Managing money well begins with hanging on to what you have. This means avoiding unnecessary expenditure and then finding a safe place to store whatever money is left over. Making that choice—the choice to save rather than to consume—is the foundation of money management.”
More than four decades ago, the idea of microcredit was born out of a radical concept – poor people, when lent small amounts of money, pay back in a timely manner. In the meantime, that money can be put to use in ways that help boost income, such as rearing goats or weaving carpets. These occupations can help a family improve its standard of living.
This led to soul-searching by the industry and the rediscovery of a new radical idea, specifically the realisation that what the people really need – more urgently than business loans -is a safe place to save their money. This is what the development expert, Robert Vogel, once famously called the “forgotten half of rural finance”. It is now universally acknowledged that the most fundamental instrument of personal finance is the piggy-bank.
Access to the right financial tools at critical moments can determine whether a poor household is able to utilise an opportunity to move out of poverty or absorb a shock without being pushed deeper into debt. The poor don’t need simple banking tools; they need tools that can help them navigate their complex financial condition that is marked by inconsistent income.
Given the variability of their income, the poor are vulnerable to sickness or death in the family or weather-shocks which can be a drain on family finances and may even prevent families from hanging on to accumulated assets, including productive ones. Healthcare is perhaps the number one route to bankruptcy. These shocks can quickly sink families into spells of extreme duress. As a result, the poor lead precarious, anxiety-ridden lives with risks looming much larger than opportunities.
The benefits of microcredit for handling such contingencies are often extolled, but debt remains debt; it always increases the risk and borrowers are sometimes overstretched. A loan is finally debt and has various implications. When delays in repayment or defaults occur — and they can happen routinely for a variety of reasons — life can become miserable for the entire family. Savings can help people manage such risks conveniently, with a less monetary burden.
The key to effective financial inclusion is a safe and confidential savings account for every woman. Increased savings and assets strengthen resilience for tougher times. Savings have been the mainstay of the impoverished and villagers cope with a vast range of hazards.
Credit can be both an opportunity and a risk for low-income families. It is necessary to open the doors, but this can also be a barrier. You can dig yourself into a fair amount of debt, and that prevents you from moving up financially. It may become a deepening hole. Loans can be malignant. Some people just cannot handle debts. The institutions that promote credit, to the exclusion of savings, place poor clients in bondage.
To finance a child’s primary school education, clients must take on debt because they are not in a position to save. To deal with a health emergency or family food shortage, to finance weddings, funerals or social ceremonies, they must keep borrowing again and again at prohibitive rates of interest that keep them on the debt treadmill since there is no other option.
One example of the dangers of debt is that it has compound interest working against you instead of for you as it does with investments. This may soon lead to acute indebtedness and make life stressful for the entire family. Debts are a huge source of anxiety and dread.
Savings increase their capability to manage cash-flow, address the problems of uneven income, cushion the blow and become more resilient when emergencies pop up, reduce the impact of the lean season, in the face of shocks, build assets or invest in a family business and, most importantly, become empowered to improve one’s status within the households and communities.
A safe and smart savings account can transform the lives of villagers. Savings also serve as a form of self-insurance and enhance the sense of well-being. When you know you have enough money to deal with all of your needs and some of your wants, in addition to those pesky emergencies, you can sleep very well at night.
Despite conventional wisdom, poor people actually do save, even if the amount is meagre. They use a variety of informal mechanisms ~ hiding cash at home, lending money to relatives, participating in rotational savings groups with their neighbours, engaging deposit collectors, buying livestock or other commodities such as jewellery or construction materials. None of these measures can be reliable or safe.
One major problem that the poor often face in accumulating savings is lack of easy access to savings accounts where they can deposit money. The money is kept in a tin at home and is easily spent when a neighbour, who is in difficulty, approaches the person next door for help. Financial institutions ought to realise that they owe poor people a safe, flexible and secure avenue to save. With credit alone, they cannot free them from crushing burden of poverty.
Modern microfinance has often had a more important impact than simple credit, according to microfinance researcher Dean Karlan, who is also the founder of Innovations for Poverty Action. Financial institutions need to create products that address real needs around financial capability, cost and access. We must think beyond the standard microcredit model.
As the former RBI Governor, Raghuram Rajan had emphasised, credit should follow and not lead.
“Savings habit, once inculcated, not only allows the customer to handle the burden of repayment better, it may also lead to better credit allocation.
The writer is the author of Village Diary of a Heretic Banker