Fiscal awareness deficit

Source Financial Express 4th December, 2010

The low level of financial literacy prevalent in the country implies that most Indians,even among those who are financially well off, are not getting anywhere the kind ofsolutions that they should get. While this may be a dampener overall, here lies theopportunity for a first-generation entrepreneur to build a good sustainable business—a business that serves a strong social purpose, has an obvious latent demand, butrequires guts and fortitude to stick it outThere are several financial intermediaries offering all kinds of services. Look aroundany given street in the major cities of the country and you would see their offices.One would assume, therefore, that the general population is aware of financialproducts and there is a thriving market. A closer examination reveals that financialilliteracy is widespread. What a paradox! The trouble is that the intermediaries tendto represent the manufacturers’ interests and behave much like high-street hustlerstrying to hawk products that enhance their returns and do not pay sufficient heed toconsumers’ interests. While this is a worrying fact, we believe that given the size ofthe market, the income levels and the latent needs, there is a real opportunity forentrepreneurs to work the reverse order—take the consumers’ interest and get themthe best deals in the market. It is obviously not going to be easy and is the proverbialroad less taken.Financial inclusion is a talked about topic today and rightly so, given the fact that alarge proportion of the population does not have access to basic financial services.However, even among those who are considered financially included, there is a lot ofexclusion because of various factors. We are talking about awareness and use ofvarious financial products and services (insurance, investments). This lack ofawareness has a serious impact on the economy, because the absence ofawareness leads to unhealthy concentration of household investments ininstruments such as real estate and land (which are easily understood).

An underdeveloped financial services industry has two components—first thereach itself and second the awareness.Our research among urban respondents (SEC A and B) across over 400 townsreveals that both on the debt side and on the investment side, there is chronicunder penetration.Of course, one doesn’t want people to go into debt. However, the lack ofborrowing is not because people do not want to borrow for spending, it’s morebecause they prefer to make informal borrowings, or in some cases they areborrowing to buy certain classes of assets in the parallel economy and arehence not eligible for institutional debt.As many as 48% of those below the age of 30 years and 38% of those above30 years have never taken any loan. Personal loan, which tend to be of smallervalue and is also the costliest loan, has the highest penetration. These areusually unplanned loans to meet exigencies. The average value of personalloans tends to be of the order of Rs 1.2 lakh.Insurance is an instrument to protect against unforeseen circumstances. Assuch, one would expect a population climbing the income ladder rapidly toworry about protecting the lifestyle of their near and dear ones. The truth, onthe other hand, is that most people are under-insured and the awareness aboutterm insurance is low.We found that even among SEC A and B, the penetration of life insuranceproducts is low. As many as 20% of those above 30 years of age have no lifeinsurance cover.The penetration of term insurance is very low, and only 5% of SEC A and Brespondents have this cover. On the other hand, average life insurance coveris just about Rs 9.7 lakh, which clearly indicates that urban India is under-insured, not because it cannot afford to be insured, but because it is not fullyaware of the ways in which it can get such protection. Clearly, insurancecovers are being taken just for tax rebate purposes and not for life cover.

Insurance as a product is not understood by a vast number of people,and only a small proportion has taken adequate protection.It is alarming that as many as 58% of households do not have anyhealth insurance cover. Clearly, people are so unaware that there is atime bomb ticking away, ready to explode at unexpected moments inlife. It is also worrying that even older respondents seem to have thesame level of awareness as the younger respondents.Frequently, the cover is also not well thought out, and the averagecover for hospitalisation is inadequate should an insured personactually fall sick and is hospitalised.The scenario is not significantly different when one looks atinvestment instruments. The modern financial system provides forseveral different instruments for different risk profiles under excellentregulation. However, one finds that once again, the awareness level ispretty low.We find that whereas there are significant investors in real estate(which is easily understood, but is highly leveraged), fixed depositsand PF (which is usually compulsory), the penetration of instrumentssuch as shares, company debt, etc, is very low. On the other hand,investment in gold has high penetration (in physical form). Incredibly,something like post office deposits has much penetration asinvestment in shares.Mutual funds is another instrument not clearly understood byinvestors. Many investors believe that it is supposed to be used fortax saving purposes only! Very few invest in debt funds, which is farmore liquid than fixed deposits. To cut a long story short, despite theavailability of many different options, investors, due lack ofawareness, do not use them. Instead, they go for less efficientinvestments, or worse, no investment at all.

Most Indians prefer keeping their savings in assets like bankor post office deposits and cash at home. Their longer-terminvestments tend to be in physical assets like real estate andgold and very few utilise financial instruments. Ironically, thelatter option is probably the most efficient and rewarding.Take the case of reverse mortgage, which has beenintroduced for senior citizens recently. The awareness levelsare very low, even at the banks that are offering it. Whathappens here is that the borrower pledges the home to thebank and gets a loan.The homeowner and now the borrower will not be required torepay the loan during his/her lifetime. On death or leaving thehouse permanently, the loan, along with the accumulatedinterest, is repaid through the sale of the property pledged.The heirs can pay off the loan and take the property. Sincethe property in general appreciates significantly, the heirs arestill benefiting from the capital gains.When one looks at several old couples living alone (childrenaway or abroad), one would think that a scheme like this is ano-brainer. It gives them extra income for the rest of theirlives and the property price gains can easily be secured bythe heirs. Yet, one finds that there is very little awareness.On an average, Indian households invest their savings inbank deposits. This can work wonders if it gets directed tomarket-linked instruments. The stumbling blocks are two—financial inclusion itself and financial literacy, or the lack of it,among those who are financially included.

On the financial literacy front, we know thatmarket participants and the regulators have beentrying hard, particularly during the past four-fiveyears, to deliver programmes targetingenhancement in financial literacy. Perhaps, morecan be done, but the task is truly daunting, and itis not very clear that mere efforts will get fasteradoption. It is here that one suspects there is anopportunity for entrepreneurs who are willing toinvest two-three years to really educate themarket and build a profitable scalable business.Perhaps many are already working on it and wewill hear of success stories in a few years. Whatthey need to do is to build a financial servicesintermediaries business, which focuses oneducating prospects and delivering solutions tothem. It needs to have a significantly higherelement of education and service than the highstreet hustling models that many brokerages andagents follow. Therefore, it will necessarilyinvolve a higher gestation period and stayingpower. Few will have the fortitude, but for thosewho do have it in them to stick it out, the rewardsare bound to be exceptional.

http://amitsinha64.blogspot.com	43
http://www.amitsinha64.blogspot.com	20
http://www.indicus.net	11
http://amitsinha64.blogspot.in	4
http://indicus.net	2
http://www.amitsinha64.blogspot.in	1

Fiscal awareness deficit

by Indicus Analytics Private Limited on Dec 21, 2010

Accessibility

Categories

Tags

Upload Details

Usage Rights

6 Embeds 81

Statistics

Fiscal awareness deficit — Presentation Transcript