Recently, the RBI published a mammoth report about the state of household finance in India. And unsurprisingly, it contains a wealth of data. Here are some of the key highlights of the report:
Physical assets dominate: It’s fairly well-known that Indians prefer gold and real estate over financial instruments like stocks, bonds and insurance. But the true extent of this preference can be quite an eye-opener. 95% of Indian assets are in physical assets. “In India, the average household holds 77% of its total assets in real estate, 7% in other durable goods (such as transportation vehicles, livestock and poultry, and machinery), 11% in gold and the residual 5% in financial assets,” the RBI report said. And mind you, the 5% category includes deposits and savings accounts too, not just shares, mutual funds, insurance and retirement accounts. So, it’s not necessary that the 5% share is in smart investment options. In developed countries like US and Germany, only 37-44% wealth is invested in property.
Loans and debt behaviour: Ask yourself this: if Indians invest so much in property, wouldn’t home loan liabilities be higher in India? If you answered yes, you are wrong. Home loans account for only 23% of the average debt that an Indian holds. Even car and loans for other assets are much lower than the international average. There’s a very logical reason for this—Indians still borrow in plenty from moneylenders and other informal sources. This is problematic because such sources are risky—there’s no legislation that protects you in such instances.
Looming pension crisis: There are three important red flags. A) People hold more land as they grow older, even after retirement. This is worrisome because properties are very illiquid and may not come handy during emergencies in old age. B) The RBI notes that people actually borrow money to buy property as they grow older. India is the only country where home loans account for a larger share of total debt as people approach retirement age. C) In a decade and a half, there will be 75% more retired people. Of this, only a small section of people will have pension. Most of them will likely not afford their own health or regular expenses. In fact, 50% of the population expects to rely heavily on their children for financial help.
Why people avoid financial instruments: A simple reason is that Indians simply prefer real estate and gold. But there are many factors that ‘push’ them away from formal financial instruments. One key factor is the lack of trust in financial companies. Moreover, people feel they are ‘less in control’ over such assets. This pushes them towards gold, which seems readily available. The trust problem also extends to insurance, which also seems ‘unaffordable’ to the majority. Many also feel they are financially secure enough to be ready for emergencies. Financial literacy is also very low, to the extent that many don’t even understand how interest compounds, especially for debt./p>
Lower transaction costs needed: The RBI gave myriad suggestions to tackle this problem of lack of decent financial savings. One of its biggest suggestions is offer products that are simple to understand at a low cost. Even opening a bank account could cost a poor household an entire day’s earnings—a really high cost for most! Add to this the time and effort taken in the long procedures. The RBI also suggests that Aadhar-enabled Know Your Customer (KYC) process can help lower costs and make processes easier for people.
You can read the RBI’s Household Finance report here Read more
The precarious state of Indian household finances Read more
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