Coincidence of convergence
RBI report stresses the importance of protecting personal data, writes K Raveendran.
In a strange coincidence, a report of the Reserve Bank of India published on August 24, the day the Supreme Court delivered its historic judgment upholding the right to privacy as fundamental, shares almost identical views on privacy and the use of personal data by financial institutions.
In its Report of Household Finance Committee, the RBI observed that technological solutions to household finance problems often rely on households sharing personal data with financial product providers and this raises obvious issues of privacy. "While this is not the principal focus of our recommendations, we do provide thinking about a sensible framework for data privacy in Indian household finance, and suggest the adoption of a rights-based privacy framework in contrast with the more common consent-based privacy framework," it said.
The same day a 9-member bench of the Supreme Court held that the right to privacy is fundamental. In a unanimous decision, the judges ruled that privacy is an inalienable right and a crucial aspect of individual liberty and dignity.
The issue arose out of a batch of petitions assailing the constitutionality of the Aadhaar project, which involves the collection of biometrics and storage of extensive personal information within a centralised database. Issues have also been raised about the security of the information, both in terms of breaches and access by third parties. The privacy implications of Aadhaar are now to be further examined by the court separately.
The historic verdict, which overturned the position prevailing for over 50 years, recognises privacy as an important facet of individual autonomy, the right to live with dignity, and the right to personal liberty. The court has also acknowledged the importance of informational privacy and right to exercise control over one's personal information.
There is no way that the RBI's approach, known over time as typically orthodox, could have been influenced by the Supreme Court thinking. This means that the apex bank must be credited with some original out of the box approach. The RBI Committee has similarly followed an open-ended approach to some of the other issues as well in an uncharacteristic departure from bureaucratic apathy.
The report documents the high levels of unsecured debt of Indian households, and perhaps more importantly, debt taken from non-institutional sources such as moneylenders. Such debt generates high costs for the Indian households, which lead to households becoming trapped in a long cycle of interest repayments.
Despite the high holdings of real estate, mortgage penetration is low early in life and subsequently rises as the households age. This is at variance with Indian households' counterparts in other countries, where debt has a characteristically hump-shaped pattern over the life cycle. Indian households tend to borrow later in life and are more likely to reach retirement age with positive debt balances, which is a source of risk, given that they are no longer earning income during these years.
The report links this tendency to social arrangements in which households bequest housing wealth to future generations and in turn receive support during retirement. Such traditional approaches to household financial management have likely evolved over time as a rational response to prevailing economic conditions. However, it notes that these traditional structures are increasingly under pressure from shifting demographic patterns, social norms, and changing economic conditions, introducing risks to economic well-being especially as households age.
The Indian household finance landscape is distinctive through the near total absence of pension wealth. Pension accounts and investment-linked life insurance products exist, but they are only used frequently by households located in a small group of states, while in most other states, the contribution of pensions wealth to household wealth is negligible.
The report refers to a strong negative correlation between participation in insurance and the incidence of non-institutional source debt, suggesting that households are dealing with risks through high-cost borrowing as opposed to insuring against such risks. This has been described as a costly approach, as high-interest payments on informal debt impose substantially greater costs relative to insurance.
The report highlights the importance of strengthening the public provision of health and social welfare services to mitigate the problem and attributes it to the tight constraints on household budgets which do not permit them to take on insurance.
Over the coming decade and a half, the elderly cohort is expected to grow by 75 per cent. Only a small fraction of this cohort has saved in private pension plans. Moreover, a large segment of the population of households in all age cohorts has not actively taken steps to insure adequate financial coverage during retirement. The need to finance adequate consumption during retirement is, therefore, a looming issue, and when combined with the low penetration of insurance, households appear particularly vulnerable to adverse shocks later in life.
The report looks at the impediments for the households to approach formal banking channels for their needs. These include the high transactions costs and bureaucratic hurdles which create a high 'nuisance factor' for households hoping to engage in formal financial markets. Indian households strongly associate formal banking institutions with large administrative burdens and complicated paperwork.
There are also trust issues that households face in their participation in formal financial markets. These arise from their negative perceptions of the formal providers, which are exacerbated by occasional poor experiences with unscrupulous providers. These trust issues appear to correlate highly with the income level of the household, and low-income households often report their belief that access to financial products is the prerogative of elite groups in society. This lack of trust in financial institutions helps explain the tendency of households to eschew financial products and to invest in instruments such as gold instead. It also helps to explain the continuing reliance of Indian households on traditional systems of provision of financial services, the report concludes.
Behavioural factors such as a lack of self-confidence in engaging with formal financial systems also come as deterrents. Cognitive issues like bias and the self-perceived financial management skills of the head of the household are also important factors.
That the report acknowledges the role played by non-institutional debt, which unfortunately comes at a high cost and associated imperfections, indicates a subtle change of approach in looking at the issues of household finances.
(The views expressed are strictly personal.)