There is a need for a minimum set of cost-effective financial products to be prescribed for Indian households like simple term insurance and basic health insurance, according to a report of the Household Finance Committee.
For instance, in insurance, simplified low-cost home and contents insurance and travel insurance should be offered, recommends the inter-regulatory committee consisting of members from IRDAI, the Securities and Exchange Board of India, the Reserve Bank of India and Pension Fund Regulatory and Development Authority. It adds that low-cost catastrophe insurance could be made mandatory when property is purchased in areas that are at a high risk of natural disasters. The committee also says that households should be given the choice to shop for the best annuity plans and that investment guidelines for annuity funds could be relaxed.
The panel suggests too a set of standardised norms across regulators for financial advice to be implemented in a phased and unified manner, supported with a fiduciary standard for financial advisors. It also proposes that the provision of financial advice be clearly separated from the distribution of financial products, and provided in a manner that avoids conflicts of interest.
Debt in later years
The report notes that the average Indian household holds 84% of its wealth in real estate and other physical goods, 11% in gold and the residual 5% in financial assets, and as households age, they pile up debt, a peculiarity unique to Indians. More than half the debt Indian households accumulate are unsecured, reflecting an “unusually high reliance on non-institutional sources such as moneylenders”.
Indian households tend to borrow later in life and are more likely to reach retirement age with outstanding debt, which is a source of risk given that they are no longer earning income during these years.
One reason for accumulating debt at a later stage in life could be the social arrangement, in which households bequeath the properties to future generations in lieu of old age care.
However, the panel notes these traditional structures were increasingly under pressure from shifting demographic patterns, social norms, and changing economic conditions, “introducing risks to economic well-being especially as households age”.
The report found that the contribution of pension wealth and insurance cover was prevalent in only a few states and not across India. Insurance penetration was low, despite risks from excess rainfall, health shocks and natural disasters.
Over the coming decade and a half, the elderly population is expected to grow by 75%, but only a small fraction of this had saved in private pension plans. Coupled with low insurance cover, Indian households “appear particularly vulnerable to adverse shocks later in life”.
More worrying is the habit of Indian households borrowing high-cost debt after a shock as opposed to insuring themselves in advance, it said. This might be due to tight constraints on Indian household budgets which do not allow them to buy insurance in advance, or because of adverse selection, moral hazards or other issues which may cause the insurance premiums to become unaffordable.
This could be overcome by strengthening the public provision of health and social welfare services, the report says. It also stresses that Indian households must re-allocate assets towards financial products and away from gold.
One major issue for a distorted assets and liabilities picture in Indian households is the lack of unified framework or guidelines for the provision of high quality and low-cost financial advice.
As part of its recommendations, the committee proposes a set of sector-specific recommendations to improve the functioning of mortgage, collateralised lending, insurance, pension, and gold markets.