The channels that have been used for financial inclusion and digital payments can be used to promote financial literacy
A senior citizen recently remarked that these days banks only contact you for loans as compared to 3-4 decades back when banks reached out to customers to garner deposits. I couldn’t agree more. Whenever I visit any ATM, I find advertisements of various types of loans, especially personal loans and home loans. Seldom does one find any promotions on savings or investments. Even at most companies, a presentation from bankers, which is normally part of the induction programme, covers only borrowing and doesn’t talk about savings or investing. Other than covering the features of the banking account, inductees are also offered credit cards and pre-approved personal loans based on their employment.
So it’s no wonder that household debt has increased to about 13.5% of GDP in FY18, from 8.5% in FY12. Household debt has been growing at a faster pace than household savings since FY12. Household savings actually reduced to 16% of the GDP in FY18 from 24% in FY12. Outstanding personal loans of commercial banks and retail loans of non-banking financial companies (NBFCs) are used to calculate household debt.
A recent survey on millennials found that 76% of the respondents took loans, and millennials rated foreign travel, keeping up with the latest fashion and gadgets and saving for a lavish wedding as their key aspirations. In my interactions, I have met many young people who save to only fund their experiences and the thought of long-term financial planning doesn’t appeal to them. Then there are those who are happy to take loans to fund their aspirations. A participant once wanted to know how he could start saving. I found that he had taken various loans to buy fancy things and every month, he and his wife would take a weekend break. With the essential expenses, EMIs and expenses towards these short breaks, it wasn’t surprising that he had no savings. While the survey revealed that owning a home was the most important aspiration, I doubt this couple would be able to get a home loan.
Not saving has become a systemic issue. With the NPA (non-performing assets) problem on corporate loans snowballing, most banks have been focussing on retail lending. But with this segment getting crowded and easy availability of credit from sources like online lending platforms or payday loans, the risk in the system is building up. Data from the Reserve Bank of India (RBI) shows that loans to retail segment grew by 18% from September 2016 to September 2017 and the highest growth was in the credit card segment where the loan outstanding grew by 26.8% in just one year. If we don’t want to have high household debt to GDP, the government and regulators will have to bring back the focus on improving the savings ratio simply because savings drive economic growth.
While the focus of the RBI is rightly on the underprivileged, a directive to banks to promote savings among their customers will have a percolating effect on the society. So the next time a bank makes a presentation to salary clients, it should spend some time talking about the need and importance of savings and investing.
Over the last couple of years, there has been a big push on digital payments literacy. The same channels that have been used for financial inclusion and digital payments can also be used to promote financial literacy. The regulator can also direct the school boards and universities to impart financial literacy to students.
Individuals, on their part, should budget and ensure they keep aside at least 30% of their take-home income, for investments. At least half of this should be in long-term investments which can be accessed only 20-30 years later. The best way to do this is by automating investments.
Companies also need to take financial wellness seriously. Almost all companies have tie-ups with banks and financial institutions for discounted loan rates but do not have anything for employees on saving and investing. They can plan some fun games or activities for financial wellness and must give learning credits to employees taking financial courses or attending sessions.
Honestly, saving money is about having a savings mindset. An interesting story that I came across was that of 6,000 young schoolchildren in a district in Madhya Pradesh have over the last 11 years deposited ₹ 1 crore in their savings accounts. The children were allowed to open accounts in banks and could deposit as low as ₹ 1, and deposits above a certain threshold would be converted into a fixed deposit. The banks further gave loans for education and for other reasons on these deposits. A small but regular effort is all it takes for a better financial future. Save money and the money will save you.
Mrin Agarwal is a financial educator, founder director of Finsafe India Pvt. Ltd and co-founder of Womantra
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