‘Households should have a set of readily available financial products’

In order to effectively harness the benefits of the formal financial markets, Indian households should have a minimum set of readily available financial products — assets, insurance, liabilities, savings, and easily annuitising land and homes, according to the RBI’s ‘Report of the Household Finance Committee’.

The products could be made readily available, either automatically “seeded” at the point of Pradhan Mantri Jan-Dhan Yojana (PMJDY) account opening (or added later to PMJDY accounts as a default but “opt-out” option), or automatically pre-qualifying households to be able to access all of them at the point of e-KYC for any one of them.

“While households will have access to the essential minimum ‘kit’ of assets by default, we should require either or both of explicit opt-ins and mandatory education... of all households before they access more complex products.

“...products not on this list could have ‘speed breakers’ associated with their take-up and widespread distribution. This is not to inhibit households from portfolio optimisation, but rather to permit an opportunity for households to reflect before taking decisions to participate and use more complex products,” said the committee, chaired by Tarun Ramadorai of Imperial College, London. In order to move investments towards financial assets, the committee advocated removal of the tax exemption for income from house property.

It also recommended that the tax exemption which provides for deductions on the capital gains made on the sale of residential property not be tied specifically to re-investment in the property sector. This should allow households that wish to sell real estate and move the proceeds into financial assets, greater incentives to do so. Given that legitimate collateralised lenders refuse to lend to small borrowers — leading to a greater reliance on non-institutional sources of debt such as moneylenders — the committee felt the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI) provisions be made applicable to smaller loan sizes in an attempt to bring “underground” collateralised lending into the mainstream..

Given that over the coming decade and a half, the elderly cohort is expected to grow 75 per cent and only a small fraction of this cohort has saved in private pension plans, the committee suggested the pensions regulator issue regulations to enable fully digital end-to-end applications for pension products and also authorise Aadhaar-enabled enrolment for the process.

Among sector-specific proposals, the panel said to help easy comparison of loans, banks should quote loans to customers using the RBI repo rate (the interest rate at which banks borrow short-term funds from the central bank) rather than based on their own marginal cost of funds-based lending rates (MCLR). Further, all banks should use the same reset period — one month. The panel is of the view that households should be allowed the choice to shop for the best annuity plan, and recommended segregating annuity investment from insurance investment. It also believes there should be increased transparency in the Indian annuity market in terms of expenses, commissions, annual fees and surrender charges, which could reduce payouts to households. Moreover, a more focussed regulatory mechanism will benefit the market.

The proposals were made in the backdrop of: a large fraction of the wealth of households being in the form of physical assets (particularly, gold and real estate); households tend to borrow later in life and are more likely to reach retirement age with positive debt balances; debt taken from non-institutional sources; and low levels of insurance penetration (life and non-life).