Like so much else in the world’s largest democracy, household finance in India is unique. There is, for example, a strong tendency to keep wealth in physical assets — gold and property. Levels of pension wealth are worryingly low, as is take up of all types of insurance, even in areas which are prone to natural disasters. When emergency expenditures are necessary, for example, for health reasons, there are high levels of reliance on unsecured debt from non-institutional sources.
These are some of the main findings from the report of the Household Finance Committee that I chaired, which was commissioned by the Reserve Bank of India and published in August 2017. Why are these issues important?
For one, we are sitting on a demographic time-bomb. The number of Indians over the age of 60 has hit an all-time high, with the most recent figures showing that this demographic comprises 8.6 per cent of the population, with a climbing age dependency ratio (currently at 14.2 per cent). We can expect this elderly cohort to grow rapidly in coming years. Indians have traditionally shunned pension plans in favour of traditional arrangements in which the younger generation takes care of their elders. But these traditional structures are under increasing pressure, putting families in a potentially vulnerable position.
For another, the lack of widespread insurance can see the victims of tragic or unfortunate circumstances forced into unregulated emergency borrowing, often from non-institutional sources, at potentially punitive rates. The steps in the recent budget towards universal health insurance are a welcome step (if implemented appropriately), consistent with the recommendations of our committee, but there is much more to be done here.
A third issue is that we have a tendency to invest heavily in physical assets such as gold and property. Steps to encourage the financialisation of savings are therefore critical. Viewed in this light, the introduction of the long-term capital gains tax is a step backwards, especially given how responsive Indians are to tax incentives.
Making a few sensible changes in financial management can yield enormous benefits for households — we estimate a roughly 10 per cent real annual income gain for the median household over a 10-15 year period. Put differently, this would equate to a 5-10 per cent move up the wealth distribution, catapulting many millions of households from functional poverty into the middle class.
A populace accustomed to traditional processes that have worked well over the centuries will not simply jump into financialisation. Financialisation has not been easy — Indian households face considerable hurdles in implementing even simple changes. A few of these hurdles include onerous bureaucracy, a scepticism of organised financial institutions, significant problems with trusting a system that has often been indicted for mis-selling, and a lack of basic information about which of the myriad services and providers is best for each family, and how (and even if) one can transition between them if necessary. All of these problems can contribute to a sense of embarrassment and even the fear of exploitation in lower-income households in particular, who often report believing that financial products are for the rich.
Our report looks in some detail at how we might begin to address questions of financial participation, but for now we can focus on one possible mechanism, namely, technology. Innovations in financial technology (and the regulatory architecture in which FinTech operates) hold the promise to surmount many of the challenges associated with helping Indian households to more efficiently use formal financial systems.
For one, technological solutions can help bypass issues of embarrassment and the tedium of bureaucratic processes. By moving to paperless KYC requirements, for instance, customers could relatively easily sign up and switch between to new products without having to go through a cumbersome process.
“Robo-advice” could also be used to ensure impartial counsel to those hesitant to take the plunge, as well as to eliminate the potential embarrassment of repeated face-to-face encounters. An even simpler solution is to pre-qualify most customers to be automatically offered a suite of simple, approved financial services or products. This could be combined with financial education and explicit opt-ins for access to more complex products, either at the point of e-KYC completion, or at the point of PMJDY account opening. These moves can be combined with providing households with a clear and integrated view of their balance sheets by using the account aggregator infrastructure.
Naturally, the detailed design of both technology and financial services will play a key role. Where there is not a high level of financial or technological literacy, it is clear that user experience is a clear element of how successful any implemented ideas will be in the marketplace. If the design is compelling and intuitive, then users will be far more likely to take up a product.
An important potential hurdle faced in implementing entrepreneurial solutions is inflexible regulation — particularly where several regulating bodies might be involved. Regulators are often concerned about the potential systemic risks of licencing new technologies. Handled correctly, however, this could even be turned into an advantage — by bypassing outdated regulatory architecture to create new infrastructure. In order to create a greater possibility of FinTech companies effecting change, we propose in our report that a “regulatory sandbox” be created. This would see a small-scale, temporary, and tightly-controlled relaxation of regulation in order to allow households to participate in trials of new financial products or technologies. This would not only allow for scrutiny of new financial products or services, but could also be used to inform policymakers. Most importantly, this institution could kick-start a dialogue between regulatory bodies, households, and the financial technology industry.
What we do in India will provide an important roadmap for other countries about the widescale implementation of financial technologies. If implemented correctly, solving issues of data privacy, and making sure that distributional and design issues are carefully addressed, India could export many of these takeaways to other economies.
To address challenges in Indian household finance, we need solutions that are both customised and scalable. To find these solutions, a controlled environment of flexibility and experimentation could well be the key. The payoffs are enormous — for India, as well as for the rest of the world. It is time to walk the talk on implementation in household finance.