Indian Independence Day Gift – The New Avatar of Financial Inclusion Drive

[Government would do well to ‘Target the Outcome of Financial Inclusion Drive’ as a ‘Means’ and ‘Not an End’ to ‘Attain Overall Prosperity’. – Use the FI Drive for Inclusive Growth and Not an End on merely Banking Inclusion]

The current policy objective of inclusive growth with financial stability cannot be achieved without ensuring universal financial inclusion and bridging the gap between the supply and demand side on one hand and lead the vision of inclusive growth on the other. The Government of India is likely to provide a positive impetus and boost the ongoing financial inclusion drive by unveiling a comprehensive program envisaging banking account along with an insurance and pension cover, apart from a default cover for lenders.  The NDA Government’s drive is likely to be opening 150 million more bank accounts, 120 million of which will be in rural areas over next four years.  Apart from providing basic banking accounts, pension and insurance services, the government will also focus on financial literacy as well as creation of a credit guarantee fund for coverage of defaults in overdraft accounts. The government plan also proposes to channel all government benefits (Centre, state and local body) to the beneficiaries using these accounts and pushing the Direct Benefit Transfer (DBT) scheme of the Union government.

This is certainly a big giant leap to inclusive growth in the regulated financial sector and the formal announcement shall be made by the Indian Prime Minister on the Independence Day (15^th August) next month. However, there are certain issues that the Government as well as the Central Bank ought to reckon with before embarking such an ambitious plan. Globally, a paradigm shift is being observed in the micro space which draws one’s attention from the financial institution ‘back to the client’. Indicators of a renewed concern for clients include research to quantify the ‘unbanked’, rallying calls for consumer protection, and efforts to better meet customer needs with diversified products. A key driver of this change in focus is the now widely embraced goal of ‘financial inclusion’. Governments in developed economies, in G 20 summit agreement, have recognized financial inclusion and consumer protection as integral to achieving financial stability and integrity as a multidimensional, pro-client concept, encompassing ‘improved and increased access’, ‘better products and services’, and ‘better use’

Need for Financial Literacy Along With Inclusion: The challenge in developing nations like India is that without the third element, ‘use’, the first two, despite the best efforts of the Central Bank as well as the Government, at best are worthless. Technological innovations are bringing both new customers, potentially including millions of unbanked cell phone owners, and new service providers – a diverse array of retail outlets, telecoms and others into the market. Diversification of products and services has already started resulting in rich, and complex, choices for consumers, especially compared to the early days of one-size-fits all working capital loans. Yet, increased access and better choices do not automatically translate into ‘effective use’. The path from uptake (i.e. opening an account) to usage is still an uncharted course. For, ‘effective use’ is hampered by asymmetries of information / literacy and power between financial institutions and poor consumers, an imbalance which grows as customers are less knowledgeable, illiterate and inexperienced while the products they can choose could be more sophisticated. Financial education is an important tool to address this imbalance and help consumers both ‘accept’ and ‘use the products’ to which they increasingly have access. As it facilitates effective product use, financial literacy becomes critical to financial inclusion and can help clients to both to develop the skills to compare and select the optimum combination of products for their needs and empower them to exercise their rights and responsibilities in the consumer protection equation. Current developments in microfinance sector including RBI’s concurrence to allow NBFC MFIs to be BCs are both exciting and potentially perilous. To take advantage of the former and protect against the latter, those placing the client at the center of their efforts have to be embracing financial literacy.

Challenges : Challenges of money management are never static, nor are the solutions. Therefore the Central Bank and GoI have to be watchful in launching the drive along with a prudently designed financial literacy tool that is tailored to the client’s specific context, helping them to understand how financial instruments, formal or informal, can address their daily financial concerns, from the vagaries of daily cash flow to risk management. Its power lies in its potential to be relevant to anyone and everyone, from the person who contemplates moving savings from under the mattress to a community savings group, to the saver who tries to compare account choices offered by competing MFIs and banks. As such it spans the informal and formal financial sectors, innovatively supporting clients’ access to, and more importantly, ‘use of’, diverse financial services. The ‘use’ factor is an element of innovative and effective financial education because when the client applies new knowledge and skills, she increases her chances of retaining them. Therefore, some of the best opportunities for financial literacy occur when the target group faces new financial situations or decisions. These are ‘teachable moments’; the learner might be in transition from the familiar to the unfamiliar, or have an opportunity that will be enhanced with relevant information and skills on a more permanent and sustainable basis.

Ownership of Inclusion: The Government would do well to target an outcome of the financial inclusion drive as attaining overall prosperity and not use the financial inclusion as an end in itself. Earlier drives of Financial Inclusion were limited to targeting opening up of banking accounts and India has a classical case distinction where millions of such no frill, zero balance accounts remained in the core banking without a single transaction. In fact, many of such accounts holders are not even aware that they possess a bank account, as they do not Own it. Thus the literacy drive and awareness campaigns should be targeted to make people realize that they actually ‘Need’ a bank account for a variety of purposes and the same has not just been offered free to them to complete the targets of the bankers. Awareness campaigns should be held in a camp mode and in order to resolve multiple issues like the KYC (Know Your Customers), bank account opening, G2P (Government to People), credit availability etc., GOI should hold camps to expand the interaction and interface between the lenders and borrowers. It should target more direct interaction between them so as to resolve various issues of negligence and knowledge using different camp modes where stakeholder bankers including Regional Rural Banks (RRBs), Self Help Group (SHG) members, NABARD (National Bank for Agriculture and Rural Development) and even government officials share a common platform and resolve ‘on spot’ issues. At supply side there is a need to sensitize the banking officials including BCs and BFs who interact at the grass-root level and interface with rural public at large. This may include, but not limited to human relations and skills in meeting customers, strategically planning increasing the customer base, broadening the scope of financial services and deepening the availability of products and cash in the system. The FI drive should encourage individual women / SHG members towards Voluntary Savings by assisting them open individual bank accounts, revive existing “no frill accounts” and depositing the surplus to facilitate and steadily graduate from community banking to individual banking. Bankers should organize capacity building workshops and training of trainers to train SHGs and individuals towards encouraging them to save individually. As the increasing reach for banking access has been an area of concern the bankers should ensure coverage of all unbanked villages in the identified areas over next 2 years with an emphasis on increasing rural accounts by opening of bank accounts for all eligible individuals and an increased savings and banking pattern. Similarly, there lie large chunk of accounts that are rarely or never used and hence increasing transactions on these accounts shall be the focus area of the drive.

Suggestions: The Government should reconsider the decision of a phased financial inclusion drive and instead perform literacy, banking accounts and offer other regulated  products in a single phase. It makes little sense to open a bank account in year one and then teach them its usage in year 2 and offer saving products in year 3. In most case, people tend to forget that they even got an account opened in year 1 and learnt about something like a saving, insurance and pension product  in year 2 and finally wait for it in year 3. Opening of bank accounts should not be treated as an end to FI and instead be treated as a means to attain ‘Overall Prosperity’

(The blog article also acknowledges a commissioned workshop paper by Monique Cohen and Candace Nelson of Microfinance Opportunities, USA)

The Smart Constable at the Polling Booth and Senior Citizens

[West Became Rich Before Becoming Old, East is Becoming Old With Greater Poverty,(Before Becoming Rich). Unfortunately, India has never factored Demography into its Policymaking]

We (in India) are in the process of conducting World’s Largest Event – The Parliamentary Elections, where more than 800 million voters are exercising their franchise to elect more than 542 Parliamentarians in World’s Largest Democracy.

Senior Citizens as Voters: One marked difference in Indian elections this year has been the growing number of senior citizens as voters. I was on a polling booth at my hometown Indore and observed an early morning interesting phenomenon. A decade or two ago when we used to go for voting, there used to be a special queue for the senior citizens. Probably, the numbers were limited within a single digit of percentage of the overall population and for obvious reasons it was treated normal. However, in the current elections in 2014, the majority of the voters as observed in the morning session were senior citizens and the constable on duty as well as the polling staff had a tough time to provide for a special queue for them. Since most of the voters at the booth were senior citizens, they had to wait for their turn rather than having a cake walk to the polling officer as they used to do earlier. Looking at the pressure of some genuinely older very senior citizens, the constable on duty wisely decided to create a special queue for only the very senior citizens and announced the privilege for voters in the 75 + age group. This allowed a lot many, very senior citizens (aged 75+) to franchise their votes conveniently. So is it that the population of senior citizens in India growing leaps and bound? Or is it that the cohort of voters aged below 60 lazier and would relish the holiday morning at bed and come to vote only at mod day? Or are we having a trend where the senior citizens are more enthusiastic to vote than their children? As I am a voter in a posh locality of the town I thought that most of the health conscious morning walkers / senior citizens had casted their vote early in the morning and there was nothing amiss in the phenomenon. But having stayed back at the booth and observing the trend during the day and getting feedback from friends and relations from other booth  I realized that there was a ‘Special Phenomenon’ that could perhaps Not be ignored.

