By Shailesh Kumar (Intern) & Misha Sharma, Dvara Research
This post is the first in a series of posts that will use the Consumer Pyramid Household Survey database maintained by CMIE to understand the financial choices of Indian households.
Financial inclusion, broadly defined as universal access to a wide range of financial services at a reasonable cost, focuses on enhancing both the breadth and the depth of a range of financial services among the unbanked and underserved population (Rajan, 2009). These include access to and use of a variety of products and services such as savings and investment, credit, insurance, payment, retirement and pension accounts, that meet the various financial requirements and life-cycle goals of households. Therefore, reviewing the current levels of financial inclusion, requires us to probe deeper into not just the levels of access but also usage of a comprehensive suite of financial products and services, beyond ownership of bank accounts. Unfortunately, much of the narrative around financial inclusion has remained focused on access to financial services, especially in the form of ownership of bank accounts.
While policy work in financial inclusion has primarily focused on the extensive margin and geared towards understanding and tackling the challenges in ‘access’ to financial services, research in household finance focuses on understanding the intensive margin, that is whether households use these financial services and if so, to what extent. Understanding the intensive margin is important as it allows us to better understand the interactions that households have with financial institutions (C, Dasgupta, Sharma, 2020).
This brief picturises the portfolio of Indian households by reviewing the participation rates across various financial and non-financial instruments using data from 2019. We use the Consumer Pyramid Household Survey (CPHS) dataset collected and maintained by the Centre for Monitoring Indian Economy (CMIE) for our analysis. CPHS is a large-scale longitudinal survey of sample households surveyed repeatedly over time. The survey is conducted thrice every year in three waves. For the purpose of this analysis, we use the May to August 2019 wave of CPHS that consists of a total of 1,47,868 households in its sample. However, we apply household weights to make the sample representative at a population level, for this analysis. Specifically, we examine the data on whether households have current outstanding investments and borrowings across a variety of assets and liabilities, respectively. This helps us construct the portfolio of households by examining their participation rates across financial and non-financial instrument.
Overall, we find low rates of participation across formal financial assets. Barring life insurance and fixed deposits, rates of participation across all other assets are equal to or less than 25%, suggesting that broadly only a quarter of households (or less) from the entire population actively participate in formal financial markets and hold basic financial instruments such as health insurance and retirement accounts. Participation in physical assets such as real estate and gold are almost universal, with 99% of households possessing these assets. On the liabilities side, 50% of households have active borrowings, with 36% of households borrowing from informal sources. These results reveal that beyond access to bank account, access to and use of a suite of financial instruments required to meet the financial needs of households, are glaringly low. The consistent increase in participation rates across physical assets and informal sources of liabilities from 2012 to 2019 indicate that households do recognise the importance of investments and credit in meeting their life-cycle objectives but do not find using formal financial services as an attractive and efficient way to meet these goals. Very simply put, this suggests an obvious weakness in the current state of the financial system in fulfilling the financial requirements of households.
Broadly the themes that emerge from this analysis are the need for greater formalisation of financial services, a visibly large scope for diversification in households’ financial portfolios, the urgent need for active use of risk mitigating products such as life and health insurance and long-term products required for financial stability such as retirement accounts. Appropriate use of each of these products based on the financial requirements, preferences, risk appetite and capacity of the household will help them get closer to achieving financial inclusion.
To know more, please read our research brief on Picturising the Portfolios of Indian Households here.
 CMIE dataset allows for analysis purely related to the participation trends across financial instruments. The data doesn’t consist of information on the monetary value of these financial instruments; hence we are unable to comment on the allocation trends.