Why the poor should not start with market-linked products

Tucked away in the lush green Nilgiris lives a tribal community called the Paniyans. Largely a labourer community, some also have a few patches of land in which they grow tea and end up getting short-changed at the hands of intermediaries. A couple of decades ago, the Center for Tribal and Rural Development, CTRD, a not-for-profit organisation operating largely in Tamil Nadu, stepped in to help them ameliorate their standard of living. What helped was the changing milieu. Looking at the nearby villages with cemented roofs and cars, it was easier for the Paniyans to welcome the idea of getting into the mainstream.

Now many Paniyan hamlets have brick huts and CTRD has provided them with cows that serve dual purpose. Biogas ensures that the cooking stove has fuel and selling milk ensures there is food to put on that stove. Their kids have begun going to school and that’s a huge plus for the community going forward. With an average annual income of Rs.36,000, this community is happy to be a part of the modern economy. Sadly, they are still insignificant in the financial world. The womenfolk, who have been the agents of change, in some hamlets have bank accounts and milk cooperatives accounts, but they seldom indulge in banking. The branch is so far away that the transportation cost makes it unviable for them to pay a visit.

Given the poor interaction with the formal world of finance and an abysmally low level of literacy, one would imagine that basic concepts in personal finance like savings and investments would evade them. But a field visit to two Paniyan hamlets, developed and not so developed, hosted by the Invest India Micro Pension Services (IIMPS) co-founded by Gautam Bhardwaj along with their field partner CTRD, punctured this notion.

They were able to understand that their income earning capacity will not be the same as the years go by and were favourable to the idea of long term savings. In understanding the need to save, Paniyans have created a demand which IIMPS has sought to fulfil by reaching out to them with long-term financial products that don’t require them to go to the banks. IIMPS has brought these products at their doorstep in a very secure fashion with the help of mobile phones and prepaid cards.

The technology works like this: after all the necessary forms are filled and KYC (know-your-client) done, an IIMPS affiliated counsellor takes cash from the investor and loads it on the prepaid card that’s given to the investors. The investor then gets an SMS on the amount that’s loaded on the prepaid card. This amount directly goes to an escrow account from where the money is channelled to investment products.

So far the story looks fascinating and full of hope, but when you look at the products that are reaching out to these people, you begin to worry a little. IIMPS as a strategy splits the funds of investors equally in a pension product called NPS Lite that is regulated by the Pension Fund Regulatory and Development Authority, PFRDA, and a mutual fund scheme called UTI Retirement Benefit Pension Fund. NPS Lite comes with a lock-in till 55 years of age or 20 years whichever comes first and the mutual fund scheme dissuades early withdrawals through an exit load of 5% in the first year coming down to 1% from the third year onwards till 58 years of age. NPS Lite invests up to 15% in equities and the mutual fund scheme can invest up to 40% in equities. For this, IIMPS charges a fee of Rs.100 in the first year and Rs.80 going forward every year.

For investors with a decent flow of income, comfortable level of disposable income and a buffer of emergency fund, a product such as NPS (National Pension System) works very well because it calls for targeted investments and locks in your money for that purpose; even a mutual fund works very well for this segment. But when the investors are the low-income groups, whose financial lives are characterized by erratic income and expenditure, money fraud and debt traps, reaching out with market-linked products with lock-ins and exit loads as the first set of financial products doesn’t seem like good financial planning.

For them, saving for the old age is not paramount, but insuring their health, lives and managing short-term money shocks are. Given the need, the first tranche of products to touch their money should be health insurance, pure life insurance, bank and post office deposits and subsequently Public Provident Fund for long-term savings. These products are needed to build a sound and guaranteed base before any money is put in market-linked products.

Yes in the long term, equities do outperform other asset classes, but then there is a risk attached. Given this and in the absence of a guaranteed products base, should equity exposure be bundled into the first financial product they buy? And should they be made to lock in their money when they haven’t even provisioned for a rainy day? I don’t think so. But if these are the fourth and fifth products to reach them, I wouldn’t have much to argue. Perception of risk and asset allocation are essential to any financial plan even if it’s for the poor. There isn’t one product that fulfills all the financial needs and therefore institutions that work in the field of financial inclusion need to adopt a holistic approach. Even banks need to go beyond the mindset of meeting their enrolment targets, they need to reach out to customers with need-based financial products.

PS: Back from the trip, when I shared my concerns with Bhardwaj, it was comforting to know that IIMPS understands the need to adopt a holistic approach. They plan to act on it once they can build suitable technology for payments and withdrawals.

Changing Lives
field updates

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