Finance must begin with savings, not credit

There’s an old saying about poverty: give somebody a fish, and he’ll eat for a day. Give him a fishing tackle, and he’ll eat for a lifetime. There are several variations in this theme. But these days, there is a general view that one of the most effective tools to fight poverty may not be a fishing tool, but a savings account.

More than four decades back the most popular retail banking product was the pygmy deposit account. Housewives would scrape together few rupees every day to give to a savings collector who would visit their homes. The money was deposited in a bank account that paid interest and was insulated from the daily demands of life.

The depositors squirrelled away a decent sum by the end of a year — enough to buy a home appliance. The simple enough motivation was: saving money, even if it is only pennies at a time, was a sure way to build wealth.

Later a very innovative idea — micro-credit — took birth out of a radical concept: poor people, when lent small amounts of money, pay it back in a timely manner. In the meantime, that money can be put to use in ways that help boost income — goat-farming, say, or hand weaving — and, ostensibly, raise a family’s standard of living.

The world soon witnessed a great global rush, pouring billions of dollars into micro-credit to help the poor. It was a powerful revolution, but it bypassed the centuries-old idea of wealth creation — savings. Savings have all along been the most trusted and the oldest basic building block of financial management for all societies.

The tide is now turning, sparked in part by micro-credit’s discredit. We all now know that there may be families who have the savvy to benefit from loans, but there may be many who can be ruined. On the contrary, every family in the poor world can benefit from a pad of savings.

Savings are a vital way for the poor to weather financial shocks and capture income-generating opportunities. Savings increase their capacities to manage cash-flow, smooth the bumpiness of uneven incomes, reduce the impact of the lean season, make them more resilient in the face of unexpected shocks, build assets or invest in a family business and most importantly, perhaps, empower them to improve their status in their households and communities.

Savings also serve as a form of self-insurance and enhance the sense of well-being.

Little risk

Savings involve little risks and not much expertise in financial management. Even in traditional societies, no matter how oppressed women are or the level of their literacy, they are often stewards of the family savings. Savings have been the mainstay of the impoverished and strengthen the people’s resilience against a biblical range of hazards.

Credit can be both an opportunity and a risk for low-income families. It is necessary to open doors, but it can also be a barrier. You can dig yourself into a lot of debt, and that keeps you from moving up financially. It may become a deepening hole. Loans can be malignant.

Some people are not good enough at handling debt. Some businesses are too risky. And the temptation is always present to take these costly loans and scrimp on groceries.

When they miss loan payments because a lingering illness keeps them away from their business, they get into regular default cycle; it soon leads to acute indebtedness and makes life stressful for the entire family.

Most people do not save enough. That is because humans suffer from economic myopia: the failure to give adequate weight to future benefits over immediate pleasures. Self-discipline required to save is greater and the consequences of failure worse.

The instinct for gratification of immediate pleasures overrides the urge to squirrel money away in a savings account for tomorrow. This is particularly true of men.

The key to effective financial inclusion is a safe and confidential savings account for every woman. The older ones always advise the younger ones to keep a store of value that other family members do not know about. When there is an emergency, they will understand your wisdom and appreciate you.

Despite conventional wisdom, poor people actually do save, even if it is just pennies each day. They use a variety of informal mechanisms: hiding cash at home, loaning funds to relatives, participating in rotating savings groups with their neighbours, engaging deposit collectors. None of these mechanisms is reliable and safe.

It is this reason that governments are now driving a great revolution; a savings account that gives an individual a financial identity. A safe and smart savings account can transform villagers’ lives .But merely having a bank account is by itself not the right indicator of financial inclusion. Having made access to financial services a reality, our efforts should now move on to improve the transactional status of these accounts. The new mantra should be: access does count, but it is usage that matters more.

The writer is Member of NITI Aayog’s National Committee on Financial Literacy and Inclusion for Women.