The BlackBerry is active but basic banking is not. I’m at Gaula, home to only 150 people across 27 families. It is also the regional office of Chirag, a 21-year-old non-profit based out of Sitla, Uttarakhand.
Why am I here? The chief executive of Chirag is concerned that his staff of 133 is getting misled into buying financial products that just don’t work for them. He thought of getting me over to conduct financial literacy workshops after the sales push of life insurance agents got to a level that had him worried.
The two calls that alarmed him most were from unit managers of a large private sector life insurance company. The first call tried to sell him an investment plan that was assuring a 20% year-on-year return. This is 2009 and markets are off 60% over last year. The assumption of the unit manager appeared to be that anybody who lived more than 10km out of Kathgodam, also in Uttarakhand and a railhead for the hills, was a country hick and could be sold any story.
On being asked where the money would be invested by the company, he asked: Why does it matter to you, I am assuring you a 20% return. This person disconnected the phone when he was asked to give this in writing.
Within 10 days, the unit manager of another branch of the same company called to promote the same product. This one was assuring a 10% return a year on the unit-linked investment plan (Ulip). He, too, was unwilling to engage with the question of where the money would be invested and how it was possible for government securities to offer an annual 20% or 10% return over the next 15 years.
The low-hanging fruit of urban India are eaten, and the true face of the Ulips sold in mid-2000 evident—they have lost value, making verbal claims of a 30% year-on-year return for 20 years false. So now the focus is Bharat, since India has become wary of this plan that will transform Rs30,000 into Rs13 lakh in 15 years.
The aim of the workshops is less to run down insurance plans but more to empower the workers on investment options that the government small saving programme provides. The zero-risk way to target an 8% return as an alternative to an unknown product that is dressed up to look pretty.
As I work my way through the day talking about the zero-risk government schemes such as the public provident fund (PPF), the national saving certificate (NSC) and recurring deposits to an audience that had never heard of these schemes, I get text messages from my bank with details of bills paid and emails on other financial transactions.
India is at online real-time banking and Bharat does not even know about PPF and NSC. The gap between Bharat and India yawns wide. And yet there are things that are identical.
All my workshops, whether in Dukani, Uttarakhand, home to 500 people, or a church in upmarket Safdarjung Development Area, New Delhi, begin with sceptical faces that ask: But where is the money to invest? Clearly, it does not matter whether the annual income is Rs50,000 or Rs5 lakh—the disbelief in the ability to find the money to invest is exactly the same.
So is the inability to decode financial products, or even get a handle on the way to evaluate them. The obfuscation of a product that allows a person to contribute for, say, nine years in a 12-year plan, with regular payouts every three years, and a large lump-sum at the end of the policy term, does not show what the annual rate of return will be.
When decoded to a mere 3.88%, there is a sense of outrage. Immediately, the 8% a year risk-free return that a PPF gives, or an 8.5% that a provident fund account provides, looks like a viable alternative. To both sets of audiences.
The magic of compounding unveiled gets the same sort of amazement. That a person beginning his life with, say, a Rs15,000 salary that grows at 10% a year is able to harvest Rs1.5 crore across 30 years of service through his provident fund results in an audible intake of breath. That a Rs70,000-a-year PPF will yield at least Rs19 lakh in 15 years also draws gasps. And this is the risk-free way of investing—the core of any portfolio.
Lopsided sales incentives across financial products have resulted in both sets of investors being thrown into the deep sea of equity investing without even having understood the meaning of inflation-plus return.
“But does it work to slat away little bits of money?” asks a farm worker of Chirag. A woman worker, who was in a similar workshop I conducted five years ago, answers for me. “I was charged up after you told us about saving small amounts and I began a recurring deposit in the post office. This year I sent my son to hostel with the Rs35,000 I managed to save in these five years,” she said. Small is big!
Monika Halan is a certified financial planner and policy analyst in the area of financial literacy and intermediation. Your comments and personal finance queries are welcome at firstname.lastname@example.org