Importance of savings mobilization

(An article written by Dr. Nimal Sandarathne to mark the 45th Anniversary of National Savings Bank falls on 16th March, 2017)

The National Savings Bank (NSB) celebrates its 45th Anniversary on March 16th. However the antecedents of the Bank goes back to colonial times. On the 6th of August 1832, one hundred and seventy five years ago, the British Governor, Sir Robert Wilmot Horton established the Ceylon Savings Bank. The Post Office Savings Bank was a very important arm of this Bank in the mobilization of savings island wide. On the 16th of March, 1972 The National Savings Bank was established by amalgamating the National Savings movement’s Ceylon Savings Bank, Post Office Savings Bank and Savings Certificates Section of the Post Master General’s Department. The NSB and its predecessors have been an important means of mobilising savings, especially rural savings.

This article discusses what constitutes savings and the relevance of a proper conceptualisation of savings for savings mobilization, the importance of mobilizing savings, particularly rural savings and the factors influencing savings.

WHAT ARE SAVINGS? THE CONCEPT OF SAVINGS FOR SAVINGS MOBILIZATION

Central to the problem of savings mobilization is the concept of savings that has been handed down in economic theory from Marshall to Keynes and in post-keynesian economics. Economists have defined savings as a residual of consumption (Savings = Income – Consumption).

This equation is correct by definition. Yet, it could be misleading in understanding the behavioural aspects of savings. It does not catch the dynamics of the savings process. Defining savings as a residual implies that savings are pre-determined by the income level. If incomes rise, there is a chance for increased savings. If incomes fall, there could be a reduction in savings or dissavings. And if incomes are static, there is no prospect for increased savings.

This conceptualisation makes savings a passive act. Consumption is the primary function, while savings is a derived one. Such conceptualisation partly arises out of the fact that often consumption is a very high proportion of income. Therefore we fall into the trap of thinking that the smaller amount or proportion is a residue.

Savings is not necessarily a residual one. It could be a positive act, Even if saving is not a positive act in a particular society, at a particular time, it could be made an active one. Sometimes the desire to increase savings could itself increase incomes. Sometimes the desire to increase savings could reduce consumption. In other words, instead of savings being a residue, the amount of consumption or the level of income could be altered to accommodate a different level of savings.

Even in poor societies consumption is elastic. People can and people do change their consumption levels in order to be able to save more. There is no minimum level of consumption although one could determine various levels of consumption as necessary to maintain basic requirements or standards of living. People can be induced to increase savings if they see some real benefit from such savings.

Very poor people are known somehow or the other to save for a religious pilgrimage. Very poor people are willing to save to educate their children. Sometimes a new consumer durable, which is a status symbol and prestigious to own, could induce poor people to cut their consumption in order to be able to purchase an item such as a radio, a TV, a sewing machine, a bicycle or a torch. This is particularly so if there is some facility by which the investment can be made in instalments, by some kind of hire purchase financing. The system of rotating credit associations or Cheetu has as its fundamental logic, the mobilizing of a large sum of money in small instalments for the purchase of a consumer durable or incurring some bulky expenditure through monthly voluntary savings.

All over the world, in diverse cultures, informal groups have been formed to save. These rotating savings and credit associations are well known to us as ‘Cheetus’ or ‘Seetus’. They have a remarkable similarity in very divergent cultures. Their basic features give valuable lessons on the motivations for saving. The basic features of these societies are that people voluntarily get together to contribute an agreed amount at regular intervals. The pooled amount is distributed as a lump sum to one of the participants. The method by which a participant obtains this lump sum varies. Sometimes it is on an agreed order, or else the highest bidder gets it or the lottery method is used to determine the order of recipients.

Two factors are important in the motivation to form such societies. First, most societies are formed with the participants having in mind a commitment to spend the amount for some specific purpose. They are a means of purchasing a desired item for which the lump sum cannot be found immediately. Savings are therefore a function of planned future expenditures, and in most cases such expenditure is for consumer durables or expenditure like a pilgrimage.

