Yesterday, Hyderabad-based blockchain firm ChitMonks received a $650,000 investment from Unicorn India Ventures, The Hindu Business Line reported. ChitMonks has developed a distributed ledger technology (DLT) platform for managing chit fund operations.
Chit fund is an age-old funding system practiced in India before banks were accessible in villages. It is essentially a savings and credit association organized by financial institutions or informally by friends, relatives, and community members. So it’s a precursor of community microfinance and p2p lending.
“Chit fund, as an asset class, is very close to millions of people pan-India,” said Pavan Adipuram, co-founder and CEO, ChitMonks. “Our passion is to create, empower, and enable the next-generation chit fund companies that are looking to grow in the chit fund business.”
A chit fund’s duration is limited to the number of members. Each member deposits a certain amount every month, which forms the total “pot” for the month. An auction at the end of the month to disburse the amount to a member who needs it. Members bid at a discount of the total pot, and the lowest bid or amount requested wins the auction.
The primary benefit of this system is that members can take credit on 0% interest. However, the organizer takes a 5% cut of the monthly deposits and chit funds have been associated with scams and frauds in the past few years. Firstly, the entry barrier for chit funds is low, and organizers do not demand documents as banks do. This increases the risk as members may default on monthly payments. Meanwhile, there have been instances where the organizers have scammed the depositors, such as the Saradha Group scandal.
ChitMonks has developed a blockchain solution for chit fund companies to increase efficiency in payment collections, online auctions, eKYC, and e-signing documents. It also provides the organizers with better underwriting data such as bank statement analysis, credit profiling, and previous liabilities.
The company’s newly raised capital will be used for product development, market expansion, and strategic hiring. Chit fund regulations are laid down by the state governments, with a central Chit Funds Act, 1982, in place. The company said its solution could be used by a fund operator anywhere in India.
Another benefit of blockchain in chit funds is regulatory oversight. ChitMonks has released T-Chits to enable regulators to administer chit fund businesses. Telangana, is aiming to become a blockchain state, and is among the first to use T-Chits.