Abhinav Nayar is the Co-Founder and CEO of Mool, an all-in-one fintech platform for banking, investment, and insurance needs of its users. It aims to empower the non-affluent working class of India beyond the urban-rural divide to make the most of economic opportunities available in the market. In his present capacity, he oversees the overall strategy, operations and expansion of the brand.
There is a crucial difference between having access to financial assets and actually using them on a regular and meaningful basis. 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 years of state support and subsidies, the average balance in the government-provided bank accounts to citizens — Jan Dhan accounts — is less than INR 4,000. Another study has shown that more than 50% of participants drop out of the National Pension Scheme 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 and product 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.
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%.
In order to better understand how household finance affects and is, in turn, affected by the circumstances, characteristics and behaviour of different income groups, we can look at Indian households in three broad segments.
Strivers
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. His income is highly volatile as he is a casual worker without a fixed employer or contract. Furthermore, Raj faces the prospect of constant crisis, whether it is a sudden healthcare cost, a workplace accident, or a period of unemployment.
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.
To bridge the gap between their income and expenditure, Strivers borrow from informal sources. Often carrying onerous terms, this expensive 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.
Risers
Poonam has worked in a government bank her entire career and has progressed to a senior teller position. She enjoys a regular salary, access to government-provided benefits including a provident fund. Based in Dhanbad, she earns less than her colleagues in metros but still does much better than some of her relatives who are farmers. She and her husband are keen to buy their own house. Their costliest items of expenditure is education for their young children, groceries for the family, and healthcare for her aging parents.
Risers have relatively secure incomes, either through their own small businesses or regular salaried jobs. They have some surplus income and benefit from good 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 insurance cum investment products make compounding harder than it needs to be. Automobiles and real estate could be financed at low rates while credit card and informal debt might be consolidated and refinanced at more favourable 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, universal life insurance, comprehensive health insurance policies coupled with limited equity exposure could help them and their families better manage crises, that could cripple progress, while growing their net worth to meet urban living requirements.
Aspirers
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 good lifestyle, using her credit card to go for spontaneous holidays and eat out two-three times a week. She manages to save, placing her surplus income in savings accounts and an SIP. She 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.
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 a passive based asset allocation approach in equity, fixed income, and gold instruments. 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 reverse mortgage their real estate to cover their living expenses and use any surplus to invest in a combination of passive large cap equity funds combined with a laddered fixed income portfolio. While the equity investment can lead to value accretion on par with rising cost of living the laddered debt investment can ease cash flow management to meet monthly expenditures. Further, physical gold can be converted to digital gold through sovereign gold bonds or gold mutual fund schemes, adding to much needed liquidity requirements. Younger Aspirers can tolerate greater risks in pursuit of higher returns, meaning a shift toward equities across market capitalization combined with conservative yielding fixed income to counter the risks associated with equities.
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 building for the emerging middle class. 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.