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    How GeNext and new entrants are working to upgrade chit funds

    Synopsis

    The sector is facing competition from alternative savings/investment products, which are better packaged and marketed more aggressively.

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    Many now enrol new members through a bank-style know-your-customer (KYC) check, showing more affinity for members without track records or referrals.
    Gentleman Babu cannot be anything but a gentleman. For over two decades, the nine-letter tag has helped Babu build Gentleman Chit Funds, with over 25,000 trusting subscribers.

    The chit funds business in India, which goes back 120 years into the annals of history, has traditionally been the preserve of affluent families with faultless pedigree. Adjectives rarely help this business but Babu has been an outlier. His carefully-preserved image has helped him break into a segment where family name, honour and credibility precede modish management wisdom.

    “If you count out the top 10 chit funds, almost all are family-owned. There are very few first generation-owned chits. Most family-owned chit funds appear to be sluggish in their pursuit for growth,” says Neeraj Bansal, chief executive, CredRight, a financial institution which arranges loans on the back of future chit fund receivables.

    There are over 10,000 registered chit fund in India. “In many, the new generation does not want to be in the chit business… Several first-generation owners are now growing their business at the expense of lethargic familyowned chit funds,” says Bansal.

    It would be safe to surmise then that Gentleman Chit Funds has captured business from traditionally-run, family-owned chit funds of central Kerala. Babu’s first business venture after securing a degree in Economics was the Gentleman brand shirt company. Four years later, in 1998, he launched a chit fund in Kottayam.

    “If you run this business well, it will last long… Go by the rule book, do not divert funds, manage the business efficiently and expand steadily,” K Babu ticks off the prerequisites on his fingers. Gentleman Chits claims an annual turnover of Rs 200 crore and has plans to expand organically.

    Contrast this to most family-owned chit funds, for whom adding branches or widening subscriber base is an anathema as they prefer to keep business small and restricted to a single region. “Chit fund is a difficult business… it’s best managed if kept within a tight circle. The business would go out of control if expanded beyond a certain size,” believes A Murugan, managing director of Tirunelvelibased Arunagiri Chits, which was established in 1955 and has a Rs 12 crore book with 1,500 subscribers.

    Neither is wrong. Babu’s idea of expanding will take him far, but it is fraught with risk. Murugan’s status quo approach may keep him safe for a while, but he may not survive beyond the generation he currently serves. Most Indian ‘chitsters’ (those who run chit funds) fall somewhere between Babu’s pragmatism and Murugan’s conservatism.

    SPAN OF CONTROL
    Traditionally, chit funds are tightlycontrolled. Various aspects of business are managed by family members and devolution of power (to employees) is minimal. Most promoters are hands-on with day-to-day workings.

    “That’s the nature of our business… Risk is an inherent factor because we manage people’s money. Chit fund promoters are responsible for the money paid in. We cannot let outsiders manage it without our supervision,” says TS Sivaramakrishnan, managing director of the Balussery Benefit Chit Fund, a family-owned firm registered in 1947, with over 10,000 subscribers and an annual turnover of Rs 125 crore.

    Sivaramakrishnan, a member of Mambilla family of Kozhikode, appointed a professional manager to “modernise” the business when he took charge a few decades ago.
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    “That guy eloped with some of our fund pay-ins… Now that’s an unpardonable offence,” says Sivaramakrishnan. “We have a lot at stake here… We put the name of our family and our ancestors on the line when we run this business. People believe us for what we are. We cannot afford to lose the trust of our subscribers. This is one reason why chit owners keep a tight control over their business,” he explains.

    Purists in the industry consider themselves as mere custodians of subscribers’ money. They are only entitled to a 5% commission (chit foreman’s commission). The cardinal rule of chit fund management is to never divert subscriber funds for other purposes. Chits that infringed the ‘no fund-diversion’ norm have paid dearly. Many had to wind up business; several others faced legal proceedings and a few unscrupulous ones vanished without a trace. The industry is rife with stories of chit fund owners misappropriating public money.

    “A high level of integrity and discipline are required in this business,” says Arunachalam Viswanathan, managing director of Sree Visalam Chit Fund, established in 1947 and managing over Rs 110 crore every year across 19,000 subscribers. “Family name, values, ethics et al ensure ethical management of the fund. Subscribers are fairly certain their money will come back at term.”

    SUCCESSION CHALLENGES
    What remains the biggest hurdle, though, for family-owned chit funds is succession planning. A few, with the younger generation at the helm, have managed to put behind long phases of lethargic existence. They are trying to modernise the 6-8 decades-old businesses they inherited.

