Why do we need to take conscious steps for financial inclusion? Why don’t the poor save? What stops them from saving? One would just reply “they don’t earn enough to be able to save”. Yes, one of the reasons. But is that the only problem that prevails in the low-income group?
Let’s take a moment to identify the key reasons that prevent the underserved to achieve the financial security that comes from making timely investments. Understanding this will help us explore the next steps on what path to take, what are the gaps to be filled, and eventually, how to fill the gap with services and products that will benefit the low-income group.
Hurdles in saving and investing faced by the low-income group
While there may be many issues depending on the income, education level, living conditions, manner of upbringing and other life experiences, they can be broadly grouped into the following four hurdles.
1. Lack of a savings habit
This relates to the psychological side of the problem — the lack of willingness to save diligently. While most people on low income in India save in some form, its mostly sporadic and in small amounts. There is a heavy reliance on informal and irregular savings methods, such as keeping cash at home or depositing in short-term post-office savings schemes or chit funds.
There is also a section of this group that doesn’t save altogether, for any practical or psychological reasons that may be present. Most don’t have the vision or find the need to save for future purposes — they will choose immediate material pleasures despite their ability to save. Lack of a habit to save money is the biggest hurdle faced by the low-income group, and the biggest challenge for the financial advisors to help them overcome
2. Financial vulnerability
A corollary or incidental hurdle of the above is the financial vulnerability of the low-income groups. This relates to the practical side of the problem — the inability to save. Essentially, their low income does not let them save, even if they wanted to. Although willing to save for future purposes, some people are forced into present spending needs (for example, a chronic medical condition) and cannot practically save for the future.
3. Lack of infrastructure
India’s financial services ecosystem lags in terms of physical infrastructure and has failed to reach the poor people, with more than 19% of the population unbanked or financially excluded, a recent Assocham-EY joint study said. India has far fewer banks compared to its population size. According to IMF data for 2015, there are only 13.54 bank branches per 1 lakh adults. Among its neighbouring countries, Sri Lanka has better reach with nearly 18.58 bank branches per 1 lakh people. China, Pakistan and Nepal have around 8 bank branches per 1 lakh people. According to a December 2015 RBI report, while there are 18.7 bank branches per 1 lakh adults in urban areas, there’s just 7.8 branches per 1 lakh adults in rural and semi-urban areas.
It can also be observed that the low-income group does not want to go through the hassle of opening a bank account. This is especially true in the rural areas where they have to drive several miles before they can find a local bank.
The government has taken several concentrated steps to promote financial inclusion, such as launch of cooperative banks and regional rural banks (RRBs), introduction of mandated priority sector lending (PSL) targets, formation of self-help groups, and appointment of business correspondents by banks to provide door-step delivery of banking services. However, a significant portion of India’s population still remains devoid of access to basic financial facilities, mainly due to lack of last mile connectivity.
While not owing a bank account is the biggest infrastructural impediment to investing, few do not even have a basic identity or address proof. For investment in capital markets, one requires a PAN card apart from owning a bank account. Henceforth, the government plans to even make Aadhaar mandatory for all kinds of financial products, from bank account to mutual investments. Financial inclusion will involve ensuring that such basic infrastructure is in place as the first step.
4. Lack of education or source of information
For whoever has both — the ability to save and the basic infrastructure required to invest — may not have the requisite knowledge or access to different avenues of saving. Most of them only trust their banks or local cooperative bodies for their savings. Others fall prey to malicious schemes and promises of small local NBFCs, chit funds or lenders.
A recent survey shows that in 20% of households with access to banking, the breadwinner (or chief wage earner) does not use banking instruments to save. The survey points out that lack of education may be a serious impediment to India’s ambitious financial inclusion agenda. A large proportion (75%) of such breadwinners are either illiterate or have just attended primary school, the data shows.
The median financial savings of the top quintile is 8 times that of the bottom quintile, as per the survey. Among various types of financial savings, 58% of the top quintile have purchased either capital market products or insurance. The comparative figure for the bottom quintile is just 14%, as per the survey.
Financial advisors are inherently disinterested as small savings means small investments, leading to measly commissions on the investments. This provides them with no material incentive to work for the low-income group. However, no one can deny the necessity of imparting them the knowledge on why it is important to save.
The need for financial advisors to step in
The government, the central bank and the corporates are largely trying to fill the gap posed by hurdle #3 noted above. To solve the hurdle #2, it may be better to first focus on skill development, education and employment efforts to improve wages and income levels.
However, financial advisors need to step in as a source of information to help the low-income group develop a savings habit — essentially solving #4 and #1 hurdles. Without concentrated efforts of the financial advisor community, it will be difficult for the low-income families to ever see the light of the day in terms of achieving financial security. While monetary rewards for these efforts may not be substantial, they will be certainly be rewarding to the soul. As the supporting infrastructure is being built by each passing day, there is a solid need for the financial community to step in to bridge the remaining gap in achieving total financial inclusion.