Every household In India has its peculiar financial culture. They reflect their innate beliefs about money and investments, their individual financial needs and aspirations, access to financial institutions and markets etc. The sum total of this is the savings and investing culture. While, they are indeed unique to each family, there are many similarities across households in a region. Indeed, sober analysis of financial culture, must involve region specific analysis. This is a better guide to understanding financial behaviour.

A recent report of the Household Finance Committee of the Reserve Bank of India, casts interesting light on it.

1) Indian household balance sheets exhibit a set of features that is unusual in the international context:

A disproportionately high share of wealth allocated to physical (i.e. non-financial) assets, such as gold.

Under-investment in long-term insurance and pension products.

A disproportionately large reliance on unsecured debt, mostly from non-institutional sources (e.g. moneylenders)

2) Indian households are exceptional in the international context, as there is no reduction in their holdings of physical assets as they pass retirement age – unlike in countries such as the UK, Australia, Germany, and China.

The participation rate of Indian households in financial assets is well below the one observed in developed countries. This pattern has been recognised and there has been a sustained drive to spread banking to the unbanked.

3)The availability of resources and the sources of debt are very different across Indian states.

Some states (e.g., Maharashtra, Karnataka and Tamil Nadu) have high levels of life insurance participation, while in others (e.g. Madhya Pradesh and Chhattisgarh) participation is very low.

In states such as Tamil Nadu, households store a high fraction of their wealth in gold, and also have more than 40% of their total debt in the form of gold loans.

4)If the current allocation pattern of resources is maintained, this implies additional pressure on the demand side for assets such as gold and real estate.

Over the coming decade and a half, the elderly cohort is expected to grow by 75 %. Only a small part of this cohort is adequately covered through private pension plans, and a large part of the population did not actively take steps to insure adequate financial coverage during retirement.

Posted: September 2017