Demographic Explosion in Greying Population: Greater Longevity, Higher Life Expectancy at 60 (18 for females and 17 for males), Lower Fertility etc. have played a significant role in Indian demographics in recent times. India's population aged 60 and older is projected to increase dramatically over the next four decades, from 8 percent in 2010 to 19 percent in 2050, according to the report by the UNFPA. The report has projected a rapid increase in India’s median age to 31 years in 2026 (it was 20 in the 1980s) and has also projected a 326% increase in the number of people aged between 60 and 80 by the year 2050 (from the year 2000); a 700% increase in the number of people older than 80; as against  a mere a 55% increase in the country’s overall population. By mid-century, this age group (60+) is expected to encompass 323 million people, a number greater than the total U.S. population in 2012. UN projections suggest that India is “gradually but surely transitioning away from a young age structure with the elderly population soon outnumbering children in India”. It will have significant implications for policymakers as well as businesses in a country that touts its ability to reap a so-called demographic dividend of a young population as one of its competitive strengths. Unfortunately, India has never factored demography into its policymaking

Implications: The profound shift in the share of older Indians—taking place in the context of changing family relationships and severely limited old-age income support—brings with it a variety of social, economic, and health care policy challenges. India is yet to define and target solving these issues and challenges. Dismemberment of Joint Family Structure has compelled senior citizens to live in rather loneliness, with share of older Indians living with only a spouse or alone doubled between the early 1990s and the mid-2000s. The aging of India's population will also lead to increases in the preva­lence of chronic conditions such as diabetes and hyperten­sion. By one measure, nearly one-half (45 percent) of India's disease burden is projected to be borne by older adults in 2030, when the population age groups with high levels of chronic conditions will represent a much greater share of the total population. Despite India's recent rapid economic growth, the majority of older Indians remain poor. A Single digit percent of them have a pension of any sort. Savings Exclusively for their old age is never on the horizon and sometimes difficult for a majority of Indians because of low earnings, indebtedness etc. where a large share of the aging population lives unbanked in rural areas.

Recalling Constable at Polling Booth:   Allow me to recall the Smart Constable at the Polling booth mentioned earlier. He smartly segregated the senior citizens and redefined the shift by created a Queue for 75+, ignoring those in the age group of 60 – 75. What implications can it have? Do we raise the Senior Citizen age to 75 as more and more people join the older cohort??? Should we raise the Retirement age of the working population? Will it actually help??? While it certainly helped him manage the crowd on the day of polling, it also gives us an important lesson to learn. Since we have a higher life expectancy at 60 and chances of living over multiple decades thereafter, does it mean that we should increase the earning tenure and reduce the retirement tenure by raising the age to work from 60 to 75? Can we resolve the crises by working for an extra 15 years and hence reduce our dependence of our savings by one and half decade? Or at Worst, are we not Compelled to Work till the End?? Are we capable of doing it?? If compelled to work, will our physical capabilities allow us to work or is it only out of compulsion? With people living well over 80, and most of the younger cohort today would continue to live upto 90s, ‘Non-earning years shall be more than half of one’s earning years’. With little old-age income support and few savings, labor force participation remains high among those ages 60 and older, particularly among rural Indians. Evidence suggests that not only does a large share of the elderly earn income, they also support their adult children who often live in homes and work on farms owned by their parents.

While there are no readymade solutions to such problems it’s high time Indians took decision to start saving exclusively for their old age. The Government of India is promoting the National Pension System (NPS) through the regulated mechanism of the PFRDA. To extend the coverage of NPS to the weaker and economically disadvantaged sections of the society with their limited investment potential, PFRDA has launched NPS- Swavalamban which specifically targets the marginal investors and promotes small savings during their productive life. It aims at building up a corpus sufficient enough to buy an annuity for their old age. It and has also offered co contributory pension scheme under the Swawalamban benefits where the GoI tops us the pension contributions to certain extent and under certain conditions for workers in the informal sector. Swavalamban Scheme grants an incentive of Rs 1000 pa to all eligible NPS / Lite accounts, if they meet the prescribed criteria. (More about NPS Swawalamban in the next Blog). While India has started waking up for the crises, neighboring countries like Bangladesh, Nepal et al that share similar demographics require aggressive shake up. 

Robin Hood Tantya Bhil (Tribal) Self Employment Scheme in Jeopardy: Banks Sensitization a Must

A Typical example where a Well Designed Tribal Welfare Scheme meets a Roadblock due to Bankers Apathy and Unwillingness to take Business Risk

Tribal in Madhya Pradesh

Madhya Pradesh is the second largest state in India with the distinction of having largest tribal population. The population of Tribals in Madhya Pradesh is 12.233 million constituting 20.27% of the total population of Madhya Pradesh (60.385 million), according to the 2001 census. There were 46 recognized Scheduled Tribes and three of them have been identified as “Special Primitive Tribal Groups” in the State.The Scheduled Tribe population in the State is overwhelmingly rural, with 93.6 per cent residing in rural areas. At district level, STs have returned the highest proportion in Jhabua district (86.8 per cent) followed by Barwani (67 per cent).

Self Employment Scheme for Tribal

Being a welfare state, the Government of MP has recently introduced ‘Tantya Bhil Swarozgar Yojana’ (Self employment scheme) for tribal youths. The scheme is supposed to be implemented through banks where the Government provides a 30% subsidy and a Guarantee to the Bankers as regard Returning the Loan. Under the scheme, loans worth Rs. 50,000 to Rs. 2.5 million or more shall be provided to the eligible tribal youths towards creating self employment opportunities. Under Tantya Bhil Swarozgar Yojana, the State Government  also provides a 30 % subsidy, subject to a maximum of Rs. 3 lakh and a 5% loan interest subsidy. Besides, fees and service tax, Guarantee will also be given by the State Government. A target has been set to benefit 5000 tribal youths under the scheme during year 2013. A scheme that shall provide employable opportunities to other tribal  in the belt.

Bankers Apathy

The fact that bank guarantees are being provided by the GoMP has failed to impress upon the bankers who are unwilling to lend a helping hand to the target population. It is a well known fact that the recovery rates amongst the bottom of pyramid as micro finance / credit are much higher (almost 99%) than the usual NPAs that banks have with the middle and higher income clients including corporate. Yet, the bankers are unwilling to learn from the Self Help Group (SHG) and Joint Liability Groups (JLG) and are not ready for loans to be distributed under the scheme as they consider it a ‘High Risk’ game. For the bankers, it is perhaps more difficult to devolve the guarantee on the State rather than recovering from the tribal. In a typical case of Indore district near Jhabua district, there were 250 applications under the tribal scheme for loan of which 74 have been approved by the Tribal Department for loan by bank and subsidy (30%) by the GoMP, and yet Only One Single Applicant has been fortunate enough to get the loan processed by the Bankers.

While there is a complete synchronization between the GoMP and the bankers in MP as regard the MP Financial Inclusion model called, ‘Samruddhi’ – Prosperity (at the Bottom of Pyramid), and the system is working well for all G2P payments and bank accounts being opened at the doorsteps of the community, the apathy of the bankers towards increasing their business risk by lending under the scheme is highly regrettable and unfortunate. A dialogue between the bankers and GoMP on one hand and GoMP and district administration including the tribal department should be immediately initiated so as to resolve such deadlocks. The state level bankers would do well to instruct their subordinates and specially at the district level to ensure that the schemes of the Government reaches the poor tribal seamlessly and offer them all possible helping hand towards credit and asset generation.

Samruddhi Penetration Flaw

 The Samruddhi (Prosperity) model opens an opportunity for every citizen of MP to have their own banking and financial identity. It facilitates an increase of money supply in the ecosystem and hence serves a great opportunity for the state to achieve financial deepening that usually refers to the improvement or increase in the pool of financial services that are tailored to all the levels in the society. This would typically precipitate an increase in the ratio of money supply to GSDP / Other price index which ultimately postulates that the more liquid money is available in the economy, the more opportunities exist in that economy for continued and sustainable growth. The G2P services under the Samruddhi model creates liquidity in the ecosystem while offering SCRIPT (Savings, Credit, Remittances, Insurance, Pension and Term Deposits) as financial products could serve the poor in different manner including covering the risks of death (Insurance), longevity (Pensions), unemployment (deposits and savings) etc. However, such roadblock and stopping stones provide a setback to noble initiatives of the Government.

As mentioned in another blog of mine, financial inclusion is incomplete and meaningless without the ‘teachable moments’ of financial literacy and capacity building at the BoP. The real success of Samruddhi model in MP shall be known only in due course of time as the model is still in its initial stage and yet to reach maturity. However, the model is based on solid rock foundation and follows the global best practices that could be replicated and scaled across the country with greater political will of the governments. The apathy of bankers such as cited above shall only create a bad name for the Samruddhi model and hence corrective action should be taken up immediately. Best Wishes to GoMP, The Tribal Department and May Better Sense Prevail to the Bankers to take the Samruddhi Model Marching Forward.

