The Financial Lives of Most Indians

Mool seeks to advise the world’s largest cohort of new savers by solving the deep design and distribution challenges that keep most Indians from earning more on their savings. We believe well-engineered, technology-enabled financial services can have an important role in helping people find their place in the world and take care of their loved ones.

There is a crucial difference between having access to financial assets (the extensive margin) and actually using them on a regular and meaningful basis (the intensive margin). Financial inclusion, which focuses on the former, should be married to household finance, the driver of the latter.

Financial assets comprise only 5% of total Indian household wealth. For example, after six years of state support and subsidies, the average balance in the government-provided bank accounts to citizens — Jan Dhan accounts — is less than $50, reflecting limited use by most holders. In another example, a study showed that more than 50% of participants drop out of the National Pension Scheme, which requires ongoing contributions from individuals, after only a year.

These examples make the case that much of the inefficiencies related to financial inclusion and household finance in India may be the result of poor process, product, and distribution design. Process-related problems are largely due to high transaction costs, which deter customers from starting and then continuing to engage with service points. Opening a bank account, for example, can consume one day’s worth of earnings for a poor household. In other words, the current banking customer experience for most Indians is a major reason for why their financial needs are grossly underserved.

There is expanding scope for digital banking services built on the back of growing mobile phone usage. In 2018, 64% of Indian adults owned a mobile phone and 25% owned smartphones. Looking more closely at younger cohorts (those aged between 18 and 34), smartphone ownership rates reach just under 40%.

Most Indians have volatile incomes

Perhaps the most striking observation about India’s 450-million-strong workforce is the fact that over 90% of the workforce is employed informally, thereby lacking social security, regular salaries, and written job contracts, for the most part. A quarter of the Indian workforce is casually employed, 52% are self-employed and only 23% are regular wage workers. Casual workers are perhaps the most vulnerable, suffering the gravest forms of income and job insecurity; this includes everyone from the 50 million construction workers in the country to many of the 44% of the labor force employed in agriculture. Besides agriculture, around 50 million Indians work in the manufacturing sector — 14 million in larger factories and 36 million in smaller, residual enterprises.

As a result, due to seasonality, business cycle changes, and labor market informality, the cash flow curves for most Indians are extremely erratic. For example, harvests enable 30% of rural expenditure while casual labor funds another 30%, meaning that at least 60% of rural household consumption is based on volatile or seasonal income sources. Indians in the formal sector enjoy regular salaries, which are higher than those for informal workers, and greater formal financial access than informal workers. Yet even for those who are regular salaried workers, 45% earn less than INR 10,000 per month, illustrating that relative income security does not necessarily translate into high incomes.

Wages have grown, but inequality persists

There has been some growth in real wages in India, increasing by 3% each year since 2000, or doubling every two decades. However, 67% of households in 2015 earned INR 10,000 or less each month. To put it differently, a household earning over INR 100,000 per month sits in the top 0.2% of the income distribution. A household-level analysis must contend with the fact that poorer households generally have more members than richer ones, allowing them to pool resources. But looking at an individual-level measurement reveals the full extent of income inequality. On a per capita basis, the richest quintile in India — individuals annually earning on average INR 168,000 — comprises 45% of total disposal income in the country. By comparison, the bottom three quintiles, earning on average between INR 26,000 and INR 57,000, only make up 33% of national income.

That India is a deeply unequal country is not surprising, but the degree to which inequality persists intergenerationally can be seen from how much different income groups are able to save. The poorest fifth of households can afford to save only a tenth of their monthly income of around INR 7700, while the richest quintile of households can save 47% of their average INR 29,800 monthly income. As a result, since wealth is usually built on the ability to save and invest income over a lifetime, the wealth distribution is even more unequal than that of income: the richest 10% of Indians possess 77% of the wealth. The median wealth per adult in India is INR 90,230, which would translate to a median household wealth of INR 361,000.

Segments

In order to better understand how household finance affects and is, in turn, affected by the circumstances, characteristics and behavior of different income groups, Mool divided Indian households into three broad segments. We used data and population projections from business reports on the Indian consumer market to estimate the size of each of the three segments, based on annual income. One of the most striking observations from the table, in our opinion, is the Risers category. While most fintechs currently cater to Aspirers, particularly those in urban areas, there is relatively less attention paid to the needs of Risers, who constitute 40% of households and have enough disposable income to save and invest in long-term financial assets.

Features

Strivers have volatile and low incomes, due to the casual nature of their work in the informal sector or the seasonality of agriculture. They do not have much surplus income, and the little that they do have might be kept at home or in a low-interest savings account. Affordable fixed income instruments could create a more predictable source of funds while a different model of savings account could offer higher returns and greater flexibility.

To bridge the gap between their income and expenditure, Strivers borrow from informal sources, including corner shops and moneylenders. Often carrying onerous terms, this unhealthy debt could be replaced with smaller lines of credit (around INR 5000) to facilitate consumption in off months.

