Thursday, April 30, 2009

"Dedicated" accounts to promote savings among poor

Social scientists have traditionally held the behaviour of poor people as calculated adaptations to prevailing circumstances or emanating from a unique "culture of poverty" with its psychological and attitudinal short-fallings. In contrast, behavioral economists feel that their behaviours are "neither perfectly calculating nor especially deviant". They feel that instead of major interventions, minor situational details, referred to as "channel factors", can be much more effective in addressing the problem.

In order to increase opening of bank accounts among the poor, policy makers have tried minimizing the costs of access to such accounts by opening more bank branches in villages and disadvantaged neighbourhoods, providing for no-frills accounts, streamlined account opening procedures. This has gone hand in hand with aggressive financial education and awareness campaign to overcome cultural stereotypes and misdirected attitudes.

It has been found by behavioural economists like Richard Thaler, that "contrary to standard fungibility assumptions, people compartmentalize wealth and spending into distinct budget categories, such as savings, rent, and entertainment, and into separate mental accounts, such as current income, assets, and future income. People typically show different propensities to consume from their current income (where MPC is high), current assets (where it is intermediate), and future income (where it is low)".

Accordingly, Marianne Bertrand, Sendhil Mullainathan, and Eldar Shafir recommend that rather than abstract accounts, banks or community groups could try to promote the formation of 'dedicated accounts' - a "fridge account", an "education account", or a "car account". Such labeling could be enticing and serve as a reminder of what is being saved for. In other words, they serve as a facilitative "nudge" to coax poor people to save for a specific purpose.

More relevant dedicated accounts for Self Help Groups (SHGs) in India would include those for education, health care, etc. These can be incentivized by governments making direct matching contributions, as part of a conditional cash transfer (CCT) scheme, to these specific accounts of the SHG members. In fact, a pension or health insurance scheme can be run for these SHG women by having such dedicated accounts to which the government makes pre-defined contributions.

Microfinance institutions that offer such products can tie up with retailers and suppliers offering these products and services to share the costs and minimize the prices, so as to offer the best deal. The monthly savings into the "dedicated" account will be equivalent to the EMI payments charged by the consumer goods retailer. Governments can even offer interest subvention subsidies for specific products (housing) and services (say education loans and insurance) if it so desires. This offers exciting opportunities for businesses and banks to tap the massive market at the "bottom of the pyramid", even as it opens up a channel for financial inclusion and targetted provision of welfare assistance to the poor.

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