“Dads Retire, Moms Never”

(A Tribute on International Women's Day, 2014)

For those of us who are in our middle ages would realize that our Dad has retired from his active work / profession at the age of 60 or so and has more or less settled down spending a sedentary life taking it with leisure, meeting friends and former colleagues, reading newspaper, watching TV, occasionally gardening and pursuing his hobby that he could not while in active service.  However, our mom has also crossed the age of 60 (official superannuation) but lo… , she hasn’t Retired from her work / chores. She continues to perform her regular household chores what she used to do even before crossing the landmark age of 60. The landmark age of SIXTY has not made any difference in her life and probably would not make any difference even at age Seventy, Eighty or thereafter. She would continue to perform her duties and take up the responsibility unabated as if she is still in her Thirties or Forties and perhaps the word ‘Retirement’ does not emerge on her card. Does it mean that she is still young? Does it mean that she never tires? Or is she compelled to work? If so, then is it a self imposed compulsion? Does it mean that ageing is not her cup of soup? Or is she mentally and physically fit and indefatigable?  I do not think that we have a concrete answer to such questions but what we can conclude from this discussion is that while men may retire from their active and professional lives, women do not. Having said that, it also leads us to a conclusion that she is positively ‘Unequal’ and not the same as her men counterparts are.  

Today, 8^th of March as the world celebrates International Women’s Day 2014, lets join hands to Salute those who teach us to be working throughout their lives and never calling it a day (Retirement). The official United Nations theme for International Women's Day 2014 is "Equality for women is progress for all."  To me as a 'Pension and Inclusion' specialist - women are better savers (not necessarily investors) have been proved beyond the shadow of doubts as they always have something or the other for that rainy day which men seldom anticipates. Our experiments on micro-pensions right from April 2006 when we designed and implemented World's first contributory micropension scheme with low income informal sector self employed women of Sewa Bank in Ahmedabad is a live example. The blog does not wish to list out the areas where and what we need to learn from women, but if we introspect and observe them keenly with interest, there is a lot that you and I can ever even imagine. (More on Women’s Propensity to Save on my next blog)

Women's equality has made positive gains but the world is still unequal. International Women's Day celebrates the social, political and economic achievements of women while focusing world attention on areas requiring further action. Each year International Women's Day (IWD) is celebrated on March 8. The first International Women's Day was held in 1911. Thousands of events occur to mark the economic, political and social achievements of women. Organisations, governments, charities, educational institutions, women's groups, corporations and the media celebrate the day.

Some groups select their own International Women's Day theme, specific to their local context. For example, the European Parliament's 2013 theme was "Women's response to the crisis" and their 2012 theme "Equal pay for work of equal value". The United Nations declared an annual theme as follows:

- 2013: A promise is a promise: Time for action to end violence against women

- 2012: Empower Rural Women – End Hunger and Poverty

- 2011: Equal access to education, training and science and technology

- 2010: Equal rights, equal opportunities: Progress for all

- 2009: Women and men united to end violence against women and girls

- 2008: Investing in Women and Girls

- 2007: Ending Impunity for Violence against Women and Girls

- 2006: Women in decision-making

- 2005: Gender Equality Beyond 2005: Building a More Secure Future

- 2004: Women and HIV/AIDS

- 2003: Gender Equality and the Millennium Development Goals

- 2002: Afghan Women Today: Realities and Opportunities

- 2001: Women and Peace: Women Managing Conflicts

- 2000: Women Uniting for Peace

- 1999: World Free of Violence against Women

- 1998: Women and Human Rights

- 1997: Women at the Peace Table

- 1996: Celebrating the Past, Planning for the Future

As I don’t have answers to the questions raised, the story on this blog remains inconclusive. Appreciate comments, views and feedback from readers. 

In the Long Run We are All, BUT Dead

Ninety One years ago, John Maynard Keynes said, “In the long run we are all dead”. This perhaps is one of the most misquoted phrases in economics. [Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again. – A Tract on Monetary Reform (1923) Ch. 3]

Changing Demographics

The British economist, 1st Baron Keynes would never have imagined that in Britain a child born in 2020 would live for 100 years. In a country like India in 2014, a child born is likely to live five years more than children born a decade ago. Statistics released by Indian Ministry of Health and Family Welfare show that life expectancy in India has gone up by five years, from 62.3 years for males and 63.9 years for females in 2001-2005 to 67.3 years and 69.6 years respectively in 2011-2015. Experts attribute this jump — higher than that in the previous decade — to better immunization and nutrition, coupled with prevention and treatment of infectious diseases. The World Health Organization defines life expectancy as "the average number of years a person is expected to live on the basis of the current mortality rates and prevalence distribution of health states in a population". In India, average life expectancy which used to be around 42 in 1960, steadily climbed to around 48 in 1980, 58.5 in 1990 and around 62s in 2000.

Interestingly, while the Quantity of life is on the rise, the Quality is worsening. It is deteriorating for various reasons including health and hygiene on one hand and ranges from socioeconomic factors like greater dependency in a nuclear family (as opposed to a joint family) to lack of social security on the other. High Inflation also plays a predominant role in adversely impacting our ability to fight poverty in old age. Populations world-wide are aging. In India, while the total population is rising by 49 percent between 1991 and 2016, the number of elderly persons (aged 60 and above) is expected to increase by nearly 107 percent to 113 million. In other words, the share of the aged in the total population will rise to 8.6 percent by 2016. Demographic projections further suggest that the number of elderly persons will rise even more rapidly to 179 million by 2026, or 13.3 percent of the population (OASIS Report, 2000). While we witness an increase in the number of aged, the traditional methods for income security (such as the joint family system) are increasingly unable to cope with the enhanced life span and medical costs during old age.  Demographic trends in India, combined with poor coverage by existing financial products, suggest that India is moving towards a significant number of elderly poor and there is a strong need to instilling new savings behaviors among the youth and working populations that would free them from depending on their adult children in their old age and allow them to save modest sums through their long working years.

In the Long Run, All We Need is a Pension

Imagine we work for 10 – 12 hours a day while in our 30s and 40s and may be 8 – 10 while in 50s. But our capability to work drastically reduces the moment we cross the senior citizen stamp at aged 60. And as we move from 60 onwards, our physical capacities to earn livelihoods reduces disproportionately quicker. While we are in our 20s we do not wish to think about old age as our wishes are more, short run myopic. In 30s we dare think about retirement as the idea of old age gives us jittery shivers and we better avoid it. In forties we feel that we are ageing rapidly and hence need to plan for the old age, by the time we decide to do something about it in the mid 40s, we have already perhaps missed the bus. At fifties, we feel that if Wishes were Horses, beggars would ride and With just one decade to save for our retirement, can we think of saving to last us for next 3 decades, say from 60s to 80s? Can we accumulate enough in the short term so that when we are 60, we can live comfortably till we join the majority? Can our savings beat Inflation and Health shocks while in the old age? Will we not Compelled to work at least on a part time basis till we join the majority? In developing countries like India and Bangladesh a Poor has to Work Until he Dies, he has no other option. With dismemberment of joint families, migration of children for better employable opportunities and urbanization, most of our generation is already the feeling the pinch of being left on their own and amongst the poor, if the main breadwinner is out, there is hardly anything left of the old parents. The chances of a son sending remittances to the old and poor parents are bleak as the children themselves are not in a position to make their own twains end meet.

Why starting early is proved by the fact that a mere five years of delay while you are in early 20s can cost you a million at the terminal corpus. We always provide teachable moments where we explain that while Ganga started saving at aged 20, Jamuna learnt the same only at 25. Assuming both of them contribute Rs. 1000 a month and that the rate of returns is a nominal 10% for both, the mere fact that Ganga saved for an additional 5 years (20 – 25) an amount of Rs. 60,000/- (5*12*1000) took her terminal value to Rs.6,324,080 while Jamuna could only gather a terminal value of Rs. 3,796,638. The difference of Rs.2, 527,442 is due to the number of years of compounding of the initial value of Rs. 60,000 over the next 35 years (60-25). This magical power of compounding or the time value of money has to be understood well before starting or rather delaying one’s decision to invest. With same parameters, if someone would start saving from the age of 30, or 40, or even 50, one would have had a corpus of Rs. 2,260,488; Rs. 759,369 and Rs. 204,845 respectively at the retirement age of 60. Hence the more number of years that one saves, the greater would be the terminal corpus value, other things remaining equal.

The Privileged Pensioners

Civil servants retire at 60 and start drawing pensions and in a developing country depends on the earnings and hence taxes of the next generation.  They are a privileged lot as most of them have a handsome pension that is inflation and wage indexed. At my first posting as Treasury Officer Indore, I was delivering pensions and I remember a nonagenarian pensioner who told me that he worked for the state for 25 years and had just attained 50^th year of receiving pension. State pensioners who retired in 1984 are now receiving their pension which is 20 times more than their last drawn pay after 30 years of retirement.

