Indian households could boost their income if they reduced holdings of gold and real estate, and increased savings in financial instruments.

This was among the findings of a new report by Professor Tarun Ramadorai, Professor of Financial Economics at Imperial College Business School for The Reserve Bank of India (RBI).

The report, by the inter-regulatory Committee on Household Finance, constituted by the RBI and chaired by Professor Ramadorai, reveals the challenges that Indians face in being able to participate efficiently in the formal financial system, and contains policy recommendations to address the issues in the current Indian financial framework.

Report findings

The report by the Tarun Ramadorai Committee reveals that if Indian households were to move away from investing in physical assets such as gold and real estate, and efficiently utilize financial services such as insurance, pensions, and short-term loans, they could boost their annual incomes and gain confidence to make wiser financial decisions to improve their long-term security.

For example, by avoiding the interest burden of emergency credit associated with medical costs, the report finds that the average Indian household could boost its income between 3 and 8 per cent.

The report includes recommendations to help households make better financial decisions, including increasing incentives for first time home buyers with mortgage tax deductions, removing tax exemptions on income from property, discouraging real estate as a pure investment and encouraging people to register all gold transactions electronically. The report also advised the widespread use of electronic know-your-customer (eKYC) standards, whilst setting up a sensible framework for data privacy, and the rationalizing of distribution incentives for insurance policies.

Professor Ramadorai said: “A large fraction of Indian household wealth is held in the form of physical assets rather than financial investments, and Indian households currently underinvest in pensions and insurance. These issues mean that household budgets will come under increasing pressure on account of demographic factors among other things. I hope this report has identified a number of ways in which Indian financial markets can be made to work better for households.”

The report shows that Indian households are often reluctant to use banks, strongly associating formal institutions with administrative burdens and complicated paperwork.

Negative perceptions of financial providers were often influenced by households’ experiences of dealing with unscrupulous operators. Many individuals were found to be burdened by high levels of unsecured debt, including debt taken from non-institutional sources such as moneylenders.

Lack of trust in financial institutions

The lack of trust in financial institutions could explain the tendency of households to eschew financial products and to invest in assets such as gold instead. Cultural factors were also thought to influence this tendency as well as the lack of interest in products such as life insurance.

The efficient utilization of financial technology held promise to provide solutions, according to the report. The report recommends that regulators and policymakers seek to put in place a framework that successfully harnesses the benefits of technology whilst containing the associated risks, so that more people can take part in the financial system.

The report advocates the creation of a “Regulatory Sandbox” to help improve financial innovation for households' benefit.