The second important fact is that a prior commitment and obligation to save is an important factor in influencing people to put by a small sum. Therefore such savings appear to be both due to a prior commitment and obligation and for a specific goal in mind. If there was no commitment to a future expenditure, there may have been no savings.

It is generally presumed that people are deriving the highest income they could, with the given resources. This is not so. When people have additional needs, they are prepared to work more hours or take on ancillary work. If self employed, they could put forth better quality of work. By these various means there is a possibility of increasing incomes.

A positive desire to save could be induced by a desire to increase consumption, which could in turn increase income. Therefore the desire to increase savings could increase income. The concept that savings is a residual of consumption is an ex-post formulation, which is correct by definition, but misleading in either understanding the dynamics of the savings process or as providing guidelines for increasing savings.

A very important implication that arises from this discussion is that savings can be increased even when incomes are low and static. Furthermore the motivation to save could increase income. Savings are in various forms and these forms need to be channelled into the financial system. Non financial savings could be converted into financial savings in institutions. A common practice in rural societies is cash hoarding. These could be channelled into the financial system by stable financial institutions. The National Savings Bank and earlier the Ceylon Savings Bank and the Post Office Savings Bank performed this role.

THE IMPORTANCE OF RURAL SAVINGS MOBILIZATION

The mobilization of rural savings is important for economic development for several reasons. Foremost among these reasons is the fact that the rural sector constitutes about a third of the country’s population. In order to develop a healthy and viable rural financial market, resources should be mobilized from the rural sector itself. In other words, rural savings mobilization is an integral and essential component for developing a sustainable rural financial market. Much of the rural sector’s development could be financed from the sector itself, if only the correct techniques, incentives and institutions are provided.

However in most countries the emphasis has been on giving credit to the rural sector. Programmes are designed to give credit from government funds or persuade, cajole or compel banks to give credit on ‘soft terms’. Such programmes often tend to be corrupt, inefficient, irresponsible, inadequate and erratic in their flow of funds.

FACTORS INFLUENCING SAVINGS

Five economic conditions affect and influence savings. While these factors influence the willingness and capacity to save, it is the institutional factors that are discussed later that provide the facility to save. In turn the facilities to save could influence the willingness and capacity to save.

Interest rates have a bearing on savings mobilisation. while slight changes in interest rates do not necessarily affect savings, high interest rates do provide an incentive to saving. there is growing evidence that interest rates do affect rural people’s willingness to save. For instance, it has been shown that people shift their savings from lower interest higher liquidity savings to higher interest lower liquidity fixed deposits when the interest rates of the latter are distinctly attractive. high interest rates attract new deposits. In fact, high interest rates create an interest consciousness among people - even among people who cannot calculate interest rates accurately!

It is not only nominal interest rates but real interest rates which affect savings. The real interest rate is the nominal interest rate, adjusted for inflation. It is true that people, especially rural people, don’t make fine decisions regarding the real interest rates. Yet, where there is a high rate of inflation, people are aware that financial investments are unprofitable and that it does not pay to keep cash. They may save but not in financial forms. They would buy land or jewellery or even some consumer durables whose price they know would rise quite sharply and visibly in a short time. Therefore inflation is an important factor influencing the willingness of people to save in financial terms.

The third factor which influences the capacity to save is the income levels and the cost of living. When incomes are low and the costs of living are rising, the capacity to save is less.

The fourth factor is the availability of consumer durables. If we are willing to accept that saving is an act of delayed consumption, then the availability of consumer durables, which are not affordable on current income results in people saving a part of their income to buy a consumer durable later. Therefore in a society where people are consumer oriented and think they must possess a radio, a T.V. set, refrigerator, sewing machine or motor vehicle, they may very well cut their current consumption and save in order to enable them to purchase these.

