As part of the NSE-IFMR ‘Financial Inclusion’ Research Initiative, Vishnu Prasad, Anand Sahasranaman, Santadarshan Sadhu, and Rachit Khaitan of IFMR Finance Foundation have authored a working paper for the series. Using customer data from a financial services institution that operates in remote rural districts of India, the authors constructed stylised typologies of household asset portfolios based on primary and secondary sources of income. Despite a demonstrated demand for various financial services, this study finds that the asset portfolio of the average rural household in India is composed almost entirely of two physical assets—housing and jewellery. A comparison with a hypothetical portfolio of financial assets reveals that rural households could earn significantly higher levels of real returns, the increase ranging from 2.02% to 4.97%, at the extant levels of risk.
The results point to the urgent policy imperative to provide rural households with access to financial instruments that would allow them to construct a more diversified, tradable, and liquid portfolio offering higher yields and shelter from local market fluctuations.
3 Responses
Another good paper that I enjoyed reading. From what I digested, a few things came to mind – related to the paper (Part 1) and not the focus of the paper (Part 2).
Part 1
i) the comparison on insurance and the risk return spread (while valid) does present the sales problem (or getting buy-ins). The commitment towards annual/monthly payment vs an invisible spike in return (its to the order of .3% and thereabouts). For the uncertain income categories ( as opposed to salary), that’s cash gone now and every month vs incremental returns. May be easier to present the possible results as the quantum increase. eg. At end of lifetime corpus of savings will now be Rs 150,000 even if the cow dies vs Rs 140,000 with risk of lot less). I understand this is not intended to be the “marketing” paper, but its an aspect to file away.
ii) the push for single stop financial products access point is strengthened through this primary research. In fact, no reason to treat this differently as an “essential service”/infrastructure like the post office is.
Part 2
A couple of points stood out, that are unrelated to the primary focus of this paper. I thought I’d write it anyway, for you to chew over.
i) The category with about the best looking financial spread/status and the one with the worst looking financial status are the Salaried vs Labour. Intuitively, a salaried person will be able to make more meaningful commitments and take risks – but this paper reinforces this with some numbers – assets, income risks. In fact, the insurance related gains are max for the salaried class. For the labor category, the incremental risk/return is virtually zero.
ii) Housing is treated as a consumption asset, for this study, primarily as land values are killed through trading restrictions on them – that affect prices and liquidity.
It stands to some reason, therefore, that moving labour to the salaried class will address huge development problems. Not different from urban areas. A more vibrant approach to land pricing will unlock that asset (that consumes 50% or more the HH income).
so:
i) There is a strong case for permitting large private investment in agriculture/related areas as an enterprise. This may enable “labor” to shift to “salary”. Much of the agri’business category are suppliers, services to agri business. They will also benefit through higher steady earnings.
ii) Unlocking the land for such trade – will also push up prices and make it a more liquid asset. Already this happens when land is acquired for infrastructure purposes – high appreciation, that is.
Even in this complicated terrain, the people who will still struggle are the landless labor. This only strengthens the case for them shifting to salaried employment – doing what they have some skill to do – agriculture.
Dear Pras, thank you very much for that detailed and insightful set of comments. I completely agree with you that our results on risk-return spread with insurance could be presented more intuitively in the paper- we will work on that. We also believe that the paper brings out the case for enhancing the range of products that are offered to households in rural areas, although there is a strong case for separation of credit from payments and retail deposits, as argued by the report of the CCFS. Land, as you rightly point out, continues to be a crucial piece in the puzzle and unlocking its potential certainly holds greater relevance for the economy. You might like this series titled “Land-Shackled”: http://www.business-standard.com/article/opinion/devesh-kapur-t-v-somanathan-arvind-subramanian-land-shackled-i-114072000708_1.html
Thanks, Vishnu. Will read the article as well.