The Indian Household Finance Landscape Tarun Ramadorai Imperial College, CEPR, NCAER Imperial College Business School Imperial means Intelligent Business 1
Household Finance � Important area of policy in India: financial inclusion . � How can we bring all of India into mainstream financial markets? Imperial College Business School Imperial means Intelligent Business 2
Household Finance � Important area of policy in India: financial inclusion . � How can we bring all of India into mainstream financial markets? � Growing body of academic work in household finance . � Unit of analysis: Household balance sheets. Imperial College Business School Imperial means Intelligent Business 3
Household Finance � Important area of policy in India: financial inclusion . � How can we bring all of India into mainstream financial markets? � Growing body of academic work in household finance . � Unit of analysis: Household balance sheets. � Assets: Houses, gold, retirement savings, insurance. � Liabilities: Collateralized and unsecured loans. Imperial College Business School Imperial means Intelligent Business 4
Household Finance � Important area of policy in India: financial inclusion . � How can we bring all of India into mainstream financial markets? � Growing body of academic work in household finance . � Unit of analysis: Household balance sheets. � Assets: Houses, gold, retirement savings, insurance. � Liabilities: Collateralized and unsecured loans. � Complex interconnections, lifecycle and wealth dynamics. Requires integrated analysis. Imperial College Business School Imperial means Intelligent Business 5
Household Finance � Important area of policy in India: financial inclusion . � How can we bring all of India into mainstream financial markets? � Growing body of academic work in household finance . � Unit of analysis: Household balance sheets. � Assets: Houses, gold, retirement savings, insurance. � Liabilities: Collateralized and unsecured loans. � Complex interconnections, lifecycle and wealth dynamics. Requires integrated analysis. � A new subfield: International Comparative Household Finance. � Badarinza, Campbell, and Ramadorai (2016, Annual Review of Economics ). � http://www.household-finance.net. Imperial College Business School Imperial means Intelligent Business 6
Indian Household Financial Decisions � Four broad features visible in the All-India Debt and Investment Survey, 2012: Imperial College Business School Imperial means Intelligent Business 7
Indian Household Financial Decisions � Four broad features visible in the All-India Debt and Investment Survey, 2012: � High allocation to non-financial assets (gold and real estate). � High levels of non-institutional-source borrowing. � Near complete lack of pensions. � Low levels of insurance penetration (life and non-life). Imperial College Business School Imperial means Intelligent Business 8
Indian Household Financial Decisions � Four broad features visible in the All-India Debt and Investment Survey, 2012: � High allocation to non-financial assets (gold and real estate). � High levels of non-institutional-source borrowing. � Near complete lack of pensions. � Low levels of insurance penetration (life and non-life). � These facts are: � unusual in the international context, and � difficult to rationalize using a canonical life-cycle model. Imperial College Business School Imperial means Intelligent Business 9
Allocation of household wealth Equal-weighted average 100 80 Percent 60 40 20 0 India China USA UK Australia Germany Real estate Durable goods Gold Financial assets Retirement accounts � The average Indian household holds 77% of total assets in real estate, 11% in gold, 5% in financial assets, and hardly any retirement assets/pensions. Imperial College Business School Imperial means Intelligent Business 10
Allocation of household liabilities Equal-weighted average 100 80 Percent 60 40 20 0 India China USA UK Australia Germany Mortgage debt Gold loans Other secured debt Unsecured debt � Mortgages are households’ largest liability in China, the US, the UK, and Australia, but account for a small part of total liabilities (23%) of Indian households. Most debt is unsecured (55%). Imperial College Business School Imperial means Intelligent Business 11