Government and private companies in India have historically provided pension only for their own employees. As a result, 90 percent of the working population in India who are in most desperate need of old age pension, are ineligible to participate in formal pension or savings programs meant to provide old age security. Banking and financial systems are also not designed to cater to support micro-savings programs, as transaction costs in building awareness and in processing payments increase significantly. The network of banks and financial institutions in remote areas are also few. The NPS of the PFRDA along with the Swawalamban benefits have reached only to few where even the retention ratio is lower as people sign up for NPS Lite without fully understanding the need for it.

Though it be Madness, Yet There is Method in it.

Simulations suggest that we would need much more in our old age than we can even imagine. Just using the thumb rule of 72, our expenditure would double over every 7.2 years if inflation rate is 10% (7.2*10=72) and every 6 years if its 12% (6*12=72). Assuming an inflation rate that is prevalent in India ie of 9%, our expenditure would double every 8 years (8*9=72). If you belong to an average Indian age, you are currently aged 30 and lets say that your monthly expenditure is Rs. 50,000. With a 9% inflation, your expenditure would double every 8 years would mean Rs. 100,000 at aged 38; Rs. 200,000 at 46; Rs. 400,000 at aged 54; Rs. 800,000 at aged 62 and Rs. 1,600,000 at the age of 70 years.  Even if we discount that your lifestyle change post retirement could bring down your expenditure by half, you would still require Rs. 800,000 pm at the age of 70. So do we have enough savings while we earn so as to manage a monthly pension of Rs. 800,000 when we reach 70 and still live for another decade or two. The numbers could be scary and carry madness, yet there is method in it. It is for us to realize as to where are we heading for?? Are we planning a safe future for ourselves or are we simply leaving everything for the Almighty to take care of us when we are old. Our myopia would simply not work, we must start at the age of Ganga and not wait for Jamuna. In case, we have missed the bus, lets compensate for it immediately and then start saving a higher amount for lesser number of years. Remember,  that Every additional year of life expectancy costs a pension plan between three and four percent in present value terms. Is it not high time that we moved beyond the ‘Getting and Spending’ and start Saving for our own old Age? For, in the Long Run We are Not Dead, But Alive and Need a Pension that would Last Our Lives.

Prosperity (Samruddhi) at the Bottom of Pyramid – The Case of Financial Inclusion Model in Madhya Pradesh

Backdrop

Financial inclusion or inclusive financing is the delivery of financial services at affordable costs to sections of disadvantaged and low-income segments of society. Access to financial services plays a critical part in development by facilitating economic growth and reducing income inequality. Inclusive financial systems allow poor to smoothen their consumption and insure themselves against economic vulnerabilities —from illness and accidents to theft and unemployment on one hand and fighting the risk of Longevity and old age poverty by pensions and risk of death by Insurance on the other. It enables poor to save and to borrow—allowing them to build their assets, invest in education and entrepreneurial ventures, and thus improve their livelihoods beyond old age. Inclusive finance is especially likely to benefit disadvantaged groups such as women, youth, and rural communities. For all these reasons financial inclusion has gained prominence in recent years as a means to improve the lives of the poor. Thus Financial inclusion today is about financial markets that serve more people with more products at lower cost.

Problem

 An estimated 2.5 billion working-age adults globally have no access to the types of formal financial services delivered by regulated financial institutions. It is argued that as banking services are in the nature of public good; the availability of banking and payment services to the entire population without discrimination should be the prime objective of financial inclusion public policy.

However, merely proving banking access and access to financial products and services would not have worked in the large Indian state of Madhya Pradesh (literally ‘Central Region’), geographically, the most central state, spread across 316,000 sq kms with a population of 73 million living mostly (75%) in rural belts of 55,000 villages. Providing banking access to denizens of 55,000 villages with low population density itself was a major challenge, apart from improving the access to welfare benefits that the Government has been able to crack by means of Samruddhi (Prosperity) model.  One of the lowest per-capita income of US$ 583, MP withstand the challenges of lower income, lower liquidity and hence lower savings and investment.

Prosperity at BoP

The Government of MP, having realized its inherent socio economic and geographical weaknesses has successfully initiated attempting to address the fundamental issue of causes of rural poverty. In an omnibus of its financial inclusion model called Samruddhi (Prosperity), it addresses the issues of targeting the deserving poor; efficient and effective cash and benefit transfers to the identified poor under the welfare schemes; creation of a plumbing arrangement that can be used as a common conduit to electronically transfer funds to the beneficiaries individual banking accounts and offering services towards opening individual based banking accounts to the poor at their own doorsteps rather than travelling large distance to the bank branches.  Samruddhi – the MPFI model is an effort of almost half a decade of research and development that has positively digressed from other conventional FI models envisaged for India by the Central Government and Central Bank (RBI). Interestingly the model resembles the international best practices like the G – 20 Principles for Innovative Financial Inclusion and is steadily heading towards attaining them. The biggest challenge in MP was to practice Inclusive Banking as an integral part of effective public service delivery mechanism. Banking the unbanked becomes a precondition to reach out to the needy population before offering them direct multiple benefits of the Government. The financial inclusion along with direct benefit transfer in MP has now become a parameter of good governance and service delivery system.

The Three Pillar Model

In order to provide door step delivery of integrated financial services to the rural poor, MP has carved out a distinct identity by evolving a pro-poor model of financial inclusion and 'Direct Benefit Transfer'.  To allow access to the banking products to the beneficiaries, it was necessary that the conduit for transmission of the Government Benefits was free of laxities. Financial Inclusion in MP has been rolled out through the platform of State Level Banking Committee (SLBC) and Department of Panchayat & Rural Development (P&RD) with beneficiaries at the center stage within an ecosystem of the following three pillars:

1.       Samagra: A Common Database multi utility database of complete population of MP (individual as well as household) towards attaining an Integrated Social Security Mission (SSSM)

2.       Common Conduit in the form of an Electronic Fund Management System (e-FMS) for ensuring timely and correct payments to the beneficiaries as Government to Person (G2P).

3.       Access in the form of Ultra Small Bank Branches (USBs) / Customer Service Points (CSP) for Opening bank accounts, performing transactions and ensuring last-mile connectivity including financial dispensation at the door steps and offering different regulated products and services.

Three of them together form the MP Financial Inclusion (MPFI) model – Samruddhi that provides for an integrated solution to inclusive growth at the front and back end. At the backend, it captures the data base of every citizen and households and defines entitlements based on their characteristics as defined under the eligibility, features and benefits of the social sector schemes that get converged into three mainstreams namely, Health, Social Security and Education. At the frontend, the model offers huge potential for banking and financial inclusion where products and services could be offered at the doorsteps of the rural population by means of ultra small branches / customer service points (USB / CSP) using banking technology.  The Three Pillars that are integrated with each other provide an end-to-end solution for the rural poor. These three pillars, left alone can be treated as modular, however the services that they offer are bundled into Government to Person (G2P). The risk of each of them if adopted on a standalone basis, may simply defeat purpose of integration. MP has cultivated a broad-based government commitment to financial inclusion to help alleviate poverty and the same has been defined and reflected in its overall objective of financial inclusion.

From the supply side i.e. manufacturer of product and services, the model strives to make the USB / CSP a sustainable business model for banks in attaining the overall objectives of Financial Inclusion. In MP, the process of FI is an ongoing long term process and is not limited to merely opening bank accounts and providing for a direct transfer of social / financial benefit and devolution of benefits. It also strives to provide financial literacy and awareness to all other financial services as core products. Besides core banking structure, non-core banking financial institutions like the post offices and cooperative banks are also used as a conduit to transfer the benefits and financial services. The central focus of Samruddhi is not only providing an access to bank and their convenience to reach out the masses, but also to offer services to the clients at the door steps / in their own vicinity and mostly using their own people.

Merely providing G2P payments and creation of a Prosperity model and offering products and services cannot eradicate poverty in the rural belt. MP has amply and aptly realized that there is a strong need for financial literacy and capacity building at the bottom of pyramid. People made aware of the G2P payments that they deserve from the Government, need of banking accounts for an efficient and effective zero cost delivery of G2P and P2P, importance of savings, credit and remittances as part of banking activities and the whole gamut of life cycle needs in the ecosystem. The need and importance of financial literacy and capacity building is also brought out in my article at this blog at:

http://kavimbhatnagar.blogspot.com/2014/01/rbi-can-bring-horse-to-water-but-only.html

Conclusions

The Samruddhi model opens an opportunity for every citizen of MP to have their own banking and financial identity. It facilitates an increase of money supply in the ecosystem and hence serves a great opportunity for the state to achieve financial deepening that usually refers to the improvement or increase in the pool of financial services that are tailored to all the levels in the society. This would typically precipitate an increase in the ratio of money supply to GSDP / Other price index which ultimately postulates that the more liquid money is available in the economy, the more opportunities exist in that economy for continued and sustainable growth. The G2P services under the Samruddhi model creates liquidity in the ecosystem while offering SCRIPT (Savings, Credit, Remittances, Insurance, Pension and Term Deposits) as financial products could serve the poor in different manner including covering the risks of death (Insurance), longevity (Pensions), unemployment (deposits and savings) etc. As mentioned earlier, financial inclusion is incomplete and meaningless without the ‘teachable moments’ of financial literacy and capacity building at the BoP. The real success of Samruddhi model in MP shall be known only in due course of time as the model is still in its initial stage and yet to reach maturity. However, the model is based on solid rock foundation and follows the global best practices that could be replicated and scaled across the country with greater political will of the governments. Best Wishes to GoMP to take the Model Forward 

Pension Withdrawals: Holier than Thou ???

