Having made access to financial services a reality, our efforts should now be to improve the transactional status of these accounts
There’s an old saying about poverty: Give somebody a fish and he’ll eat for a day. Give him a fishing tackle and he’ll eat for a lifetime. There are several variations to this theme. However, these days, there is a general view that one of the most effective ways to fight poverty may not be a fishing tool but a savings account. I remember, it was during my school days when I opened my first bank account. This seemingly small act meant that I could manage my own finances and take financial decisions on my own. We saw a bank as a place to save — they would take good care of your money and might even add a little to it and, perhaps, we could take some money out if we needed it during a rainy day. On opening the account, I received a little booklet — the ubiquitous passbook in which every deposit and withdrawal was acknowledged by the bank staff. It was a privilege to have a bank account. It was my first step on the financial ladder and an initiation to the path of financial independence. The implicit message here is that the bank account is the locus of money management. All main financial transactions would pass through the account and it would serve as a barometer of our financial health and proof of our solvency.
So in my view (it may be the same for others) a financial institution was meant to be a place to save. Borrowing might come later. The purpose of saving was not to qualify for borrowing but it was a useful thing to do. Why should it not be the same for the poor? The truth is that much of the world is in crisis today because of debt. There’s too much of borrowing while people are not saving enough. More than four decades ago, the most popular retail banking product was the pygmy deposit account. Housewives would scrape together few rupees everyday and give it to a savings collector who would visit their homes. The money collected was deposited in a bank account that paid interest and was insulated from the daily demands of life. Depositors squirreled away a decent sum by the end of the year. This was enough to buy a home appliance. The simple motivation was: Save money even if it is only a few pennies at a time. This was a sure way to build wealth.
Later, a very innovative idea of micro-credit took birth out of a radical concept: Poor people, when lent small amounts of money, pay it back in a timely manner. In the meantime that money could be put to use in ways that help boost income — goat farming or say, hand weaving — and ostensibly, raise a family’s standard of living. The world soon witnessed a great global rush, pouring billions of dollars into micro-credit to help the poor. It was a powerful revolution but it bypassed the centuries-old idea of wealth creation — savings. The latter has all along been the most trusted and oldest building block of financial management for all societies. They have been the mainstay for the impoverished in the face of a biblical range of hazards. The tide is now turning, sparked in part by micro-credit’s discredit. We all now know that there may be families who have the savvy to benefit from loans but there may be many who can be ruined. To the contrary, every family in the poor world can benefit from a pad of savings.
In contrast to savings, credit can be both an opportunity and a risk for low-income families. It is necessary to open doors but it can also be a barrier. You can dig yourself into a lot of debt, and this keeps one from moving up financially. Several loans, particularly those used for consumption and acquiring white collar goods, are known to become malignant, unless accompanied by proper financial education and planning. Some people are not good enough at handling debt. Some businesses are too risky. And there is always a temptation to take these costly loans and scrimp on groceries. When they miss loan payments, they get into regular default cycle; it soon leads to acute indebtedness and makes life stressful for the entire family. Most people do not save enough. This because humans suffer from economic myopia — the failure to give adequate weight to future benefits over immediate pleasures. The instinct for gratification of immediate pleasures overrides the urge to squirrel money away in a savings account for tomorrow. Despite conventional wisdom, poor people actually do save, even if it is just pennies each day. They use a variety of informal mechanisms: Hiding cash at home, loaning funds to relatives, participating in rotating savings groups with their neighbours and engaging deposit collectors. But none of these mechanisms is reliable and safe. Merely having a bank account is not the right indicator of financial inclusion. Having made access to financial services a reality, efforts should be made to improve the transactional status of these accounts. Meaningful financial inclusion is hard, involving a complex interplay of factors: Viable business models, regulatory models and behavioural change of new account holders. The new mantra for financial inclusion should be: Access counts but it is usage that matters.
(The writer is Member, NITI Aayog’s National Committee on Financial Literacy and Inclusion for Women)