Given their precarious economic situation, Strivers suffer from unemployment, illness, and accidents in the forms of lost earnings and the cost of healthcare. As a result, an emergency fund that would contain three months’ worth of income along with small-ticket-sized health insurance could provide a valuable safety net for employment and health shocks.

Striver Persona

Raj is a 30-year-old construction worker in Mumbai, having relocated from his home in Bihar. He is therefore one of the 50 million construction workers in the country, and is part of the migrant worker population, having left his family behind in their village. The capability to seamlessly transfer money and access human touchpoints for assistance across a wide geography would help serve his need to remit money to his family and move around to different work sites.

Crucially, his income is highly volatile as he is a casual worker without a fixed employer or contract. In order to create some level of income stability, Raj might benefit from a supplementary investment income in addition to his highly variable wages.

Furthermore, Raj faces the prospect of constant crisis, whether it is a sudden healthcare cost, a workplace accident, or a period of unemployment. An emergency fund that contains six month's worth of income and is extremely liquid might help him tide over any crisis.

Risers

Features

Risers have relatively secure incomes, either through their own small businesses or regular salaried jobs. They do have surplus income, but might benefit from better expense management, including budgeting and forecasting. Risers invest the majority of their surplus income in fixed deposits, post office schemes, and gold, the returns of which are typically beaten by price inflation on commodities and services.

Risers generally save and invest to create a corpus for large expenditures, such as automobiles and real estate, children's college education, and retirement. However, the generally poor state of financial advice available to them and the marketing of expensive ULIPs and other investment products make saving harder than it needs to be. Automobiles and real estate could be better financed with auto loans and mortgages at competitive rates, and pre-existing loans might be refinanced to attain more favorable terms.

Though they can afford to take sick leave and pay for routine healthcare costs, Risers might see their needs served well by longer-term risk-mitigating products. For example, more universal life insurance coupled with health, critical illness and accident insurance policies, could help them and their families better manage crises and out-of-pocket expenditures.

Riser Persona

Mukesh has worked in a government bank his entire career and has progressed to a senior teller position. He enjoys a regular salary, access to government-provided benefits, as well as possession of an employees’ provident fund.

Based in Meerut, he earns less than his colleagues in metros but still does much better than some of his relatives who are farmers. Nevertheless, his salary encourages him to think about buying his own house and moving out of his current joint-family living arrangement. Working in a bank, he is aware of mortgages but was always risk-averse when it came to long-term debt — seeing some of his friends take out home loans, however, has opened his mind to the idea.

One of his costliest items of expenditure is healthcare for his immediate family, especially for his young children. Though the main financial burden comes from routine consultations, diagnostic scans, and medication, he is worried about being able to cover the cost of a sudden health emergency that would require hospitalization. He has a life insurance scheme but is curious about health insurance policies that might help ease the burden of health emergency costs.

As a long-term goal, he is saving for his childrens’ education by relying on a fixed deposit. As a result, a long-term investment product that offers low risk and higher returns might serve him better.

Aspirers

Features

Aspirers are fundamentally managers of value, with either high-earning potential at the start of their careers or financial comfort toward the end of their working lives. They, therefore, enjoy a high level of consumption that could be managed in the long-term through the use of equity savings or fixed income instruments, pension accounts, and systematic investment plans. In the short-term, affordable credit cards might service their consumption needs.

Older Aspirers would have a substantial share of their wealth in real estate and gold, which are relatively low-yielding and illiquid. For example, they could convert some of their physical gold to sovereign gold bonds, and start investing in safe, fixed income-yielding bonds. Younger Aspirers can tolerate greater risks in pursuit of higher returns, meaning a shift toward equities.

Persona

Saina graduated from a prestigious university with a BTech degree and has been working at a large IT services company for the last five years. She enjoys a high level of consumption, using her credit card to go for spontaneous holidays and eat out three times a week. She manages to save, placing her surplus income in fixed deposits and savings accounts.

She hopes to maintain her current lifestyle of discretionary spending and create a corpus of wealth to help her parents in their retirement. Consequently, her needs might be met by a combination of long-term, riskier equities as well as fixed income instruments that would provide an assured source of funds at regular intervals for her parents.

She still lives with her parents, has no plans of starting a family within the next five years but is still unsure of her long-term future. Her parents, who are themselves aspirers, are looking for stable returns from the investments of their retirement corpus and the rent they earn from their second home. Given all of these diverse options and life stages, Saina and her family might be interested in a quality, but affordable, financial advisory service.

Most fintechs focus on high-income households in large cities while micro-finance institutions are geared toward low-income groups in rural settings. Mool aspires to incorporate the best insights from both of those approaches and bridge the gap by thinking about Indian households across the income spectrum.