This note comes as a reaction to the Indian Pension Regulator PFRDA’s (Pension Fund Regulatory & Development Authority) invitation of public comments on allowing partial withdrawals under the National Pension System (NPS).

As a personal opinion, the Purpose of Pension Savings Gets Defeated With Partial Withdrawals.  

Backdrop

The purpose of Pension is Purely to Provide / Receive an Income in the Old Age for self as well as spouse (family pension). An Individual Retirement Account (IRA) is ideally meant only for the concerned Individual including the Spouse and should not be treated as cheap banking source during the accumulation phase itself. In fact, one’s own pension account should not even be used to help Children for their education, setting up business or marriages, unless the children are minor or differently able as in true sense of family pension.

Pension Savings are NOT meant to be used for the purpose other than fighting the old age poverty and hence any withdrawals even partial, should Never be adhered to. Remember, the longevity is on the rise and life expectancy at 60 is more than 18 years in countries like India. So in any case one would require pension as means of livelihoods for over two decades that would be full of Inflation and warrant expenses on health. Any compromise at the accumulation phase would have a heavy impact on the de accumulation phase. It may be perfectly fine if one leaves the wealth for the successors at the end of life, but Outliving one’s resources could turn out to be the worst nightmare where one would exhausts one’s resources before joining the majority.

Current Issue

Indian Pension regulator PFRDA (Pension Fund Regulatory & Development Authority) has proposed allowing subscribers of National Pension System (NPS) to withdraw up to 25 per cent of accumulated funds for meeting medical treatment expenses, higher education and marriage of children, and even house purchase. The "partial withdrawal" is however allowed only after 10 years of contribution by the subscriber. The draft guidelines for withdrawal of 25 % of accumulated contributions by NPS subscribers are proposed and comments from the public and all concerned are invited by the PFRDA on its website.

NPS is aimed at providing income security in old age and not to meet periodic or occasional fund requirements during the working life of a person. NPS is a long-term, retirement savings product which accumulates and generates maximum pension wealth. NPS, which has more than 5 million subscribers as of now, is one of the lowest cost pension funds in the country (and also in the world) and is open to every citizen.  The current exit / withdrawal guidelines under NPS ought to be framed in such a manner that the subscriber has a long period of accumulation of corpus for providing him with a decent accumulated pension wealth when he retires or he moves out of the regular work routine due to age. PFRDA has also invited suggestions over the same.

Precedence

It is not that the partial withdrawals were not permitted earlier under the civil servants General Provident Fund (GPF) or public / private sector Employees Provident Fund (EPFO). However, experience suggests that wherever partial withdrawals are permitted, the allowance of withdrawals is used to finance insignificant events not related to retirement leading to a situation where the terminal balance in their PF accounts remains abysmally low and hence the purpose of pension / PF gets defeated. Amongst the civil servants (joined prior to 2004), besides the GPF, there were other retirement provision as well like the Gratuity, Commutation, Leave Encashment etc. and hence even if their terminal GPF balance was close to nil, it does not really matter to them as the lump-sum received at retirement serves their purpose. The civil servants are also the privileged lot which has a wage and inflation indexed handsome pension post retirement that is sufficient to keep them happy for the rest of their lives. But what about employees under the NPS and the informal sector workers under the NPS / NPS Lite??? They seldom have other retirement benefits and do not have any inflation and waged indexed pension. For them, the corpus NPS may be the only means of livelihoods over the multiple decades and if that too is shared with their children education and marriage, there is hardly any money left that they could survive the old age crises in the offing.

Alternatives and Exception

All investments are supposed to be targeted and earmarked for foreseen as well as unforeseen events and different boxes need to be created within their portfolios depending the risk and return characteristics of investment options as well as the time period for which investment is made. For purposes like children marriage, education, housing etc. that are foreseen expenditures, there are different instruments and products that are available that one can opt for. For unforeseen events such as health, accidents theft etc  again there are these products / insurance to cover the risk. Similarly, old age is also a predictable event and hence pension savings should be exclusively meant  for consumption in the old age and Never be used for those purposes. Even under the NPS, the PFRDA has allowed a Tier II account that has the facility of flexible savings and withdrawals that could be used for all such purposes and also as cheap banking, if necessary. However, pension savings should be treated as sacred and never touched upon other than the purpose of old age.

The only exception to the withdrawals of pension savings should be ‘Critical Illness’ that might lead to a terminal case. So, where the chances of the survival of the person itself is in jeopardy, the rationale of keeping the pension savings in a funded account beyond life may not hold justified. However, this provision too should not be used as sweepingly since there could be a chance where even the spouse might need this money as in case of family pension.

The Damage

Lets check with two such cases and identify what damage the withdrawals could make in the lives of the pensioners. Assuming Ms. Consistent joins at the age of 20 and contributes Rs. 1,00,000.oo per year throughout her life upto the age of 60. Simultaneously, Ms. Withdrawal  also joins at the age of 20 and contributes Rs. 1,00,000.oo per year throughout her life upto the age of 60, but owing to children’s education, marriage etc. start withdrawing from the corpus as per the proposal of PFRDA. In that case lets assume that Ms. Withdrawal  pulls out her money at regular intervals ie 25% of the available balance amount at the age of 30, 35 and 40. Let the rate of return in each case remain at 10% pa.

In the first case, while Ms. Consistent has contributed Rs. 40,00,000 (say 4 million) in her pension account, the terminal balance would be Rs. 4,86,85,181 (say 48.69 million) without any withdrawals. On the other hand Ms. Withdrawal shall have a balance limited to Rs. 2,76,70,702 (say 27.67 million) at retirement despite contributing the same amount of Rs. 4 million and growing at the same rate of 10%. However, Ms. Withdrawal during the entire tenure has withdrawn Rs.  5,09,607 at the end of age 30, Rs. 8,02,089 at aged 35 and  Rs. 11,66,078 while she completed her 40^th years of life. Thus while Ms. Withdrawal has withdrawn a total of Rs. 24,77,773 spread across three PFRDA permitted withdrawals, her total damage at the terminal value is Rs. 2,10,14,479 (Rs. 21 million) which is (4,86,85,181 – 2,76,70,702) more than five times her own contributions.  If the same amount of Rs. 21 million was annuitized for a period of 20 years at 10% (Principle + Interest) she would have received a pension which would be more by Rs. 2,02,794 per month. Thus in other words Ms. Withdrawal has met a damage where her monthly pension is being reduced by more that Rs. 2 Lakh for a period of twenty years.

To recapitulate the discussion, we must realize the Importance and Necessity of Pension for our old age that should remain as  ‘Touch Me Not’. Any type of individual based pension fund should be treated as sacrosanct where no contamination or withdrawals should be allowed for which other accounts / investment options can be taken up,

RBI Can Bring the Horse to Water, But Only Financial Literacy can Make him Drink

RBI (Central Bank in India) can Bring the Horse to Water, But Only Financial Literacy can Make him Drink

Backdrop

The history of financial inclusion (FI) in India is actually much older than the formal adoption of the objective. The nationalization of banks, Lead Bank Scheme, Expansion of Cooperatives incorporation of RRBs, Post Offices, Service Area Approach and formation of Self-Help Groups - all these were initiatives aimed at taking banking services to the masses. The brick and mortar infrastructure expanded the number of bank branches ten-fold - from 8,000+ in 1969, when the first set of banks were nationalized, to 99,000+ today. Despite this wide network of bank branches spread across the length and breadth of the country, banking has still not reached a large section of the population. The extent of financial exclusion is staggering. Out of the 600,000 habitations in the country, only about 36,000+ had a commercial bank branch. Just about 40% of the population across the country has bank accounts.

Financial inclusion or inclusive financing is the delivery of financial services at affordable costs to sections of disadvantaged and low-income segments of society, in contrast to financial exclusion where those services are not available or affordable. Financial inclusion today is about financial markets that serve more people with more products at lower cost. An estimated 2.5 billion working-age adults globally have no access to the types of formal financial services delivered by regulated financial institutions. It is argued that as banking services are in the nature of public good; the availability of banking and payment services to the entire population without discrimination is the prime objective of financial inclusion public policy.

