Financial Inclusion

Matt Levine had a superb newsletter recently on whether asset managers and pension funds who push customers towards buying high-cost retirement savings plans are doing a good thing or a bad thing. As Levine expertly explained, it all depends upon the context.

 Is bad retirement advice worse than no retirement advice? Like here is a simple hierarchy of things you could do to save for retirement, from best to worst:

  1. Save for retirement in an efficient portfolio of index funds with very low fees.
  2. Save for retirement in a mediocre product with very high fees.
  3. Not save for retirement.

So if some slick-talking hustler shows up at your place of employment and talks you into option 2, has he done you a favor, or done you harm? The answer depends on what you would have done if he hadn’t shown up. If you were on your way to Vanguard to buy index funds when he waylaid you, he has moved you from option 1 to option 2, and made you poorer in retirement. If you were on your way to blow your paycheck on lattes at Starbucks, he has moved you from option 3 to option 2, and made you richer in retirement. The context is key.

Earlier today, I was at a post office, trying to cash a National Savings Certificate that my parents had somehow bullied me into investing in, and was reminded of how inefficient post offices are. For a long time, India Post has allowed people to maintain deposits, in so-called “savings accounts” (though India Post is itself not a bank).

And as I’ve experienced while trying to operate such accounts on behalf of sundry relatives, it’s incredibly inefficient. Lines are long. Post offices are understaffed, and staff mostly overworked. Computerisation is minimal – while finally they have a way to print out pass books, it still lags significantly behind even nationalised banks. Things we take for granted at most banks – such as ATM cards – are absent. You need to line up to take your cash out.

The reason I’m describing this is that the “Post Office Savings Bank” has recently received a license to formalise its banking, to become a so-called “payment bank“. The “bank” won’t be able to lend, but can facilitate payments and movement of money. The amount of money in the savings accounts is capped at Rs. 1 Lakh.

The intention behind the license is sound – India Post has a network that goes into all sorts of nooks and corners of the country, and now people in those nooks and corners can have a bank account, and send money to each other! Which is a wonderful thing.

But then, India Post is a really large and slow-moving operations, so it’s unlikely that they’ll adapt much towards modern ways of banking after they become a proper (small) bank. So the customers they’ve “financially included” will need to wait in line to put or get out money, perhaps fill forms in order to be able to transfer funds, and face other inconveniences to be able to “bank”. So is the financial inclusion worth it?

To paraphrase Levine, it all depends on the context. To continue paraphrasing Levine, if India Post Payments Bank (as it will be called) were to waylay a customer who was on his way to opening a PayTM account, it has done a disservice, by replacing an easy-to-use electronic account with one where he will have to face lines, which might dissuade him from banking altogether.

If on the other hand IPPB were to waylay a customer who was on his way to the post office (!) to send a money order to a relative, they are actually doing him a service, providing him a more efficient method for transferring funds.

It all depends upon the context.

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