8/8/2019 Fiscal Awareness Deficit

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Source Financial Express

4th December, 2010

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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 of 

solutions that they should get. While this may be a dampener overall, here lies the

opportunity for a first-generation entrepreneur to build a good sustainable business²

a business that serves a strong social purpose, has an obvious latent demand, but

requires guts and fortitude to stick it out

There are several financial intermediaries offering all kinds of services. Look around

any 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 financial

products and there is a thriving market. A closer examination reveals that financial

illiteracy is widespread. What a paradox! The trouble is that the intermediaries tend

to represent the manufacturers¶ interests and behave much like high-street hustlers

trying to hawk products that enhance their returns and do not pay sufficient heed to

consumers¶ interests. While this is a worrying fact, we believe that given the size of 

the market, the income levels and the latent needs, there is a real opportunity for 

entrepreneurs to work the reverse order²take the consumers¶ interest and get them

the best deals in the market. It is obviously not going to be easy and is the proverbial

road less taken.Financial inclusion is a talked about topic today and rightly so, given the fact that a

large 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 of 

exclusion because of various factors. We are talking about awareness and use of 

various financial products and services (insurance, investments). This lack of 

awareness has a serious impact on the economy, because the absence of 

awareness leads to unhealthy concentration of household investments in

instruments such as real estate and land (which are easily understood).

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 An underdeveloped financial services industry has two components²first the

reach itself and second the awareness.

Our research among urban respondents (SEC A and B) across over 400 towns

reveals 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 of 

borrowing is not because people do not want to borrow for spending, it¶s more

because they prefer to make informal borrowings, or in some cases they are

borrowing to buy certain classes of assets in the parallel economy and are

hence not eligible for institutional debt.

 As many as 48% of those below the age of 30 years and 38% of those above

30 years have never taken any loan. Personal loan, which tend to be of smaller value and is also the costliest loan, has the highest penetration. These are

usually unplanned loans to meet exigencies. The average value of personal

loans tends to be of the order of Rs 1.2 lakh.

Insurance is an instrument to protect against unforeseen circumstances. As

such, one would expect a population climbing the income ladder rapidly to

worry about protecting the lifestyle of their near and dear ones. The truth, on

the other hand, is that most people are under-insured and the awareness about

term insurance is low.We found that even among SEC A and B, the penetration of life insurance

products is low. As many as 20% of those above 30 years of age have no life

insurance cover.

The penetration of term insurance is very low, and only 5% of SEC A and B

respondents have this cover. On the other hand, average life insurance cover is

 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 fully aware of 

the ways in which it can get such protection. Clearly, insurance covers arebeing taken just for tax rebate purposes and not for life cover.

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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 any

health insurance cover. Clearly, people are so unaware that there is a

time bomb ticking away, ready to explode at unexpected moments in

life. It is also worrying that even older respondents seem to have the

same level of awareness as the younger respondents.

Frequently, the cover is also not well thought out, and the average

cover for hospitalisation is inadequate should an insured person

actually fall sick and is hospitalised.

The scenario is not significantly different when one looks at

investment instruments. The modern financial system provides for 

several different instruments for different risk profiles under excellent

regulation. However, one finds that once again, the awareness level is

pretty low.

We find that whereas there are significant investors in real estate

(which is easily understood, but is highly leveraged), fixed deposits

and PF (which is usually compulsory), the penetration of instruments

such 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 as

investment in shares.

Mutual funds is another instrument not clearly understood by

investors. Many investors believe that it is supposed to be used for 

tax saving purposes only! Very few invest in debt funds, which is far 

more liquid than fixed deposits. To cut a long story short, despite the

availability of many different options, investors, due lack of 

awareness, do not use them. Instead, they go for less efficientinvestments, or worse, no investment at all.

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Most Indians prefer keeping their savings in assets like bank

or post office deposits and cash at home. Their longer-term

investments tend to be in physical assets like real estate and

gold and very few utilise financial instruments. Ironically, the

latter option is probably the most efficient and rewarding.

Take the case of reverse mortgage, which has been

introduced for senior citizens recently. The awareness levels

are very low, even at the banks that are offering it. What

happens here is that the borrower pledges the home to the

bank and gets a loan.

The homeowner and now the borrower will not be required to

repay the loan during his/her lifetime. On death or leaving the

house permanently, the loan, along with the accumulated

interest, is repaid through the sale of the property pledged.

The heirs can pay off the loan and take the property. Since

the property in general appreciates significantly, the heirs are

still benefiting from the capital gains.

When one looks at several old couples living alone (children

away or abroad), one would think that a scheme like this is a

no-brainer. It gives them extra income for the rest of their livesand the property price gains can easily be secured by the

heirs. Yet, one finds that there is very little awareness.

On an average, Indian households invest their savings in

bank deposits. This can work wonders if it gets directed to

market-linked instruments. The stumbling blocks are two²

financial inclusion itself and financial literacy, or the lack of it,

among those who are financially included.

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On the financial literacy front, we know that

market participants and the regulators have beentrying hard, particularly during the past four-five

years, to deliver programmes targeting

enhancement in financial literacy. Perhaps, more

can be done, but the task is truly daunting, and it

is not very clear that mere efforts will get faster 

adoption. It is here that one suspects there is an

opportunity for entrepreneurs who are willing to

invest two-three years to really educate themarket and build a profitable scalable business.

Perhaps many are already working on it and we

will hear of success stories in a few years. What

they need to do is to build a financial services

intermediaries business, which focuses on

educating prospects and delivering solutions to

them. It needs to have a significantly higher 

element of education and service than the highstreet hustling models that many brokerages and

agents follow. Therefore, it will necessarily involve

a higher gestation period and staying power. Few

will have the fortitude, but for those who do have

it in them to stick it out, the rewards are bound to

be exceptional.