Chit Fund Business Online

I have been thinking about some ebusiness Ideas and am trying to see  if the chitfund business  this business can be implemented on-line. It is one of the famous businesses in south India with the total turnover runnig into several hundred crores of rupees. Several companies(Margadarshi, Shriram Chits)  are making a ton of money using the basic idea. For millions of poor and middle class investors this was the primary source of savings in India for a long time.

This is how its supposed to work ( a simple explanation from margadarshi website)

“Chit is a mutually beneficial scheme where in a group of people contribute towards the chit value and one member from the group is given the prize amount and the dividends are distributed to all the other members. For Example if we consider a chit value of Rs.100000/- with 50 members in the group each member has to contribute Rs.2000/- where by (50 X 2000) Rs.100000/- is collected.

The auction is conducted in which the members participate and the person who discounts the maximum is declared as the prized subscriber. If there are more than one participant for maximum discount the Successful Bidder will be determined by way of lottery. Where in, the tokens bearing the numbers allotted to the members is put into a box and one token is drawn by any of the member present in the auction and thus, the member whose number is mention on the drawn token will be declared as the Successful Bidder.

45% is the maximum bid allowed, which means a person foregoes Rs.45000/- and the balance Rs.55000/- is paid to the prized subscribers. Out of 45% discount 5% goes to the company towards company’s commission for conducting the chit and balance of the discount amount is distributed equally amongst all members of the group. That is 40 % is distributed to all the members by which next month they have to contribute (Rs.2000/- – Rs.800/-) = Rs.1200/- only and Rs.800/- is declared as dividend for that month.

When there are no maximum bidders, then the members will bid in the open auction that is conducted within 5 minutes for each group and the person who bids the highest is declared as Successful Bidder. For Example: Suppose, in the 10th month the Successful Bidder was declared at 40%, then all members of the group will get a dividend of Rs.700/-each i.e. (Rs35000/-divided among 50 members) and each member has to pay Rs.1300/- towards Installment.

Therefore the members have to pay the installment amount less the dividend, the dividends earned workout to be the interest on the Installment payments made by the member. Successful Bidder is supposed to give the required sureties depending on the future liability of the chit. Only Non-Prized Subscribers whose payments are up to date can participate in the auctions.

Every month there is a Successful Bidder who gets his prized amount on submission of required Guarantors. The company is prepared to disburse the prized amount within 72 hours provided the sureties are satisfactory and documentation is verified and approved. The prized subscriber has to continue to pay the monthly installments till the termination of the chit.

Those members who do not want to borrow funds contribute to the chit and after the 40th month if there are no bidders for the auction, lot declares one of the remaining members as Successful Bidder and the prized amount is paid to them. They either have options to submit sureties or prefer Future liability deducted upon which balance amount is paid from the Prized amount. The dividend accrued for the 50 months are the returns on investment for the monthly deposit made to their accounts.”

With social networks so prevalant online  these days and sucess of online financial sites  like  prosper.com,  may be this is a viable idea. I am not sure what else can be done to sell this idea in the american market?

This business will broadly supposed to work something like this: A group of members enroll into a scheme, for enrollment they provide their ACH account number’s so that their installment in automatically collected on the due date. the bidding process will be totally transparent once the the bidding is complete the dividends will be distributed to the members of the group via ACH. The commision amount in this case goes to the service provider.

 Dr.Stefan Klonner seems to have done a lot of research in this area. Will post more on this topic as I  learn more.