In early August, the Reserve Bank of India (RBI) formed a committee to study the state of household finance in India. Financial sector regulators, who make little serious effort to engage with investors and savers, dominate the committee whose mandate is to compare household financial markets in India with major world markets to identify areas of change. An interesting part of the committee's mandate is to understand whether Indian savers deviate from "desirable financial allocation and behaviour" and if so, why.
All this is rather ambitious for three reasons. One, we are probably working with flawed data on household finance. Two, there are many economic levels in India. How feasible is it to create a policy that would be fair not only to all the savers but also to the sellers of financial products? Three, is it possible, or even desirable to fix the normative behaviour of households? Let's start with the issue of data. RBI publishes an annual survey called Handbook of Statistics on the Indian Economy. It includes data on "Changes in financial assets/liabilities of the household sector." The second source is All-India Debt and Investment Survey (AIDIS). But if you want aggregate data, these two are the main sources. Whatever else we know about household finances is based on anecdotes and conjectures picked up from colleagues, helpers, friends and relatives. Those who work as advisors or marketers of personal finance products probably have better insights.
Unfortunately, the data put out by RBI is not good enough. Shares and debentures are grouped under one head although they have exactly the opposite features. This group also includes mutual funds. There is some data under "non-banking deposit". It is not clear what this includes. The year-to-year variation of that figure is usually in double digits. But non-banking deposits are huge in reality. They include corporate fixed deposits and deposits with non-banking finance companies at the very least. How have the deposits into pyramid and chain money schemes - that rob households in India blind - been accounted for by either RBI or AIDIS? Each such scheme garners deposits ranging from a few crores to a few thousand crore of rupees; and there are thousands of them across India. They can only be included in non-banking deposits. For instance, PACL or Pearls alone raised Rs 49,000 crore according to Sebi; is it included by RBI or AIDIS? Most unlikely. Neither are various other non-banking deposits we make, such as with builders.
This takes us to the next issue. Since the data structure itself is suspect, how can policymakers depend on it to formulate policies? Three kinds of household assets show a secular rise over the years in RBI data: Currency, bank deposits and provident/pension fund. Of these three, banks deposits are a default choice. Any formal inflow of money first hits the bank, such as salary cheque. Then the behavioural bias of savers takes over - they follow the path of least resistance. Money in the bank is safe, earns interest and moving that money demands too much decision-making. If bank deposits are rising because savers are "lazy", life insurance is getting money because of the strong incentive of insurers and their army of agents (including banks) to push their products as a safety-cum-wealth accumulation option. The lion's share of the insurance premium goes into government bonds. Thus, households are indirectly funding the government's (wasteful) expenditure and paying a heavy price for it. Can the committee recommend a stop to this for the sake of a better household savings mix?
Also, can we develop a common policy focus for all households, knowing that the household finances of a poor family and their understanding of financial products would be totally different from that of a middle class family? And there are many economic layers in between. Remember, no matter what kind of policy we formulate, we cannot restrict the sales of products to one economic segment or the other. Can we dictate that the poor must keep their money in banks and that banks must not mis-sell financial products to them? It would be nice if we can, but it is not feasible.
My third and final question is, is it even fair to nudge household savers through policies? Trying to do that we would certainly bring our own personal biases into it (yes, policymakers too suffer from behavioural biases). By the way, the regulators have already been at it for decades. The shrinking base of stock investors from the 90s is a direct result of policies and actions of the securities regulator. The disarray of the National Pension System is due to its flawed architecture. Life insurance plays a prominent part of the urban household savings mix thanks to a benign insurance regulator (helping origination) and RBI (helping distribution). Wouldn't it be interesting to see what the committee, packed with representatives from the same regulators, comes up with?
The writer is the editor of www.moneylife.in
editor@moneylife.in
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