Wednesday, March 17, 2010

Multi-tier accounts for the poor

I have blogged and written about the possibility of drawing on financial innovations to help the poor manage their incomes, savings and consumption needs more optimally. One of the most fundamental innovations could involve the use of multi-tier accounts that leverage inflows from wages and other household income with the various government welfare schemes to achieve the aforementioned objectives. Here is how a super-set of such multi-tiered account will look like (the tiers are shown in the boxes)



(please click on the figure to enlarge)

Every poor person will have a single UID-linked bank account which would have multiple functionally (or use-directed) determined tiers. All his transfers from government - wages, pensions, farm loans, Minimum Support Price (MSP) payments, housing subsidies, self-employment loans/subsidies etc - would by default flow into the respective heads within the account. He can also choose to transfer his private wages and other income into the same account, as possible default (or pre-defined) escrows into specific heads.

The member would contribute a specific sum every month to an educational annuity or insurance product which could be matched with a government share. The periodic (monthly/quarterly) contribution can be transferred by default from her savings bank account. The contributions could even be increased with some periodicity, in small increments, as a default option.

The tiers within the account could even be leveraged to access capital from the private market to purchase various consumer durables by EMI-based payments or even raise small business loans and house construction loans. Some of the subsidies and government loans (say for housing or self-employment or health insurance) can even be topped-up with regular financing from banks by dove-tailing repayments from a specific savings tier (within the individual's account).

Here are just two examples. First, a self-employment subsidy of Rs 10,000 and a Rs 25000 margin money loan at a concessional 5% provided under say, the National Scheduled Tribes Development Corporation (NSTFDC), can be leveraged by a credit-worthy individual (who has been using the multi-tier savings account and has an acceptably regular savings patterns) with a private bank to raise another Rs 25000 loan to start a small pickle making unit. A "pickle plant" tier with first charge (default transfer of wage/income inflows) of any income of the borrower can funnel repyments. The details of such accounts are important and should be carefully worked out.

Second, consider a government run pension/health insurance scheme where the government contributes a sum of Rs 20 per month and the beneficiary puts in a matching Rs 20. Now, the beneficiary could choose to increase his contribution to Rs 50 every month and avail of a higher pension or expanded health care benefits. The scheme, run by say LIC, could be very easily administered through a pension/health insurance tier within the beneficiary's account.

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