In response to the 2008 economic crisis, banks and financial institutions made their lending policies stringent and attached higher costs and tighter credit controls for borrowing. Harder access to credit and a lengthy approval process created a gap between demand and supply that prompted a new alternative financial market in the form of peer-to-peer (P2P) lending to emerge to bridge that gap. P2P lending platform connects investors and borrowers and offers a solution to the costly and nerve-racking credit approval process of traditional borrowing.
P2P lending, also known as marketplace lending, social investing, or direct consumer lending companies, offer their services online. This means their overhead costs are low and they are better positioned to provide consumers with a cheaper and more accessible alternative to classic borrowing.
How P2P Fintech Startups are Creating New Opportunities for Good Old Chit Funds
On a broader level, P2P lending is based on an age-old funding system practised in India called the chit fund, also called the ROSCA (Rotating Credit and Saving Associations) model.
This means that India is not new to P2P lending. Community-based financing and lending in the form of chit funds offering savings and investment opportunities to their members have been a part of unorganised P2P lending for centuries in India. What is relatively new is the concept of technology-enabled P2P lending platforms.
What are Chit Funds?
Chit funds are financial institutions native to India. The system is equivalent to ROSCA and caters to people’s financial needs by offering a scheme that allows them to save as well as borrow.
For generations, Indians have been saving money in chit funds. The popularity of it is so massive that there are now more than 10,000 registered chit funds in India. The registered chit fund industry stands at ₹35,000 crores, while the informal chit funds are estimated to be 50 times more. In a nutshell, chit funds play an indispensable role in meeting the needs of the people who still remain underserved and underbanked.
By combining the savings and lending into a single product, chit funds also take a unique place to serve small and micro business owners’ needs.
Unfortunately, this innovative offering asset class lacks appeal with today’s tech-savvy youth for whom everything has to happen with a click of a button. There have also been unfortunate fraud incidences in the past with unregistered chit fund that has led to a perception that chit funds, on the whole, are highly unregulated, disorganised, and corruption-laden, which is, unfortunately, a far cry from reality.
Indian startups have stepped in to bridge this trust gap and make chit funds more accessible to “digital India.”
Digitalisation of Chit Funds: Startups Gearing up to Take Chit Funds to India’s Youth
Armed with technology, a few startups have successfully disrupted the Indian chit fund industry for the better. For example,Money Club digitally carries out customer onboarding, payments, and bidding through a mobile app. CredRight is another fintech startup that allows micro and small entrepreneurs to borrow against chits. Finlok is a Pune-based company where users leverage their social networks for group savings.
From Chit Funds to P2P Platforms: How this works?
The chit funds process remains the same, but now it has moved to a digital P2P lending platform.
For example, 25 people form a chit fund group to contribute ₹1,000 each month for 25 months. So, every month there is ₹25,000 pot available for which the 25 participants can bid. The winning bid is the one that takes the least amount home. If one of the 25 people bids to take ₹ 23,000, the remaining ₹2,000 is shared among the rest of the members. The bid winner’s name is removed from the next auction while he continues to pay his share of the contribution.
P2P lending platforms have given a new face to the age-old saving and lending system in India. The new-age chit fund companies have caused a positive digital disruption to offer a perfect digital solution to channel individual savings and make money accessible to India’s large credit averse population when they need it.
Aatish Khanna works with the Content Marketing team at Money Club – digital chit fund platform that makes saving, borrowing, and investing your money more efficiently. He writes on topics to help his readers understand processes so they can make better financial decisions. He’s the go-to person that his family, friends, and colleagues turn to for all their money matters. He loves to play board games and aspires to one day build his one finance-related board game and app.