Participation over the life-cycle Asset side of the household balance sheet Fin. assets and pensions Durable goods and gold Real estate 100% 100% 100% Fraction of sample Fraction of sample Fraction of sample 80% 80% 80% 60% 60% 60% 40% 40% 40% 20% 20% 20% 0% 0% 0% < 35 35-44 45-54 55-65 > 65 < 35 35-44 45-54 55-65 > 65 < 35 35-44 45-54 55-65 > 65 Age (years) Age (years) Age (years) India UK India UK India UK China Australia China Australia China Australia USA Germany USA Germany USA Germany Source: Badarinza,Balasubramaniam and Ramadorai (2016) � India and China: high rate of home-ownership and low participation rates in financial assets and pension accounts. Imperial College Business School Imperial means Intelligent Business 12
Participation over the life-cycle Liabilities side of the household balance sheet Unsecured debt Other secured debt Mortgage loans 100% 100% 100% Fraction of sample Fraction of sample Fraction of sample 80% 80% 80% 60% 60% 60% 40% 40% 40% 20% 20% 20% 0% 0% 0% < 35 35-44 45-54 55-65 > 65 < 35 35-44 45-54 55-65 > 65 < 35 35-44 45-54 55-65 > 65 Age (years) Age (years) Age (years) India UK India UK India UK China Australia China Australia China Australia USA Germany USA Germany USA Germany Source: Badarinza,Balasubramaniam and Ramadorai (2016) � Significantly lower participation of households in all debt markets in both India and China. � Reduction of debt as people approach retirement age less evident, or even reversed. Imperial College Business School Imperial means Intelligent Business 13
Allocation over the life-cycle Asset side of the household balance sheet Fin. assets and pensions Durable goods and gold Real estate 100% 100% 100% 80% 80% 80% Percent Percent Percent 60% 60% 60% 40% 40% 40% 20% 20% 20% 0% 0% 0% < 35 35-44 45-54 55-65 > 65 < 35 35-44 45-54 55-65 > 65 < 35 35-44 45-54 55-65 > 65 Age (years) Age (years) Age (years) India UK India UK India UK China Australia China Australia China Australia USA Germany USA Germany USA Germany Source: Badarinza,Balasubramaniam and Ramadorai (2016) � Over-exposure to non-financial assets, and pensions are a negligible fraction of assets. Imperial College Business School Imperial means Intelligent Business 14
Allocation over the life-cycle Liabilities side of the household balance sheet Unsecured debt Other secured debt Mortgage loans 100% 100% 100% 80% 80% 80% Percent Percent Percent 60% 60% 60% 40% 40% 40% 20% 20% 20% 0% 0% 0% < 35 35-44 45-54 55-65 > 65 < 35 35-44 45-54 55-65 > 65 < 35 35-44 45-54 55-65 > 65 Age (years) Age (years) Age (years) India UK India UK India UK China Australia China Australia China Australia USA Germany USA Germany USA Germany Source: Badarinza,Balasubramaniam and Ramadorai (2016) � Intense reliance on unsecured debt, especially at young ages. � In both India and China, life-cycle profiles are inconsistent with advanced economies, especially for mortgages. Imperial College Business School Imperial means Intelligent Business 15
Cross-country comparison: Blinder-Oaxaca Decomposition Real estate Financial assets Pensions 80 20 15 Predicted value Predicted value Predicted value Realized value Realized value Realized value 60 15 10 Percent Percent Percent 40 10 5 20 5 0 0 0 Other India Other India Other India countries countries countries Mortgages Other secured debt Unsecured debt 60 30 60 Predicted value Predicted value Predicted value 50 25 50 Realized value Realized value Realized value 40 20 40 Percent Percent Percent 30 15 30 20 10 20 10 5 10 0 0 0 Other India Other India Other India countries countries countries � Cross-country differences aren’t well-explained by differences in household demographic characteristics. Imperial College Business School Imperial means Intelligent Business 16
The complexity of Indian household financial demands � Cognitive capabilities, behavioural considerations. � Idiosyncrasies arising from occupation, geographic location and traditional risk-sharing systems. � These in turn lead to unique economic conditions and financial goals. � Solutions? Imperial College Business School Imperial means Intelligent Business 17
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