We have been pointing out on this Blog (See: Where Indians Save) as well as in our training programs see our website www.iistpune.in that Indians are low risk investors (not low returns mind you). Given a chance Indians would prefer to invest and save in such a manner that their capital is protected. This is reflected in the data compiled by RBI on the savings habits of households. Over the years, the tendency to save in low risk has varied between 89 % to 97 % of the total of all financial savings. In the last four decades for which the data is available, the low risk percentage has moved up and down but all the time within the range mentioned above.
How can money held as cash be negative?
The Reserve Bank of India released the figures for financial savings of Indians for the year 2016-17, in September 2017. The next update will be due in Sept 2018. The 2017 figures that were released by RBI show a strange phenomena. The figure of money held in the form of currency (something like cash in hand) is given as -17% (minus 17 %). Many of our trainees in our classrooms were asking how can cash in hand be -17 %. It can be zero, but never negative.
In order to understand this we need to know how the savings data published by RBI is estimated. The savings data published contains the following categories: Currency, Bank Deposits, Life Insurance, Pension and Provident Fund, Shares (including mutual funds) and Non Banking Financial Companies. The data reported under each of these heads is estimated by the RBI using statistical techniques of estimation. While Bank Deposits, Life Insurance, Pension and Provident Fund, Shares, and Non Banking Financial Services can be estimated relatively in a easier manner (though all estimations throw up their own challenges), the category Currency is far more difficult to estimate. There are reliable sources from where data on Bank Deposits, Life Insurance, Pension and Provident Fund, Shares, and Non Banking Financial Services, is collected and published. there is no source for data on Currency or money held in the form of cash by individuals.
People do not report on how much they hoard
For obvious reasons, the amount of money that is hoarded at home is not reported by individuals and households. Therefore there is no official data on Currency. But using statistics it can be estimated. One of the ways of estimation is to calculate the amount of money in circulation and deduct all other savings and household expenditures (as reported in the National Sample Surveys) and domestic capital formation from the money in circulation.
Money Hoarded Has Come Into the Banking System
The figures for Currency for the year 2016-17 shows that the estimation methods for Currency was perhaps not very accurate. So when demonetization took place in that year, people deposited more currency that what the RBI data showed for the previous year, 2015-16. The RBI had underestimated the Currency held by individuals in the previous year. This came to light when in the fear of losing their money, individuals rushed to deposit the money in banks. 17 % more than what the RBI had estimated as cash in hand, was deposited in banks. That is suppose the RBI had estimated that households had Rs. X, people actually had Rs.X plus 17 %, all of which came into the banking system.
Wait! Demonetization also brought SIGNIFICANT money into Life Insurance
The happy news is that people also transferred a significant share of that money to life insurance. In the year 2015-16, 18 % of the savings was in life insurance. But in 2016-17, the year of demonetization, people saved 25 % in life insurance, a jump of 7 %. While the share of banks went up nearly 50 %, from 41 % in 2015-16 to 60 % in 2016-17, the share of life insurance went up by 39 %. In comparison the savings in high risk investments went up from 9 % to 11 %, an increase of 22 %.
One Fourth of all Financial Savings is coming to Life Insurance!!!
Wait a minute! Understand the importance of Indians saving 25 % of their total financial savings in life insurance. One-fourth of all savings is in life insurance! Next time you hesitate on how much premium to ask, remember that you should do a financial planning exercise with your customer and tell him or her that the average for all Indians is 25 % of their savings is in life insurance. This is a good bench mark to put to your customers.
False Propaganda Does Not Influence Investors
Year after year, savings data published by RBI for 40 years shows that Indians are low risk investors. During this period there have been many share market ups and downs. But the faith of individuals in low risk investments has not been shaken. During these forty years, the media and financial advisors, have played a VERY BIG role in trying to influence the customers to shift to high risk products, especially mutual funds. They have used strong words (for example they say in low risk investments you do not beat inflation, which is not true) they routinely insult low risk investors (for example they say that low risk investors are not financially literate, which is also not right). They have used every trick up their sleeve to sell high risk products – used false information, exaggerated return projections, used unscientific methods to explain the benefits of mutual funds, and in many other ways the media and financial advisors have mis-lead the investors. But individuals are smart, they know where to put their hard earned money.
Keep selling life insurance – the evergreen product for all times.