Fintech is transforming one of India’s oldest inclusive finance tools

Why we invested in CredRight to support small businesses in India

By Paarul Dudeja

The CredRight team stand in front of their logo

There are around 50 million micro, small, and medium businesses (MSMEs) in India that face a nearly $300 billion credit gap. To help fill this gap, CredRight is revitalizing one of India’s oldest credit and savings industries, the chit fund industry. Chit is the local way of referring to ROSCA (rotating savings and credit associations) schemes in India, similar to Tandas in Latin America, Hui in China and South East Asia, and Gam’eya in the Middle East. The chit fund industry was one of the first to serve rural individuals and small businesses that couldn’t access formal capital markets — it leverages social trust and local knowledge above any official documentation. “This has long been the predominant instrument for financial inclusion in India — even before microfinance,” says CredRight co-founder Neeraj Bansal.

We’re proud to partner with CredRight as they revolutionize this historic industry using alternative data to underwrite loans and help build a better future for India’s small businesses.

In India, registered chit funds have at least 5 million subscribers, nearly half of which are MSMEs. Chit funds work by bringing together a group of people to pull their resources and pay into a single fund, and each month, participants can bid to receive the chit prize. Once an individual wins the chit prize, it means they can access the funds they need.

Historically, chit funds have served their customers well, applying a human touch that offers comfort and transparency to customers. Reputable chit funds are usually trusted in their communities — fund managers know the participants, often for years, and have a good grasp of each person’s financial situation. The information gleaned from these relationships helps in determining which individuals are selected to form a particular group.

While chits help the massively underserved small businesses in India get access to working capital, they aren’t a complete solution for a few reasons:

  • Only one individual can get the chit prize every month. So what happens when multiple individuals or small businesses need an advance that same month?
  • The chit group is brought together by the chit manager, who looks at factors such as borrower credibility and balances the timing of borrowers and savers needs. But can’t multiple people be equally in need at the same time? And what alternative do we leave for those whose financial needs are relatively less critical but nonetheless important?

CredRight offers loans to those chit fund members who need funds but did not win the chit prize in any given month. Through its partner chit funds, CredRight reaches these potential customers promptly. It then uses its proprietary underwriting, incorporating previously untapped data from chit funds and other sources, to provide loans. As every chit fund member is entitled to their chit prize at some point over the chit life period, CredRight’s loan gets repaid when the borrower eventually wins the pooled chit prize.

At Venture Lab, we were impressed by some of CredRight’s key innovations and strengths, including:

Providing a consistent, reliable and affordable source of funding: CredRight alleviates the uncertainty of financing for business owners who use chit funds as a source of working or investment capital. The loans are offered as soon as members demonstrate their need by bidding for the pooled chit prize. Inherent in the chit fund cycle is the notion that a payout is never guaranteed for a member at any particular stage in the cycle — members can bid, but they are not assured to win. CredRight’s reliable product allows subscribers to rely on affordable funding to plan for new investments or manage their working capital. From a financial health perspective, certainty and the ability to plan ahead are key for businesses.

Partnering with a traditional industry prevalent in rural and low-income communities for low-cost customer acquisition: Chit funds are dominant in low-income communities across India. People in these areas are much more likely to be part of a chit than to borrow from a bank, and they have few alternatives if they fail to win a bid. As an independent player, CredRight is able to partner with the network of registered chit funds in India and potentially reach millions of members. CredRight’s technology-driven model provides an additional and scalable source of financial access to these rural communities using the rails of an established traditional industry.

Using rich and previously untapped alternative data: With tens of millions of India’s MSMEs cut off from formal financing, CredRight has created an innovative new model that uses previously overlooked data to help small businesses thrive. The company incorporates a wide variety of data, including transactions taking place within a chit group, to determine creditworthiness and underwrite loans. A positive byproduct is the company is also helping its customers build a formal credit score.

Incentivizing customer migration from informal chit funds to regulated chit funds in a largely ignored industry: CredRight diligently chooses its chit fund partners, focusing on ones that are the most credible. Its product enables regulated chits funds to provide benefits similar to unregulated chits. Many unregulated or informal chits may offer unsuccessful bidders “off-the-book” loans. By partnering with CredRight, the regulated chits can better compete with their unregulated counterparts for subscribers. From an impact perspective, we believe this serves the critical purpose of promoting the good chits while helping to eliminate bad actors, which have a higher likelihood of fraudulent behavior.

CredRight has a strong team that’s up to the challenge of addressing India’s massive small business funding gap. The founders, Neeraj Bansal and Vineet Jawa, bring talent and experience from working in banking and startups. T.S. Sivaramakrishnan has a vast network and knowledge of the Indian chit fund industry. Importantly, the team has deep commitment and passion for supporting small businesses.

We’re excited to help transform a centuries-old industry in India and providing borrowers with loans when they need them. We believe that CredRight is catalyzing this industry to become a real force for good. Venture Lab is delighted to be supporting CredRight in its initial phase of growth, and we’re anticipating a highly rewarding journey with the team.

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