Saving the saver

The small, 20-basis point increase in Indian households’ allocation to financial savings has been widely celebrated in the last two years as a structural shift. Such celebration, however, may have been premature going by the findings of an expert committee on household finances commissioned by the RBI. The committee, chaired by Tarun Ramadorai, unearths deep-rooted cultural and structural causes for why Indian households across the spectrum avoid financial products and sit on unproductive physical assets. The findings call for a reboot in the current policy approach towards savings and investment products.

Drawing on proprietary research, past NSSO surveys and interactions with industry, the committee offers three headline insights on savings behaviour. One, Indians have a globally high 95 per cent of their wealth parked in physical assets (77 per cent in property, 7 per cent in durables and 11 per cent in gold), with only 5 per cent in financial products. This does not materially change with affluence or age. Therefore, as the working age population burgeons over the next decade, the committee warns that policymakers should budget for even higher demand for both housing and gold. Two, focused as they are on property investments, very few Indians are investing towards retirement, with 77 per cent of the households failing to plan for pension. As most people lean on their children post-retirement, the report warns of a looming pension crisis with the elderly cohort expanding by 75 per cent in the next 15 years. Three, even with vastly improved access to financial products under the PM Jan Dhan Yojana, Jeevan Jyoti Yojana and the Atal Pension Yojana, savers shy away from financial products due to the high transaction costs, their own unpredictable income streams and lack of trust. Most households lean on informal sources for emergency loans at high costs. The report offers a battery of solutions: an Aadhaar-based unified eKYC for easy onboarding, no-frills general insurance, easier terms for gold monetisation and reverse mortgage, unified regulation, use of technology for financial advice and removal of tax breaks on property investments, to name a few.

While these recommendations are eminently sensible, their implementation is unlikely to prove easy. For instance, a unified KYC and a common demat account across stocks, mutual funds and insurance has been hanging fire for many years now, with financial firms unwilling to share their databases. The idea of an umbrella financial regulator has been gathering dust as individual regulators have been reluctant to cede turf. Financial firms, on their part, seem quite content to cater to affluent, repeat customers, rather than tap the bottom of the pyramid. Poor internet connectivity and low digital literacy have proven impediments to going paperless. But then, identifying the problem is half the solution, and this report acquaints policymakers with the real reasons why Indians find financial products daunting.

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