    “The new generation is well-educated… They’re trying to grow the business now, opening more branches, enrolling agents and digitising their service delivery model,” says Bansal of CredRight, which recently raised $1.3 million from venture investment firms Accion Venture Lab and YourNest.

    But there is scepticism among scions of families that owns chit funds. Take, for instance, Balussery’s Sivaramakrishnan, who is trying to get his son into the business. “My son has still not made up his mind whether he wants to join the family business or not… He’s interested in starting something of his own. He’s also an investor in a Delhi-based startup,” laments Sivaramakrishnan.

    “He has to decide for himself… He cannot apply his startup logic if he wants to be in chit fund business. He cannot have a massive topline and a negative bottomline in chit funds. He will have to learn the core values of this business before taking full charge,” he says.

    In terms of succession, Mayavaram Financial Chit Corporation is fortunate. Chief executive Manoj Padmanabhan (38) returned to Chennai after securing a management degree from Arizona State University. “Most family-owned chit funds have aged owners… The reason for this is no youngster wants to be in this business, which is highly regulated and has low margins,” he says.

    Mayavaram was started by Padmanabhan’s grandfather in the 1940s and nurtured by his father, who was a proficient accountant. Stick to family values, Padmanabhan was told by his father when he took charge.

    “Family values help for sure… It helped us to be relevant for over 70 years,” he says. “But family values alone won’t help you grow. You have to install easy service delivery mechanisms to attract new subscribers.”
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    The industry estimates over 90% of family-owned chit funds have repeat customers. This means not many new subscribers walk in, which is bad news for those starting out. Padmanabhan explains, “We’re trying to move away from traditional ways of running a chit by connecting with new subscribers via online and mobile phone apps or making pay-ins less cumbersome by linking up with banks and wallets.” However, he is conscious of the flipside. Default and non-repayment rates are creeping up. Sivaramakrishnan of Balussery, who is also the secretary of All India Association of Chit Funds, pegs industry-level default rates at 0.6-0.8% of annual turnover.

    “In this business, you can’t have defaults. It’s one reason why we only take known subscribers or customers with strong referrals,” says R Srinivas of Lakshmi Sharada Chit Fund, operating in Bengaluru since 1964.

    The Chittlur family, which manages Lakshmi Sharada, are primarily manufacturers of silverware. “We decided to keep the chit fund business small to save ourselves the troubles of running it,” says Srinivas. Lakshmi Sharada has eight directors, of which four are from within the family.

    MODERNISATION PANGS
    Meanwhile, the industry has evolved. When the Mambilla family started Balussery Benefit in the 1940s, the medium of transaction was paddy, not money. Records were maintained on palm leaf manuscripts and temple priests were chit fund agents. These temple priests would enrol members of wealthy families into the fund.

    When Viswanathan’s family rolled out Sree Visalam Chits in Tamil Nadu, their subscribers were mostly small traders and businessmen. But with rising societal aff luence, the profile of chit fund subscribers has also changed. “We don’t see a lot of businessmen these days because they rely on other sources of funding… Nowadays, a chit fund is seen as a collective savings scheme for the middle class,” says Viswanathan.

    Many now enrol new members through a bank-style know-your-customer (KYC) check, showing more affinity for members without track records or referrals.

    “It’s difficult to bring about change in a traditional business like chit funds,” points out Karthish Mohan of Panasuna Chits, which started off as a partnership firm in 1960, in Salem. “You need to convince the family elders your initiatives are in the right direction. It took me 3-4 years to even complete an office automation project!”

    Panasuna has four family members running the business and Karthish is the youngest partner. The chit was started by Karthish’s grandfather, who tried and failed at 19 businesses before this. “You have to take your staff along as well… They may have worked in the company for several years, and may be accustomed to one way of doing things. You’ll have to adopt a top-down approach if you want to modernise an old chit fund,” Mohan says.

    BLEAK FUTURE, IS IT?
    The chit fund industry will always be on a precarious perch, given the nature of its fiduciary responsibility towards subscribers. High operating cost and low fund manager commissions do not leave enough margins for owners to plough back and grow the business.

    The sector is facing competition from alternative savings/investment products, which are better packaged and marketed more aggressively. The image of chit funds has also taken a beating. “Any financial company fails, they blame it on chit funds… Sarada, Sahara and Rose Valley were not running chit funds. They were peddling public deposit schemes,” contends Babu of Gentleman Chits.

    “We’re scared of failures. The failure of one chit fund, in any part of India, impacts the whole industry. It gives a bad name to all of us.”

    Mohan uses all available platforms to promote registered chits, to ward off unsuspecting investors from parking money in illegal schemes. Registered chits manage close to Rs 35,000 crore every year, though association members opine the share of unregistered funds may be 80-90 times that. Idle chit chat aside, the chit means business.


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