By Moin Qazi
Indias Prime Minister Narendra Modi is the first world leader to recognise the enormous power of a savings account. His dream projectJan Dhan Yojanatransformed the banking landscape and set an epochal milestone. Within three years, more than 270 million bank accounts have been opened. Modi himself signalled the new revolution as an end to financial apartheid.
Finance and the vicious cycle of poverty
Access to the right financial tools at critical moments can determine whether a poor household is able to capture an opportunity to move out of poverty or absorb a shock without being pushed deeper into debt. The poor dont need simple banking tools; they need tools that can help them navigate their complex financial lives, which are marked by many needs and inconsistent income.
Given the variability of their income, the poor are vulnerable to disruptive events such as sickness, death in the family, or weather shocks. These events stress family finances and may prevent families from hanging on to accumulated assets (including productive assets). These shocks can quickly sink families into spells of extreme duress. As a result, the poor lead precarious, anxiety-ridden lives with risks looming much larger than opportunities.
More than four decades back, the field of microcredit was born from a radical concept: poor people, who lent small amounts of money and paid it back in a timely manner. In the meantime, that money was put to use in ways that helped boost incomesuch as goat-farming or carpet-weavingand, ostensibly, raised the familys standard of living.
Savings help smoothen risks in the common man’s life
The benefits of microcredit are often extolled, but debt remains debtit always increases risk and borrowers are sometimes overstretched. Savings help people manage risk affordably and conveniently, with a less monetary burden. Also, savings matter, especially to women. Even in traditional societies, no matter how oppressed women are or how uneducated, they are often stewards of family savings.
Savings increase their capacities to smooth the bumpiness of uneven incomes, reduce the impact of the lean season, become more resilient in the face of shocks, build assets or invest in a family business. Perhaps most importantly, it empowers them to improve their status in their households and communities. Savings also serve as a form of self-insurance and enhances the sense of well-being. They are a gateway to self-employment and job creation. Lower-income families can convert savings into home purchases, micro-enterprise, or use it for educational purposes.
The savings account v. cash under the bed
One problem the poor often have in accumulating savings is the lack of easy access to savings accounts where they can deposit money. The money is kept in a tin at home and is easily spent when a neighbour is in difficulty, or when a cousin comes calling. The key to effective financial inclusion is safe and confidential savings account for every household.
Despite conventional wisdom, poor people actually do save, even if its just pennies each day. They use a variety of informal mechanisms: hiding cash at home, loans to relatives, participating in rotating savings groups with their neighbours, engaging deposit collectors, buying livestock or other physical goods such as jewellery or construction materials.
However, they could benefit from safer and more stable ways of building financial security than physical items that may lose their worth or risk being stolen. They also want products that suit their living patterns. Financial products designers hardly want to do the hard work of first understanding how the poor think. They would rather design products with generic features and then persuade the poor to adjust to them.
As the former RBI governor Raghuram Rajan emphasised, credit should follow and not lead. He said, Savings habit, once inculcated, not only allows the customer to handle the burden of repayment better, it may also lead to better credit allocation.”
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