‘India needs better inflation-indexed savings products’
Indians are debt-averse, but tend to overburden themselves with debt at the end of their earning age, finds a committee, under the Financial Stability and Development Council (FSDC), headed by TARUN RAMADORAI, professor of financial economics, Imperial College Business School, London. Most of the assets are in the form of real estate, bought with an intention to bequeath to the future generation in lieu of old-age care. But the penetration of mortgage loans is still very low, indicating Indians mostly use cash to buy these houses. There is also a need for linking home loan rate to repo rate and not MCLR, to have a standardised referance. In an interaction with Anup Roy, Ramadorai says there is an urgent need to channel physical savings into financial savings. Edited excerpts:
Your report says the behaviour of investing in physical assets cuts across all layers of wealth distribution...
If you look at the savings of both poor and rich, the fraction of savings that is in physical form is roughly the same regardless the income group. A poor person with ~100 to save will invest ~90 in gold or livestock and a person with ~10,000 will invest ~9,000 in real estate and gold.
As Indians age, there is no reduction in real estate savings. Is this the case the world over?
Globally, mortgage debt reduces as people age. People take mortgage loans of 25 years when they are young and are entering the job market, so that they pay off their loans in their working life, by 50-55. But in our country, we do not like taking on debt when we are earning. Instead, the only time Indians take debt is towards the end of their life to purchase a house that they pass on to the next generation. It seems the entire wealth accumulation is to purchase a house.
Is that risky?
You can not say any behaviour is good or bad on its own. The question is what would happen if you were to try something different? Some people who hold a huge amount of gold in their portfolio, if you took about a quarter of that gold and moved that into financial markets, under even very modest assumptions of what the financial market returns would be, you still find these people would be far better off. They would be earning roughly 3.5 per cent of annual income. It is a movement up into wealth distribution by five per cent. That is quite a substantial jump arising out of a modest adjustment.
Your report says mortgage loans are only 23 per cent of total liabilities, yet real estate is 84 per cent of savings. Does that mean a bulk of the transactions happen in cash?
One of things that this is telling us is the existence of a pretty large informal market. Transactions are not coming in the right form. Also, Indians are traditionally debtaverse. But the older generations are the ones who are taking on more debt. You can solve this problem in two ways: One, real estate transactions are completed in a transparent manner; and two, we want to increase people’s comfort with home loan products. You should be borrowing from the future and paying it off over your lifetime. We have suggested linking home loans to repo rate, and not MCLR, so that there is a standardised reference rate.
The reliance on physical assets, is it not a very Asian characteristic?
This real estate obsession is Asian to a certain extent, but gold is unique to India.
Why do Indians have this fixation with gold?
There are a couple of reasons. I think they are looking for an inflation hedge. We made a set of prescriptions to explore if inflation-indexed products would be more appealing. The goods and services tax (GST) should take care of some of the local inflation. India has not been a single market for goods for a long time. Inflation in one place is sometimes very different than inflation in another place. With the GST you will have unification of prices and should partly solve some of these issues. Gold is also a good source of collateral, you get a gold loan in 10 minutes. Maybe we need to find improved collateralised lending.
The report says that Indian households are even now substantially dependent on moneylenders. Are you saying financial inclusion even after the PMJDY has not succeeded?
The PMJDY has made substantial progress, but it is primarily about providing banking services on the savings side. Moneylenders are on the credit side. Now, you can use the platform to provide a nice suite of financial products. The moneylender system is telling us something: The formal system is not working for people as it should. Moneylenders are costly and pose all kinds of problems later in life, but if you want money, they give it to you quick. Whereas, if you go to a bank, it will make you run around. For a guy at the bottom of the income distribution, those one or two days are so costly that it becomes a nuisance factor.
The report mentioned data privacy. If identification numbers are not shared, how will the government ensure that all benefits are passed on in an efficient manner?
On the one hand, you would like to have the benefit of having data access so people can be provided with first-class financial products that suit them. But on the other hand, you do not want people to abuse the information they have. We need a robust privacy infrastructure in the country. If you are a provider of financial products, you can have access to the data, and then if you violate any of the terms of fair use you can face strict penalty. The full force of the law should come down upon you if that is the case.
The report dwells on the sociological effects of household savings in real estate. You are saying bequeathing property is no guarantee that your old age will be taken care of.
In the past, when formal financial markets were not available, these were the best forms of doing things. You had some social insurance within the family. We should be quite respectful of those traditions. But is the current system fit for that purpose? People are taking on jobs and moving away.