Issues

Issues have been raised around the mandate driven FI. Is FI a Political Agenda or a Regulatory one? Unlike the IRDA and PFRDA, the RBI as a Regulator does Not have a 'D' - the Developmental Role to play. So should be the FI drive be at the instance of the RBI or the GoI? The issue I am addressing is not banking inclusion of penetration, but that of using the existing banking accounts. The so called no frill / zero balance / basic bank accounts that lie on the Core Banking system have seldom been used by the account holders. Hundreds and Thousands of people in rural India have their banking accounts and most of them are NOT even aware of it, what to talk of using the same. The bankers can bring the Horse to Water, but can't make him Drink is proven by the fact that most of these category banking accounts remain without any transactions defeating the purpose as well as making the proposition unviable for the bank, their Bank correspondent network managers (BCNMS) and the customer service provider who actually opens the account and keep waiting for transactions to happen.

Fighting the Wrong Battle

We have always been 'fighting the wrong battle' - the battle from the 'supply side'. Who would do what FI and Why? What would be the norms and who would regulate it? What would be the role of each of the (supply side) player viz Banks, Post Office, Mobile Money, Cards etc. and What all product mix etc. etc. Development sector has innumerous examples where the supply side has only negatively dented  the structures and have seldom made any impression on the impact of the socioeconomics. Supply seldom creates its own Demand unless the consumers are aware of the benefits of the products and services.  Has anyone gone to the trenches and identified as to What do THEY Want?? And if they don't want but just Need it, then how do we get the 'Need' Converted into 'Demand'? For example, everyone on this planet need a 'Pension' to fight old age poverty, but what is the 'Demand' for such products.

Solutions lies at Grass-root Capacity Building and Financial Literacy

Financial Inclusion (FI) is Meaningless without Substantial Financial Literacy (FL) and Capacity Building at the Grass-root. However, FL should not be considered with a typical classroom approach, instead,most effectively and efficient use of 'Teachable Moments' - 'that moment when a unique, high interest situation arises that lends itself to discussion of a particular topic'. The time at which learning a particular topic or idea, say, opening and using banking account becomes possible or easiest.

While all the bankers headed by the regulator RBI have a mandate for financial inclusion and also have different agencies to deliver the same, a lot has to be taken up before it reaches to its logical culmination. There is also a strong need for an agency that could build the capacities of the rural India as regard financial inclusion and may range from financial literacy – the teachable moments to financial deepening that could attain a status of managing their own money using a regulated environment. Thus the solution lies not in the supple side, but in activating the ‘demand side’ of the FI.  There is a strong need to activate the 'demand side' for financial deepening - allow G2P in their bank accounts and let them use the liquidity, which is possible by creating awareness through 'teachable moments' and offer diversified products like Savings, Credit, Remittances, FD, RDs, NPS Lite (Swawalamban) etc. so that full advantage of the FI model could be utilized by the rural and urban workers.

Cash Transfers (Conditional / Unconditional)

People tend to forget fast and do not care unless they have their economic interests aligned to it. We open a bank account for them, achieve a banking inclusion target and then forget it. Instead, can we think of also putting some initial money into their accounts like the politically dead ‘Bhamashah’ scheme of the Rajasthan government?  Lets open their accounts, put some money in their account and permit them to use this money over next 12 months while also conditionally compelling them to credit their accounts atleast a couple of times in that period. Even a Debit and Credit of the same amount would do as long as they do. Meanwhile, can we start working towards channeling the Government to Person (G2P) payment into these bank accounts. Say, the MNREGA payments, social security pension, other subsidies of the Government etc. and also offer them simultaneously products like the NPS Lite with Swawalamban benefits. It would allow them open a pension account for themselves and invest Rs. Rs. 1000.oo pa so as to take the Swawalamban benefit of Rs. 1000.oo. Soon, they would see that their invested Rs. 1000.oo becomes more than Rs. 2000.oo (Own 1000 + GOI 1000 + Growth) as they receive the account statement from the NSDL against their own PRAN. During this period of 12 months lets keep them on their toes as regard managing their own money by budgeting etc, and teach them the ‘life cycle needs’ of money ranging from savings, RD / FDs, credit, remittances, insurance and pensions. At the end of the 12 months period, they would be happy to see their bank account grow, regular G2P in their bank accounts, their pension account grow and overall knowledge and experience of money handling. All the bankers including the RRBs are aggregators licensed by the PFRDA and receive Rs. 100.oo for opening and maintain a valid NPS pension account. This would also keep the BC / CSP above the break even as his remuneration is not only linked with the one-time opening of accounts, but also his regular earnings would depend on the frequency and quantum of transactions and the commission received for opening and maintaining a valid NPS Lite Swawalamban account. FI could turn out to be a win-win situation for all the stakeholders viz. the government by blocking the leakages in payment of G2P, the bankers of regular transaction in the accounts, the BC/CSP of earning reasonable fee based and commission based incomes and above all, the We the People – who have an understanding of using their money and banking, have access to knowledge and experience on finance, budgeting etc. including a portfolio of low cost regulated products and services, the G2P and the Co Contributions from the GoI in their pension accounts and a tension free pension for future and above all, Prosperity and Empowerment. 

Pensioners of a Lesser God

Pensioners of a Lesser God

Backdrop

The Main Opposition Party in India, the BJP on Wednesday 15^th January made a strong pitch for increasing the minimum pension to beneficiaries under the Employees Pension Scheme (EPS) to Rs 3,000 (US$ 50.oo) per month and link it to the price index. This is against the current proposal of the UP government of Rs 1,000 (US $ 16.6) proposed recently.  Under the EPS of the Employees Provident Fund Organization (EPFO), over 50 million EMPLOYED workers of the Organized Sector in India contribute 8.33% of their wages for provident fund and employers contribute the same amount to pension scheme, the government contributes only 1.16 per cent for the pension scheme. As a result, these employees on retirement, under certain conditions, receive a pension based on their pensionable service as well as pensionable salary.

Excluded Groups

While there are these Political Parties and Pressure Groups / Trade Unions etc. that can Fight for themselves and the employees in the organized sector as above, there is an 80% + work force in India in the Informal / Unorganized sector where there is no Employer Employee Relationship and hence they Lack employment security, work security and above all, SOCIAL SECURITY for Old Age. For this majority Informal sector workers that always remain Voiceless and Unrepresented in the form of Excluded Occupational (un)groups, there is no Provident Fund, No Pension and hardly any meaningful Insurance since they do not have any 'Mai Baap' - The Godfather. They remain the Children, nay (Non)Pensioners of a Lesser God who too would get old one day. This is the most vulnerable group that definitely requires Pension and Social Security more than anyone else since their working lives too are characterized with frequent breaks and uneven incomes, low wages (or earnings) and nil bargaining power etc. However, the problem is that no political group or pressure groups are batting for them as perhaps it lacks a fixed vote bank.  The large overlap between the poor and the group of informal workers was brought into public discourse by one of the early NCEUS (National Commission on Enterprises in the Unorganized Sector) reports which came out with the oft-quoted figure that 77 percent of the population spent less than Rs 20 per day in 2004-05.

NCEUS

The NCEUS (2004) of the first United Progressive Alliance (UPA) government was in accordance with its common minimum programme (CMP) that committed it “to ensure the welfare and well-being of all workers particularly those in the unorganized sector who constitute 93 percent of our workforce”. Under the chairmanship of the late Arjun Sengupta, the NCEUS published several detailed reports that have provided accurate measures of the size and magnitude of the unorganized sector and have highlighted the abysmal conditions prevailing there. It may not be incorrect to suggest that the credit for making the unorganized sector a part of contemporary public discourse falls, in large measure, on the NCEUS. The NCEUS highlighted the complete lack of growth of organized employment during the phase of rapid growth in India since the early 1990s. Virtually all the growth in employment since 1991 has been informal employment. This led the NCEUS to conclude that the growth process had bypassed the majority of the Indian population. To correct this distortion and to re-orient the growth process to serve the needs of the majority of the Indian working population, the NCEUS made many recommendations and urged some relevant legislation. Most of these suggestions were ignored by the government and the NCEUS along with its website was quietly folded up.

Micropensions as Social Security

Meanwhile, efforts were made by the Private organizations, Trade Unions, State Governments and GoI to provide for contributory and co contributory pension provisions for the unorganized sector workers. April 2006 witnessed the First Micro pension scheme in India where a private organization, Invest India Economic Foundation along with the UTI and Sewa Bank created an enabling, safe, secure and regulated environment for 30,000 low income informal sector women workers in Ahmedabad to start saving for their retirement. Their micro savings as low as a dollar a month was invested in a balanced fund, the UTI Retirement Benefit Pension Fund that provides steady growth over long term period. States like Rajasthan (Vishwakarma) , Andhra Pradesh (Abhyahastham) and Madhya Pradesh (Kushabha Thakre) announced, designed and started implementing co contributory micro pension schemes purely for the informal sector workers. While Rajasthan was the first state to implement Vishwakarma pension scheme along with a tunrkey implementation partner of Invest India Micro Pension Services, it became the first State in India where a matching contribution upto Rs. 1000.oo pa was provided by the state government to the workers of the pro poor twenty occupational categories who opened their pension savings accounts. The scheme soon gathered a momentum and was joined by more than 50,000 low income pro poor but informal sector workers.

http://www.business-standard.com/article/economy-policy/rajasthan-s-pension-scheme-for-unorganised-sector-draws-praise-108090801017_1.html

States showed the path to the central government and the GoI opened the NPS to the informal sector in 2009 and then added the co contributory benefit of Rs. 1000.oo pa to the informal sector workers under the Swawalaman scheme. Finally, for the informal sector workers, the GoI offered the SWAWALAMBAN benefit under the NPS lite that allows workers to save for old age by contributing Rs. 1000 - Rs 12000 pa and the GoI co contributes another Rs. 1000.oo pa in their NPS Lite Pension Account. The scheme is currently been announced for a specific time period only but motivates workers without any God Father (Mai Baap)  to create an upfront fully funded pension account.

