The average Indian household holds 84 per cent of its wealth in real estate and other physical goods, 11 per cent in gold and the residual 5 per cent in financial assets, a report has said.
A study conducted on a committee that the Reserved Bank of India (RBI) had instituted t to household finances found that retirement accounts play a very limited role in household balance sheets, even at the top of the wealth distribution.
The panel, set up after discussions in Financial Stability and Development Council (FSDC), found that Indians continues to accumulate debt as they approached retirement age, and most household debt is unsecured (56 per cent), showing an unusually high reliance on non-institutional sources such moneylenders.
The committee — chaired by Tarun Ramadorai, Professor of Financial Economics, Imperial College London — had representation from all financial sector regulators, namely, Reserve Bank of India (RBI); Securities and Exchange Board of India (SEBI); the Insurance Regulatory and Development Authority of India (IRDAI); and Pension Fund Regulatory and Development Authority (PFRDA).
Highlighting the unique aspects of Indian households’ financial decision-making, the committee has made several recommendations on enabling better participation by Indian households in formal financial markets, including a Regulatory Sandbox for assessing the role of new financial technologies and products.
The report finds that a large fraction of the wealth of Indian households is in the form of physical assets (in particular, gold and real estate). This is unusual in the international context, and especially unusual for younger households, and for households in the bottom 40 per cent of the wealth distribution.
If the current patterns of allocation are maintained, demographic projections indicate that there will be significant additional pressure on the demand for assets such as gold and real estate in the coming decades.
The report says that Indian households could benefit greatly by re-allocating assets towards financial markets and away from gold. If households in the middle third of the gold holdings distribution re-allocated a quarter of their existing gold holdings to financial assets, on average, they could earn an amount equivalent to 0.8 per
cent of their annual income per year (on an ongoing flow basis).
For the median Indian household, shifting from non-institutional debt to institutional debt can lead to gains equivalent to between 1.9–4.2 per cent of annual income on an ongoing basis,
The committee has proposed a set of sector-specific recommendations to improve the functioning of mortgage, collateralised lending, insurance, pensions, and gold markets.
The report has described a minimum set of financial products that Indian households should have in order to effectively harness the benefits of formal financial markets. Many of these products already exist, and indeed, are being delivered to households via government programmes such as Pradhan Mantri Jan Dhan Yojana (PMJDY).
These products can serve as a checklist that can be used to evaluate progress on participation and use of household financial markets in India.
Where this is not already the case, products on the list could be made readily available to households, either seeded automatically at the point of PMJDY account opening (or added later to PMJDY accounts as a default but “opt-out” option), or by automatically pre-qualifying households to access all of these products at the point of e-KYC for any single product.
“Finally, we stress the need for flexible regulatory processes to further encourage financial innovation that will benefit households. Towards this aim, we propose the creation of a regulatory sandbox to allow regulators to facilitate small-scale tests by financial technology firms. In such a carefully controlled environment, certain regulations may be temporarily relaxed, and households can be allowed to participate in new products”, the committee said in its report.