Chit fund sector gets tech-savvy with gold mine of big data at stake

With the chit fund sector now on a firm legal pedestal with recent passage of the Chit Funds (Amendment) Bill, 2019, the emerging fintech space surrounding chit finds is set to get a boost. At the heart of this growth is the quest for the gold mine of data hidden in sector, running into several million.

Over the last couple of years, several fintech players are already in the business of data analytics in the chit fund sector, providing services like credit bureau checks and facilitating loans for chit fund subscribers and companies. Also, with banks and non-banking finance companies facing liquidity crunch, chit fund has turned into a booming business.

According T S Sivaramakrishnan, president, All India Chit Fund Association, and managing director of Balussery Benefit Chit Fund, the sector has been growing at about 10-15 per cent annually over the past few years.

“After demonetisation, we saw good growth in terms of value of chit funds. With banks, NBFCs shying away from lending, many small entrepreneurs are turning to chit funds,” he said.

“The size of the untapped data in the chit fund industry is mind boggling, credit profiles of several millions of low and mid income groups. We have come across several players seeking access to this data for cross selling,” Sivaramakrishnan added.

The size of the organised chit fund industry is close to Rs 60,000 crore, with 45000 registered chit fund entities working in the country. However, the size of the untapped chit fund sector is more than 30 to 40 times of the regulated one.

In 2016, Pavan Adipuram started ChitMonks, a platform which uses blockchain technology to bridge the gap in flow of information from chit fund companies to regulators. Its flagship product, T-Chits is now being used by Telangana government for collecting regulatory information about chit fund companies in the state. The companies have to mandatory use the software for filing regulatory documents.

“This is an amazing data, that of close to million subscribers in Telangana alone. Their collective annual turnover is close to Rs 18000 crore. Earlier, this data was totally missing from the system. Now, one can bootstrap the credit identities of these subscribers and help them in accessing more financial products. It will open a new domain of fintech solution services,” says Adipuram.

In 2017, Neeraj Bansal  started CredRight, a fintech company which provides credit check services and arranges loans for chit fund subscribers. The company analyses data of subscribers by chit fund companies, a segment with no links to credit bureaus due to lack of access to organised finance. It also arranges loans for those who are not successful in the initial chit bidding rounds.

“We arrange funds for both chit fund companies and subscribers, as both face liquidity issues. Also, most chit funds do subjective underwriting, as they don’t have any knowledge of factors beyond previous repayment history. We do that data analysis like cash flows and financial sustainability of the subscribers and give them ratings,” says Bansal.

According to Sridhar Narra, CEO, Kireeti Soft Technologies, which provides software for conducting chit fund operation, technology is helping in streamlining the sector, particularly, identifying good customers.

“These are real big numbers. The chit fund sector would roughly represent 20 per cent of the retail banking segment. There is a huge potential in analysisng this data, as in rural areas there are a large number of subscribers who have excellent ratings, but that is not captured by any credit bureaus,” says Narra.

One of the key recommendations of the sector ahead of the amendment in chit fund act was to allow chit fund companies to undertake fee-based activities, like selling third party financial products, said Janardhan Reddy, member of key advisory group for NBFCs, Union ministry of finance, instrumental in bringing in the recent amendment, Given the size of the sector, this would have been a lucrative business for the companies. According to Reddy, in Andhra Pradesh and Telengana, the biggest markets for chit funds, the industry growth has been around 25-30 per cent annually, surpassing national growth, in the last few years.

Last week the Lok Sabha passed the Chit Funds (Amendment) Bill, 2019, amending the Chit Funds Act, 1982. The prescribed ceiling of aggregate chit fund amount for individuals has been raised from one lakh rupees to three lakh rupees and in case of firms, the limit has been raised from 6 lakh to 18 lakh rupees. Besides, words chit amount, dividend and prize amount have been substituted with terms gross chit amount, the share of discount and net chit amount. The legislation also increases the maximum commission of a foreman from five per cent to seven per cent and also allows the foreman a right to lien against the credit balance from subscribers.

A typical customer of chit fund scheme is daily wage earner in the lower bracket, and small entrepreneur with fund demand of close to Rs 10 lakh in the highest bracket, also the fastest growing segment in the industry.

Under a chit fund scheme, a foreman enters into an agreement with a number of subscribers. Every one of them agrees to pay a certain sum for a certain period and each subscriber, as determined by a lot or by an auction, is entitled to a prize amount.