Decoding financial lobby-speak
Why should we bother? It is our money they're all talking about
The pre-budget buzz has begun. Page one stories are all about the finance minister meeting the regulators, the banks and the financial sector captains to get inputs on what needs to be done to facilitate the flow of money that business will need as the economy is cranked up once more. There are certain words, phrases and terms used by the financial sector that have a deeper meaning—sometimes an actual threat—that a smart finance minister either understands himself or is made to understand by his team of bureaucrats. I’m decoding some of these so that we better understand the meaning behind the words we read as these meetings get underway. Why should we bother? It is our money they’re all talking about. And the conversation is all about how to keep our money earning below inflation rates and how to keep it captive so that it can’t go anywhere other than to the government and in the process fatten banks and insurance companies.
One of the topics that gets the suits into paroxysms of head shaking and an almost audible tch tch tch is the one where they discuss the lack of smarts of the retail investor. “They prefer gold and real estate, but we need this money to come to productive use—in banks, in insurance and into the stock market. If the industry were to get more incentives and investors more tax breaks, they would do the right thing. We also need to spend more on financial literacy so that the retail investors can make the right choice. And of course, sellers need incentives to be able to penetrate the market.”
This is the basic crux of the argument for getting a bigger share of the ever rising household savings, which were 20 trillion in 2011-12. The message to the finance minister by banks and insurance companies is this: we are the octopus arms of the government that suck out cheap household money and funnel it back to the government. Households get negative real returns after inflation and tax, but that’s fine; retail investors think in absolute numbers, and we can play that game well. Investment and prudential norms funnelled 20 trillion of cheap household money to the government through banks and insurance companies in 2012-13. If this money starts decreasing and begins to go into gold and real estate, who will buy your bonds and how will you finance your deficit? So back off on tougher customer facing regulation. Tax gold. Do what it takes, if you want the wall of retail money to continue coming to you. Notice that mutual fund companies are bit players in this big annual lobby exercise. There is no captive money from funds that comes to the government. Ergo. Little lobbying power.
How is all this to be done? One, “give tax incentives to the household to invest in financial assets”. I wonder why no finance minister asks why people don’t need incentives to invest in gold or bank deposits and why they need incentives to invest in insurance, stocks and funds. Two, “allow back incentives in financial products, feet on the street need incentives to sell—we need embedded commissions back—the higher the better”. I wonder why no finance minister asks the most obvious question: with 40%-plus commissions for over 40 years, why is India so poorly insured? Why is it that online term plans that are self-bought have an average sum assured of 70 lakh and the agent sold ones of 1.5 lakh? Three, “government needs to spend more on financial literacy. When the consumer is financially literate, she will do the right thing”. A meta study (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2333898) across 168 papers finds that “interventions to improve financial literacy explain only 0.1% of the variance in financial behaviours studied, with weaker effects in low-income samples.” Or, in English—financial literacy hardly works. It is actually a regulatory cop-out that transfers the burden of responsibility onto a customer. It is like removing all safety norms in the car industry, opening the bonnet of a car and telling a prospective buyer: here is the disclosure, see if it works for you; if the car blows up, you should have done your due diligence. Expecting an average household to know finance concepts of IRR, XIRR, PV, FV and real return is asking too much.
The finance minister needs to ask the question that how is it that the otherwise jugaad-expert average Indian, known for his value orientation in all things money, becomes a cartoon character who adds one to one and comes up with 11? Could it be that the myth of the stupid Indian investor is really a malicious creation of the financial sector? Could it be that the way products are constructed, advertised and sold is so flawed that retail investors take refuge in things they can see and hold rather than promises made on invisible products that often blow up in their faces? What would explain the big promise of a 13% guaranteed return that turns out to be a 4.7% annual return? The fine print says that the 13% (you silly fool) was on the sum assured and not on your investment!
Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor, Mint Money, Yale World Fellow 2011 and on the board of FPSB India. She can be reached at expenseaccount@livemint.com
Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
MoreLess
First Published:4 Jul 2014, 08:03 PM IST
- Top Gainers
- Top Losers
- 52 Week High