Bell the Cat

Will the BJP et al also look into the issues of the informal sector workers and demand better terms and conditions as well as tenure for the Swawalamban? The Government ideally should also consider raising the tenure of Swalamban for at least 25 years and make it more attractive for younger workers to save for their old age. Can the PFRDA and the aggregators provide for greater intervention on pension literacy and popularize the same by making people understand the scheme? Can the Government plan to provide a Matching co contribution for anyone who contributes more than Rs. 500.oo pa? Can the government raise the co contribution limit to Rs. 1200.oo pa and also peg the co contribution with Inflation so that the GoI co contribution gets Raised Year after Year along with Inflation? There are many such issues where the PFRDA and the GoI can improve upon the NPS Lite - Swawalamban scheme and take the social security for Unorganized Sector Workers to its great heights, that has no parallel in the world.

A Video on Social Security for Indian Women Migrant Workers.

Social Security (Return, Rehabilitation, Insurance and Micro Pension) for Indian Overseas Women Migrant Workers.

Rationale for Establishing a Return and Retirement Fund for Indian Overseas Women Migrant Workers in the ECR Countries
Abstract:
Overseas Indian Workers are excluded from access to formal social security and retirement savings schemes available to residents of the ECR countries. They are also excluded from formal pension, provident fund and gratuity schemes available to Indian workers. No mechanism presently exist to enable and encourage these workers to either save for their old age or have a motivation to come back to India for a return and resettlement. As a consequence a majority of these Overseas Indian Workers face the grave risk of poverty when they return to India and become too old to work.
On average, nearly one in every five Indian workers in ECR countries is women. These women workers are even more vulnerable to old age poverty since they enjoy a higher life expectancy than men but are disadvantaged due to relatively lower incomes, a shorter working age and interruptions in employment due to childbirth and other family responsibilities.
The paper focuses the rationale and requirement for such a scheme and provides recommendations to the policy makers towards designing such institutional mechanism that would encourage the target population to voluntarily save for their scheduled return and to also improve their retirement incomes. The paper argues in favor of using Conditional Cash Transfers (CCTs) mechanism for providing socioeconomic safety net. Even with needed reforms of formal sector pensions, part of the requirement for retirement income security will need to be met from newer instruments such as the CCTs. CCT have received considerable attention as instruments for eliciting desirable behavior on the part of the recipients, minimizing transaction costs and errors in delivery of public services. That the CCT mechanism can be used effectively and efficiently to motivate pension savings in India has been partly demonstrated by states like Rajasthan and Andhra by launching co contributory pension scheme with the states contributing financially to augment retirement savings of low-income individuals.
Key Words: Women Migrant Workers, Return and Old Age Income Security, Pension, CCTs.

Pensions for the Bottom Billions by Mark Cobley - Dow Jones' FE, London

Pensions for the Bottom Billions by Mark Cobley - Dow Jones' FE, London

Pensions for the bottom billions

Mark Cobley

20 Nov 2013

It’s a financial version of the “chicken and the egg” problem: which comes first? Capital markets, or the pension funds that invest in them?

Source: Getty Images

In the developed world, this is largely an academic question – we have both chickens and eggs, and the system works reasonably well. Even in many emerging markets – Brazil, Chile, China, India – domestic pension funds are being built up and the virtuous circle of saving and investment is under way.

But what about the world’s “bottom billions” – the countries without capital markets or mechanisms for ordinary people to invest in them, and thus save for their old age?

That is where Kavim Bhatnagar, a former senior Indian civil servant now working as a consultant to Bangladesh’s government, steps in. He is on a mission to take pension saving to the poorest of the world’s poor, and combine it with efforts to build capital markets and financial industries in developing nations.

He set out his ideas to the World Pensions Council, an industry forum, in Hong Kong this month. These include the creation of a pooled investment vehicle for developing nations, and an international centre of pensions expertise, both under the purview of agencies such as the World Bank or International Monetary Fund.

His proposals are ambitious, but Bhatnagar has experience under his belt – he helped design India’s new national pension system and is now working on reforms in Bangladesh.

You might think these young, developing nations have many decades to address this. You would be wrong. While in countries such as the UK, France or Germany it took more than 100 years for the proportion of the population aged over 65 to double, places such as Iran, Venezuela and the Philippines will see that happen in the next couple of decades, according to projections from the United Nations. Bhatnagar estimates there are as many as 100 countries in the developing world with similar demographics.

But pensions coverage is alarmingly low. In the 34 developed countries that belong to the Organisation for Economic Co-operation and Development, an average 83% of the working-age population is covered by some kind of pension saving system. In other parts of the world, those numbers are much lower. In the Middle East and north Africa, it’s 34%; in Latin America, 32%, and in south Asia – the Indian subcontinent and nearby countries – the figure is just 13%, according to OECD data.

Does this mean these places have no savings at all? Not necessarily. Paul Gruenwald, chief economist at Standard & Poor’s for the Asia-Pacific region, points out that while assets in formal pension systems look low in many Asian countries, nations such as China have a lot saved up in banks, while people in India or Vietnam “may just be holding gold”. A lack of pensions does not equate to a lack of wealth.

It is also possible to build capital markets without domestic pension savings. Turkey has reasonably well-developed markets although its domestic pension assets are just 12% of gross domestic product, according to IMF figures. But this has left the country dependent on foreign capital, which from the point of view of local politicians, can prove alarmingly mobile. This is one reason Turkey is now offering its citizens generous incentives to save into pensions.

Bhatnagar has direct experience of building up such domestic capital pools. He was working for the Indian government in 2004 when it reformed its civil service pension scheme into a defined-contribution system known as the National Pension System.

As a private consultant to the government, he then worked on the extension of the NPS to non-government workers in 2009. In order to encourage the poorly paid into the system – farmers, village workers and so on – the Indian government offers an incentive of 1,000 rupees known as the Swavalamban Scheme to those who save.

In the four years since, the NPS has developed into a system with five million members and 330 billion Indian rupees ($5 billion) under management, according to the latest figures available from India’s Pension Fund Regulatory and Development Authority. Two million of those are new post-2009 joiners, according to Bhatnagar, and the government’s target is to sign up 20 million “informal sector” workers in the next decade.

Bhatnagar is now working on pension reform in Bangladesh, where he is a consultant to the government. He is working on a proposal to reform the existing civil servants’ scheme and then extend it to the private sector – in particular the country’s garment industry.

He said: “But there is a problem, one we did not face in India. Where will this money be absorbed? Capital markets and money markets are not in a position to absorb it in Bangladesh.”

Bhatnagar’s ambitious solution is as yet on the drawing board. He said: “There could be formed a pooled investment fund under the supervision of the agencies such as the IMF, UN Development Plan, World Bank or Asian Development Bank, which ought to be pushing pension inclusion as their own mandate.

“The maximum permissible limit for a country could be pegged at 50% of its investible funds being invested through long-term internationally diversified equities, bonds and currencies.” He envisages the remaining 50% of the money staying at home, to develop domestic capital markets.

Under his plan, countries that signed up to this “Pensions Convention” would have to pledge the 50% to the common pool, but could bring it back in a phased manner over the years as their domestic markets and financial institutions bed down.

The oversight of international agencies could give savers in these countries – where trust in financial or even government institutions is not widespread – confidence that their money was safe.

Meanwhile, the international centre could also co-ordinate pensions and market expertise from each country, allowing them to collaborate on policy and system design, as well as sharing technical assistance and IT support.

Sadly, governments might need some convincing. Nicolas Firzli, director-general of the World Pensions Council, said he had been “impressed” by Bhatnagar’s ideas and track record, but cautioned: “It remains to be seen if governments would allow what they may well perceive as some form of ‘capital flight’ offshore, considering they would fund a sizable proportion of these low-cost pension schemes.

“Here, western donors and supranational institutions clearly have a role to play by facilitating the emergence of shared best practices and common norms, when it comes to fostering and protecting cross-border pension investments.”

Bhatnagar’s ideas would take a significant international agreement – not to mention a lot of practical work. But the demographic crisis is pressing in fast, in the developing world as well as in richer nations. The problem must be tackled, and soon.

--This article first appeared in the print edition of Financial News dated November 18, 2013

Solving the Pensions Crisis Across the Globe - By Mark Cobley in Dow Jones' FN London

Solving the Pensions Crisis Across the Globe - By Mark Cobley in Dow Jones' FN London

Solving the pensions crisis across the globe

Mark Cobley

10 Dec 2013

In 2014, it will be the 125th anniversary of the pension scheme. Otto von Bismarck, the Chancellor who unified Germany, introduced the world’s first state pension in 1889 – but the concept has not aged well.

