The engagement of Indian households, particularly low-income households (LIHs), with formal financial markets continues to be low despite policy efforts towards financial inclusion. In this paper, we argue that this stems from a lack of proper understanding of their financial lives and, consequently, a lack of attention to what they might value. We further argue that as a result of this, the overall approach to offering products and services, including the design features thereof, fails to meet their needs and offer complete value in the manner that is required.
The paper starts by revisiting existing literature on the financial lives of LIHs that shows that they manage their finances in a rather sophisticated manner. This can be traced to the radical uncertainty they face, which includes a “triple whammy” of income problems and expenditure shocks that are frequent and unique to their circumstances. Therefore, day-to-day money management becomes an important feature of their financial lives, as does the inseparability of their financial lives from the socio-cultural contexts that they inhabit.
Having described the financial lives of LIHs, we show how the design features of two commonly offered product categories, basic savings bank accounts and life insurance products, do not map to their financial realities and are misaligned with their needs. Further, we argue that comprehensive portfoliolevel approaches to offering financial products as an alternative to the current approach of offering individual products in a compartmentalized manner may also not be appropriate for LIHs. This paper underscores the urgent need for pertinent stakeholders within the financial services industry to actively engage with these ideas so as to engender meaningful financial inclusion.
The full paper is accessible here.
One Response
Hi Amulya & Sowmini, this was an interesting paper. In the discussion on limitations of portfolio approaches for LIHs, I think you missed the point around dominance of physical assets in LIH portfolios. These are potentially riskier than certain financial instruments. Also, not entirely sure of the statement that LIHs cannot afford to put aside money for long-term purposes & therefore, the futility of asset allocation. Sure, there is a threshold in terms of minimum income/consumption below which accumulation is not possible. What about the HHs above that? Also, look at Ibbotson’s work on integrating human capital when thinking about asset allocation for LIHs. We discuss this at some length in FELIH.