As part of the Working Papers series, Vishwanath C, Monami Dasgupta & Misha Sharma, Dvara Research, have authored our latest research paper titled “Household Finance in India: Approaches and Challenges“
“The possibility that household finance may be able to improve welfare is an inspiring one” ‐ Campbell (2006)
Household Finance is the study of how institutions provide goods and services to satisfy the financial functions of the household, how consumers make financial decisions and how government action affects the provision of financial services (Tufano, 2009). This paper attempts to comprehensively review existing literature, flag key research questions and priorities for innovation that financial service providers, regulators and policymakers and researchers should focus on in order to move the needle on universal access to finance. This paper is divided into two parts. The first part summarises the key research themes and methodologies used in the field of household finance, while the second part synthesizes evidence on the current state of household finance in India and priorities for innovation in financial services of low‐income households.
These topics are reviewed through the lens of low‐income households, given their volatile cash flows, the composition of household portfolios, susceptibility to shocks and over‐reliance on human capital. The paper categorizes the literature in the field of household finance into two large research themes. The first theme talks about the ‘what’ and the ‘who’ to understand what kinds of financial decisions are being undertaken by low‐income households and who are the decision‐makers/participants/ beneficiaries/ network of various financial interventions. The second theme talks about the ‘why’ to understand the various factors that influence the financial decisions of low‐income households, as households cannot be isolated from the contexts that they operate in.
This paper highlights significant gaps in access to financial services among low‐income households. These arise from a high concentration in physical and illiquid assets, low exposure to financial assets, continued reliance on high‐cost, non‐institutional debt, and little to no access to risk mitigating products such as insurance and pensions. The paper recognizes that there are multiple factors affecting household decision‐making. On the demand side, factors such as cognitive and behavioural biases, issues of trust in the financial system, heterogeneous needs based on education, wealth levels, and geographies they are located in have a bearing on households’ decision making, while institutional context, existing market limitations and regulatory gaps contribute to the supply‐side barriers.
We highlight three types of innovations needed to address the identified gaps ‐ product innovations, process innovations and regulatory innovations, and hope that this serves as a useful reference to entrepreneurs working in the field as well as for policymakers.
To the best of our knowledge, this paper is the first attempt in the field of household finance in India that presents the case for household finance research along with comprehensively describing its’ current state, challenges, and scope for innovation towards achieving universal financial inclusion. This paper attempts to provide a theoretical background to researchers looking to conduct research in the field of household finance, as it not only surveys the existing literature relevant to the field but also highlights areas for further research.
Some of the key research gaps that the paper identifies are: (i) a need to better understand the financial portfolio of Indian households and the underlying reasons for the financial decisions and strategies employed by them and (ii) a need to better understand the interactions between financial systems and the socio‐economic and cultural dimensions of Indian households, thereby understanding the impact of finance on households. We hope that this paper will advance the field of household finance research in India and bring this pertinent field into focus.
The full paper is available here.