Financial Planning: 10 solutions an RBI Committee recommends for every Indian household

The Reserve Bank of India (RBI) in a report dated on August 24, pointed out that the events that had the largest  financial impact on a Indian family are the loss of crops or livestock due to bad weather, medical emergencies associated with hospitalisation, and damage to properties, farm equipment or other business capital, due to a natural disaster. 

Cumulatively, these events account for the major financial losses in more than 60% of cases.

Interestingly, only a quarter of households are able to deal with emergency expenses by drawing upon accumulated wealth. Instead, half of the population counts on help from family, friends and moneylenders.

What is the solution?

The solution is to be ready with "essential financial kit". 

Explaining what is the kit, RBI in the report said, "We describe a minimum set of financial products which Indian households should have in order to effectively harness the benefits of formal financial markets. While these products are not an antidote to the problems with Indian households’ financial allocations, they serve as a good working default from which households can subsequently adjust as they grow in experience and financial sophistication."

Giving 10 solutions to Indian households to create emergency kit, RBI has also provided recommendations to the government, this what the apex bank suggests: 

1. Pradhan Mantri Jan Dhan Yojana: To start with, do not open any frills bank account. However, you can go for Pradhan Mantri Jan Dhan Yojana programme as it offers many attractive features including the RuPay debit card, and associated accident insurance. 

RBI said, "We also support the priority to improve incentives for women to hold such accounts to further the goal of their financial inclusion, and moves to directly transfer government benefits into these accounts."

2. Target-date funds: Target date funds are the funds which are combination of bond and stock index funds which automatically shift the asset allocation of equities, debt, and cash over the lifetime of the fund as selected by investors.

These funds will help improve retirement outcomes, and provide Indian households with the experience of sensible stock market participation, which is useful for knowledge creation purposes.

3. Pension schemes: According to RBI, both Atal Pension Yojana (APY) and National Pension System (NPS) account should be there in your emergency kit. 

RBI, said, "Though we prefer the defined contribution NPS scheme, on balance. We recommend radical simplification in the process to enrol in such pensions schemes, and we also recommend that the household be able to access their pension account using a common interface with the other products on this list."

4. Life Insurance:  A simple term life insurance product that provides a lump-sum in the event of death of a policy holder with no benefit payable should the policy holder be alive at the end of the term. Currently the PMJDY provides a basic form of this insurance at the point of account seeding, with a benefit of Rs 30,000. 

However, the apex bank proposed that the claims procedure should be simplified – in many major insurance companies, this is still a “paper” process, and recommended digitisation and substantial simplification of this process.

5. Health Insurance: For health insurance, RBI believes to opt for RuPay cards with PMJDY as it has personal accident insurance attached, with a claim limit of ₹1,00,000-₹2,00,000 depending on the type of card.

RBI said, "The health insurance should be available in terms of cashless treatment in a set of qualifying hospitals up to a pre-prescribed limit in the event of illness, alongside a reasonable level of cover. The scheme should be easy to subscribe, renew, and claim."

6. Catastrophe Risk Insurance: RBI recommended low-cost catastrophe insurance because being uninsured in catastrophe-prone zones imposes negative externalities as the cost of public bail-outs increase in such circumstances. 

"These policies should have a hassle- free claim procedure including auto triggered payouts in the event of catastrophes occurring, such as the cloud burst in Uttarakhand, or floods in Chennai," RBI said. 

7. Unsecured loans: RBI recommended that unsecured loans be provided to qualifying households, in amounts under Rs 30,000. Presently, PMJDY provides access to an overdraft facility of Rs 5,000, but the median size of unsecured loans from non-institutional sources in the AIDIS data is Rs 38,800, meaning that households have a need to borrow substantially more than the overdraft limit. 

RBI said. "We propose that repayment of the amount through EMIs for a maximum of two years is allowed, and that a condition of borrowing be that households take on insurance at the time of taking on the loan."

Moreover, RBI also pitched for rates of interest to be below annualised rates of interest charged by non-formal sources such as moneylenders, and regulators should look carefully at price-caps on high cost loans currently available in the market.

8. Small savings: Institutions such as moneybox.com are now using households’ digital footprints to enable “invisible” savings by linking payment applications with savings applications. 

Such products allow the household to “round up” small transactions and engage in small savings into a set of equity-linked instruments, RBI said.

Adding to it, micro-savings products with reminders will improve the savings. RBI said that the reminders should highlight the customers about their particular financial goal like future expenditure opportunities, or school fees reminder or EMI payments. 

9. Annuitising land and homes: A large fraction of household assets is invested in (illiquid) real estate. RBI believes that providing mechanisms for households nearing retirement to convert some of their physical asset holdings into financial assets or annuitised payments can, potentially lead to large welfare improvements.

"We therefore propose a detailed study that considers the institutional features needed to generate greater take-up and delivery of reverse mortgages. We believe that this will be an important way to improve liquidity in Indian household balance sheets," RBI said.

10. Tax-exempt savings vehicle: Presently, Indian households do take a note of Public Provident Fund (PPF), EPF, Equity-linked Saving Schemes (ELSS) to save tax. 

But, RBI thinks that there is little flexibility in the choice of financial products in which households can obtain tax benefits, and these benefits are restricted to sets of qualified products offered by financial firms.

"We therefore recommend the creation of a tax-exempt savings vehicle that is agnostic to the choice of financial products in which households choose to invest, with an annual limit of contributions beyond which taxes shall apply. Examples of such vehicles include the Individual Savings Account (ISA) in the United Kingdom, and the 401K plan in the United States," RBI added. 

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