Indranil Bhoumik/Mint
Indranil Bhoumik/Mint

Need for greater household savings

The behaviour of financial organizations plays an important role in the growth of products.

Financial instruments and physical assets have an intimate link even though they have different functions. The former are about protection and a better future lifestyle and the latter about convenience and better current life. Yet they are not synergistic and compete for the limited budget of households. Financial behaviour of households, therefore, always needs to be seen in the context of their lifestyles and aspirations.

There are a range of myths that go about as facts—the south Indians are conservative, the Gujaratis are investment oriented, Punjabis have a preference for conspicuous consumption over savings and so on. A fine look at who is doing what reveals a far more homogenous picture than we tend to believe. Conspicuous consumption can be seen in Chennai as it is seen in Kolkata. But for every such fact, I can provide a counter which is as true.

To repeat, the data shows something far more interesting. First, education and occupation provide a far better measure of aspirations and financial habits than regional inequalities. Second, income is a far better predictor of behaviour than caste and creed. Third, the differences between different income or socio-economic (SEC) segments are far more than differences across regions. Fourth, this is not to say there are no differences between regions, but these differences are minor.

There are a range of financial organizations that are supplying financial products and services to Indian households—banks, life insurance, health insurance, mutual funds, chit funds and the post office being the major ones. And we should judge their ability to adequately service the middle class and the poor by the difference between the penetration of relevant products in different SEC cohort. Insurance firms are the worst—with large differences in penetration of insurance instruments between the richest and the poorest segments. But clearly the best is the post office. The penetration of post office savings is higher for the poor. Chit funds come next in order.

The least regulated organizations tend to have better penetration among the lower income segments—this only goes to show that the most important input in accessing the large Indian market is low-cost delivery of service to the poor. Access, therefore, is critical and too much regulation in India is affecting those who need access to financial services the most. But regulation is one factor, another is also an inclination. Until recently, private entities were far less interested in venturing into rural areas—largely seen as unprofitable. But today they are more likely to look for pockets of high economic activity and affluence in rural areas.

The behaviour of financial organizations—both as a matter of their stated organizational policies and the culture within—plays an important role in the growth of financial products and services. Data on household debt shows that even though households within a particular region may be as interested in availing credit, financial sector organizations themselves may have unstated regional or state level or sectoral or even neighbourhood level biases. So the organized sector-centric and western India-centric and city-centric financial sector is more likely to provide credit to urban households in west India than in other regions or in rural areas. This will of course change as competition forces financial institutions to search for all possible profit-making opportunities.

But these are early days for the growth of the financial sector—the Indian middle class is coming into its own, the nuclear family is becoming more and more important, the social security of the past through community and family is breaking down, female education is making both women and families more aware and so on. Many of these changes are desirable, many are not, but they are all creating the need for greater individual and household savings.

The extremely low penetration of financial products is, therefore, going to change dramatically in the next few years. This will change as there is an unmet need coming in from the demand side. However, the supply-side is somewhat weak in India. Rarely are new products launched that have not originated internationally. New technologies such as the mobile phone have not been used by financial institutions that are too busy fighting a turf battle with telecom firms; there are many more examples. Moreover, the unorganized sector somehow has not been able to benefit much from growth in organized sector credit. Innovation is largely missing from the DNA of the Indian organized financial sector. At the same time, government actions have expressly aimed at squeezing unorganized sector credit such as money lenders.

Therefore, the combination of regulation that makes delivery costly, and a financial sector that has been largely lazy, is responsible for where we are. Hopefully this will change and hopefully the Reserve Bank of India and the Securities and Exchange Board of India will be more proactive in creating such an ecosystem.

Laveesh Bhandari is director, Indicus Analytics.

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