The basic design of the Bismarckian contributory pension – you pay into a fund throughout your working life, which entitles you to a guaranteed income from the age of 65 onward that is closely related to your previous salary – has been undermined by radically shifting demographics.

Ageing societies in the west can no longer afford these pensions, and most people in the world’s poorer countries have never had one anyway.

Yet something must be done to finance the world’s old age. Global policymakers, together with private-sector leaders, have finally accepted that they can no longer delay.

Larry Fink, the chief executive of BlackRock, the world’s largest asset manager, has been among those urging action. He told Financial News: “The fact is, a lot of national pension plans often don’t pay enough to fund a satisfactory retirement, and the problem is compounded by many of them being underfunded.

“Just as individuals have to be more proactive, so do governments. The current structures in place in most countries are simply insufficient to address retirement needs, especially in light of increased longevity.”

The demographic challenge is, in the words of Indian pensions expert Kavim Bhatnagar, “awe-inspiring”. He points out that population ageing is not just a western problem. About 100 countries, including India, Bangladesh and Venezuela, are set to double their populations of older people in the next couple of decades, he said. European nations such as France or the UK took more than a century to make the same transition.

He added: “These are also the countries where the coverage of old-age social security is almost missing, with 80% to 90% of the current working populations with no social security or pensions. The majority of older women are either widowed or deserted.”

Michael Herrmann, economic adviser to the UN Population Fund, said: “In countries like these, ageing is typically financed through informal family transfers. But people are moving into cities and those traditional family structures are breaking apart. That system won’t be sustainable.”

Hundreds of millions – if not billions – in rural areas and the informal economy in much of southern Asia and Africa are outside western-style financial systems. Many do not even have bank accounts, let alone pension schemes.

Economies in east Asia are often more developed, but the demographic challenge there is even more pressing. Robert Palacios, senior pensions economist at the World Bank, said: “Much of east Asia is in a race against time; a race to expand coverage of pension systems as the population ages. Japan has obviously a very high pensions coverage. But if you look at China, Thailand, Vietnam… when they converge on the demographic profile of Japan, and you look at how fast they have to expand coverage, it’s a monumental task.”

In China, the world’s most populous nation, a looming demographic crunch is unlikely to be alleviated by the government’s recent “rather mild” relaxation of its one-child policy, according to Stuart Leckie, chairman of Hong Kong-based consultancy Stirling Finance and an expert on the Chinese system.

He explained: “Previously, if two only-children married, they could apply to have a second child. Now what they are saying is that if only one of the parents is an only-child, they can apply. Over the last few years, about 16 million children have been born in China every year. People say that this new policy might encourage an extra one million births a year.

“Going from 16 million births to 17 million, in a country of 1.35 billion, is not going to solve the problem.”

In many developed economies, meanwhile, the guaranteed pension payable after 65 – the contributory defined-benefit scheme – is under severe pressure, if not already abandoned.

A contributing factor to DB’s demise has been that many nations have operated state DB systems on a pay-as-you-go basis: contributions into the system from current workers are paid directly to current pensioners. The workers build up a paper entitlement instead of an actual fund, and their pensions are then paid out of the contributions of tomorrow’s workforce.

Nick Sherry, a former Australian pensions minister, recently addressed an industry conference on pensions reform in Hong Kong, organised by the World Pensions Council.

Speaking at the sidelines of the conference, he told Financial News: “There is nothing wrong with pay-as-you-go in principle, if you are able to keep the cost manageable.

“Most countries have failed to do this. When retirement ages were set 100 years ago, they were set at the early to mid 60s, and most people did not live far beyond this. Countries like Greece, Spain and Portugal have got into trouble because the level of promise was much too generous and applies to most people.

“Clearly, Italy and France and ultimately Germany and Japan have similar promises that have been made. Demographics is creating enormous cost pressures on government.”

In the UK and US, he said, these same pressures apply to schemes in the public sector. In the private sector, DB promises tend to be funded, and have now been withdrawn because the funds were insufficient to pay for rising longevity. Sherry added: “I predict that public-sector DB in the US and UK will be gone in five to 10 years.”

Radical pensions reforms have a political cost and can lead to strikes and demonstrations.

Nevertheless, the demographics are inexorable. Last week, the UK set out new plans to raise the retirement age to 70 in the long term – putting it at the vanguard of international efforts to tackle rising life expectancy. Denmark and Italy have raised it to 69 in recent years; Ireland, the Czech Republic and Greece (see boxout) to 68.

Reforms can have immediate benefits. Last week the ratings agency Moody’s said Spain’s plan to decouple state pensions from inflation – announced in September – was “positive” for its outlook on the country’s debt, which it rates one notch above junk. The agency did not upgrade Spain, but it did shift its outlook from “negative” to “stable”.

The response to these twin challenges – reforming systems in the rich world, and extending them to the global poor – is taking a variety of forms, but a couple of outline trends are increasingly discernible.

The first and clearest is that most pension systems, whether public or private, will be based upon the principle of defined contributions. Unlike DB, DC schemes do not promise a guaranteed pension income.

Instead, contributions are saved up in a personal account for each worker, which is swapped for a pension upon retirement.

From its beginnings in Chile, Sweden, Australia and the US in the 1980s, DC has spread around the world in the past couple of decades. Latin American nations such as Mexico, Peru and Colombia followed Chile’s lead in the 1990s and early 2000s, shifting from public social security systems towards private DC funds. Following the collapse of Communism, many eastern European states followed this model as well. Meanwhile, the Anglo-Saxon nations have replaced private DB systems with private DC systems.

Today, both India and China are in the process of developing DC-based public systems and extending them to broad swathes of the population. Brazil is planning to introduce a DC top-up for its federal employees.

A shift toward investing pension contributions in the financial markets is often – but not always – coupled with the move from DB to DC (see accompanying article: “Private sector eyes increased role”).

However, some observers now detect a new trend emerging, especially in the global south. Chile, the test-bed for privatisation in 1981, embarked on a fresh reform in 2008, introducing a new public “safety net” pension, funded out of general taxation.

Palacios believes that such non-contributory systems, or contributory systems where the state matches payments-in from people without formal employment, will play a large role in extending pensions to the world’s poor.

He said: “In Mexico this year, the government has declared that it’s going to have a universal, non-contributory pension. In China, you have this expansion of the rural pension system, which is probably the most ambitious and rapid expansion of pensions coverage in history. It will be partly financed by matching contributions from federal and local government, and contributions from the individual.

“Globally, there is an increasing shift away from dependence on the old Bismarckian system; on payroll taxation and contributions, and the link to formal-sector employment.”

• Greek woes lead to ‘drastic’ remedy

During the past few years of crisis, bailout and political upheaval, at the behest of its international lenders Greece has implemented probably the most radical pensions reforms undertaken by a developed country. And there may be more to come, writes Mark Cobley.

Georgios Symeonidis, a board member at the Hellenic Actuarial Authority and adviser to the Greek Labour Ministry, describes the redesign of Greece’s state system – which accounts for about 99% of all pensions paid – as “drastic”.

In 2010, payouts were cut, with the earnings-related portion of the state pension linked to career-average salaries instead of final salaries, which tend to be higher. A cap on increases in public pensions spending: 2.5 percentage points of GDP between 2009 and 2060 was also introduced that year. The Hellenic Actuarial Authority is to run projections every two years and if it estimates that the increase is exceeding that limit, pensions will be adjusted.

Symeonidis said: “This clause makes the system a self-correcting one.”

In 2012, the system of additional public occupational schemes, which overlies the state system, was converted to “notional defined contribution” – meaning that its payouts can be reduced if life expectancy climbs. The state pension age was lifted from 65 to 67, with further increases in this also tied to longevity. The OECD predicts 68 by 2050.

Launching the OECD’s global pensions report in London last month, Stefano Scarpetta, director of the organisation’s employment, labour and social affairs directorate, said: “In our last publication [in 2011] we were forecasting that public pension expenditure in Greece would rise to 24% of GDP by 2050. Following the troika reforms, we now think this will be 15.4%.”

The current OECD average is 9.3%, predicted to rise to 11.7% by 2050.

This year Greece has overhauled its pensions administration and data systems, and there has been a crackdown on contribution evasion – commonplace in previous years. The government has also convened a “special committee” of pensions experts to recommend further reforms, with a possible implementation date of 2015.

Nick Sherry, a former Australian pensions minister, is preparing a survey of 15 pension systems worldwide for the Bank of Greece.

Symeonidis said there were discussions between policymakers, politicians and pensions experts over a defined-contribution reform of some elements of the Greek system. He said: “One part of the system will have to change to DC, because we are all living longer.”

--Additional reporting by Alkman Granitsas in Athens

--This article first appeared in the print edition of Financial News dated December 9, 2013