Social and cultural values play an important role in influencing decisions to save. A society or people given to ostentation may spend a larger proportion of their income, if not all of it, to display their wealth. On the other hand, social values may dictate others to be frugal and save for a rainy day or for their children and grand-children. It is a fact that such attitudes play an important role and particular ethnic or cultural groups can be identified as having different attitudes to consumption and savings. For instance, societies which require a dowry system or possession of jewellery may save more for such needs. Therefore social and cultural values, as well as expectations of the future, are important influences on people’s propensity to save.

Institutional factors have an important bearing on rural savings mobilization. It is the institutions and the techniques adopted by them which provide the facilities for saving. In turn, the facilities to save influence the willingness of individuals to save. It is not merely one of increasing the number of bank branches but also qualitative adaptations suited to rural conditions that are needed for increasing savings. The type of banks that are established should be suited to the rural clientele. Bankers should go out to their rural customers rather than expect rural folk to come to them. If branch banks are of the same type as urban banks and use the same approaches in their banking, then, it is likely that such banks would attract only larger customers such as land owners, traders and merchants, rather than the larger number of ordinary rural folk. This would mean that these banks would not really have a capability to mobilize the savings of the bulk of rural people. They may dole out some finance to farmers under special agricultural credit programmes, but they will not really have a rural clientele who have confidence in their bank.

The techniques used by banks are of considerable importance on how successful they would be in mobilizing rural savings. It is often said that it is uneconomic to attract small deposits because the administrative costs of such schemes are not justified by the amount of savings mobilized. In this respect, the experience of the Syndicate Bank in India is instructive. They commenced a savings scheme known as the Pigmy Deposits Scheme. The objective of this scheme was to mobilize small savings - in fact very small savings. Under this scheme a Commission Agent calls over at homes and accepts deposits as small as 25 cents a day. By a person calling at the door, as well by accepting such small deposits, the Syndicate Bank has been able to mobilize very large amounts under this scheme. The costs of such a scheme are kept to a minimum by employing the collector on a commission basis.

Another technique that has been adopted is to organise savings schemes among school children. Children could persuade their parents to give them money to save and the children themselves could save out of moneys that they would have otherwise spent on useless items. Such a scheme too would be of minimum cost. It could pay dividends not only immediately but have an important impact in the long run by inculcating the savings habit which would increase savings of adults later on.

Another possibility is to attract savings by schemes which are particularly active at certain times of the year such as at harvest time. In a farming community, an active savings campaign at harvest time could attract money that would otherwise be spent on extravagant items or hoarded.

Savings could also be increased by tying the granting of credit to savings deposits. One of the important perspectives in understanding savings is that people are willing to save when there are tangible benefits. Therefore, if a saving scheme is tied to the granting of credit and a depositor granted credit several times his deposits, such a scheme should indeed attract savings. Programmes could also be designed for the purchase of consumer durables before the entirety of the required money is saved.

A technique used by our banks to attract savings adopts and adapts a traditional custom. The banks open on Sinhala and Tamil New Year day for the first financial transaction, for the new year. People are encouraged to transact their first business with the bank by opening a Savings Account with the traditional offering of betel leaves. The bank gifts a coin in return. Many bank customers now consider it auspicious to make a deposit at their bank during the Sinhala New Year. This scheme has indeed successfully modernised a traditional custom with successful results in savings mobilization.

CONCLUDING REFLECTION

Even in low income societies people are able to save. The conceptualisation of savings in the manner outlined earlier is crucial to a positive approach to savings mobilisation. Macro economic conditions such as interest rates, inflation, income levels and the cost of living, as well as social and cultural values influence the willingness and capacity to save. Savings are inevitable and all societies do save. Therefore, the development of appropriate institutions and innovative techniques for savings mobilization are important determinants of the amount of savings actually mobilized. Innovative techniques suited to rural conditions and cultural practices can increase the amount of savings mobilized.