tools in India. What’s unique about chit funds is that it was started in India decades ago and it still has a huge presence in certain parts of the country.
Let us try to understand more about the chit asset class
Chit funds are a form of P2P lending and borrowing option. It’s a micro financing option where a group of people come together to cumulate money for a pre decided amount and for a pre decided period of time. It is a scheme which may be offered by financial institutions or can take place informally between a group of friends or relatives; they are usually used to fulfill short term monetary goals.
Many people living in the rural areas of India are unable to avail services due to factors like poverty and illiteracy. They are unable to take loans as they don’t meet the necessary eligibility criteria and with no money in hand they get stuck in the vicious cycle of poverty which hinders the standard of living.
And with problems like rising inflation, high interest rates and banking services not reaching the needy, there is a need for a solution that can help reach this sector of the society.
Here’s where chit funds have played an important role over the decades. The P2P lending option allows people to take loans from one another and provides them money when in need.
Here’s how chit funds work
Let’s understand with an example
Suppose you join a chit group of 6 people who agree to save Rs.10,000 every month for a duration of 6 months. Now within these 6 months you may borrow an amount of money through bidding an amount. If more than 1 group member bids an amount then the lowest bid wins and the remaining amount is distributed among the members after a small commission is deducted. Alternatively if you don’t borrow within the duration then you may receive all your savings by the end of the term.
This way, not only will you be able to borrow during emergencies but also be able to inculcate the practice of saving.
There are three kinds of chits available in India:
State run Chits: These are offered by the state government of a particular state like State of Kerala or Tamil Nadu
Registered Chits: These are registered institutions that offer chit options to public like Mavayaram Chits, Chetana chits and so on.
Un-registered Chits: These are un-registered chit trading practices which happen informally between families or friends for a specific purpose.
Out of these, the state run chits as well as the registered chits are one of the safest options to invest in as they are regulated by government norms. Un-registered chits mostly run of mutual trust and understanding but carry the risk of default by the members.
This particular risk is what led to various scams to happen in India which eventually led the public to view chit funds with a skeptic eye and lack of trust. These scams not only hampered the development of chit asset class but also shunned the growth of trusted chit providers.
Even today, the chit asset class is unable to serve the current market segment due to lack of development, transparency, inability to scale, poor customer service as chits are mainly traded informally, high operational cost etc.
It was until recently, with the change in government norms and strict regulations were chit funds able to retrieve their space in the market. One major contributor to this growth was the disruption of digital technology.
So how did technology help chit funds get back on track?
Today almost every financial product is available in a digital format as the benefits surpass the cons. Not only does digitization of products provide more reach but also bring perks like transparency, ease of use, convenience, information and so on; right in the hands of the customers.
For chit funds, digital technology can solve the problem of transparency which is an important element of the product. Fin-tech firms like KyePot, who exclusively provide digitized chits to the customers, understood this issue from the core and hence, work tirelessly to eradicate this problem and bring in more security for its customers through their application.
With technology, the chit asset class can reach the consumer easily. On the KyePot app, customers get excellent in-class user experience from the point of registration to after service customer support. Users also get to experience full transparency and control through which they can safeguard and secure their money.
What was the result?
More and more people are now embracing this micro-financing option as it is a unique combination of Savings plus Investment; they are a firm of low cost loans which can be availed by anyone. Through digital options this tool is bringing in financial inclusion among the unbanked tier 2 and tier 3 citizens of India.
Although chit funds have a long way to go, the day isn’t far when this tool will be the most preferred investment option especially to the masses of India. The combination of digital technology and regulated government norms will definitely help this tool grow over the next few years and make it one of the safest and easiest investment options.