India is a country of big savers but meager investors. While more than 80% of the population of 1.1 billion save regularly, one-third prefer to keep money at home and over 50% opt for local bank deposits. As a result, two-thirds of savings are kept in safe liquid assets, while less than 25% is put into stock markets, insurance policies and other financial instruments.
These findings, reported recently in a study by an Indian life insurance joint venture run by New York Life and Max India, illustrate the country’s vast potential for structured savings’ plans and life insurance when risk-averse attitudes change.
Unlike most countries, India has no state-supported social security to provide safety nets for the aged, sick and needy – so, says Max New York Life, there is “potential for life insurance as a risk-mitigating tool”.
But why do Indian people seem happier with their money under their mattresses than in insurance and other financial instruments? A foreign banker will probably put it down to India’s position as an emerging economy with a predominantly poor population that is not yet sophisticated enough to understand the benefits of other forms of savings. But that is only part of the story.
Most families want to have their savings ready for emergency and other immediate use and are not saving for old age. More than 80% of 63,000 respondents covered in the survey, which was run by Delhi-based NCAER, a leading economic policy center, said they saved for emergencies, children’s (usually extravagant) marriages, and other expensive social events, plus children’s education.
There are also other reasons, not mentioned in the report. Women often do not trust the men either to save or invest wisely, so they keep the family’s money at home. There is also a huge underground economy, so many people might be shielding their savings from financial reporting and controls.
The result is a precarious situation in which few families can provide sufficiently for the future. The study found that 96% of households cannot survive beyond a year on their current levels of savings, if they suddenly lose their chief earner. Yet a majority “expressed confidence in their financial well-being” says the report, because they expect to find new jobs, or obtain loans from friends and relatives.
Families have traditionally assumed that they will be looked after by younger generations as they get older, but that is being upset by two social changes. First, life expectancy is now over 65 years (with many living far longer). That is more than 15 years higher than in 1970 and more than double the level at India’s independence in 1947. The young do not have sufficient funds to look after both parents and grandparents.
Secondly, the tradition of extended families, with several generations living under the same roof, is breaking down, especially in urban areas where many younger family members move out after marrying – or even before, which was very rare until the last few years.
There is a sharp divide between the rural areas, where 70% of the population live, and those in urban areas. Cash savings predominate away from the big cities, while knowledge about financial instruments such as life insurance policies is more common in urban areas.
But overall, the message is the same. There is huge business for life insurance and other savings instruments as attitudinal changes accelerate. The report says that the average household in India has an annual income of $1,626 and expenditure of $1,222, leaving $404 to save and invest – with urban incomes being 85% higher than those in rural areas (though there are wide regional disparities). Mutual funds’ assets under management have grown by nearly 800% in the past four years, though the growth slipped last year as India’s 8-9% economic growth has slowed.
Yet only 24% of households have life insurance coverage, and the report estimates that there are immediately 21 million households “that could be a lucrative target for life insurance marketers.” That is attracting foreign companies such as AIG (AIG), Metlife (MET), and Prudential Financial (PRU) as well as New York Life and others that include Allianz (AZ), ING (ING) and Standard Life from other countries, with more queuing up to enter.