PENSION FOR THE URBAN POOR

One Triumph At A Time PENSION FOR THE URBAN POOR Nilanjan Dey

Authorspeak This mini-book focuses on financial education, financial literacy and retirement planning. Nilanjan Dey This mini-book, a result of experiments conducted in 2022-23, focuses on ‘financial education, financial literacy and retirement planning’ – subjects that are close to my heart. Its main thrust, and the conclusions drawn from it, derives strength from two micro investment projects conducted simultaneously in the NGO/non-profit sector. Both aimed at empowering marginalised sections through education and skill-development. The mini-book showcases a programme that i have taken up independently and voluntarily, keeping in mind the need for financial education, which is absent in the targeted segment. All sources, including those from which data and information have been collected, have been fully acknowledged and identified. A complete list of the same has been added at the end. The narrative, which is based on experience gathered during the conduct of the micro investment programme, is original in all respects. The programme, limitations in terms of size and scale notwithstanding, is expected to be viewed as a pilot initiative – which may lead to a larger and a more prolonged, sustainable exercise at a later stage. The small but comprehensive micro investment projects contained in it are aimed at first-time participants. The latter, all of whom individuals with bank accounts compliant with kyc regulations, have neither adequate savings nor meaningful investment strategies. Moreover, the absence of fit and 2

proper guidance offered in a professional manner exposes them to vulnerabilities typically evident in low-income groups, especially those engaged in the informal sector. The programme is presented as an end-to-end solution, including planning and execution for each participant keeping in mind the individual’s risk- tolerance. Each case involves interactive counselling, first in groups and, later, separately. The aim is to familiarise each individual with three major fundamentals: • Early start & regular investment • Capital growth & current income • Retirement & old-age security The initiative, I must add, is a genuine and honest effort to aid the cause of inclusiveness. It is completely self-funded; there has been no involvement of sponsors or patrons of any nature. I hope it will result in greater awareness of the key issues that are involved. Every effort has been made to provide authentic and reliable data, collected from attributable and publicly-available sources (listed under references). All inferences and conclusions drawn from the same, however, are entirely mine. Nilanjan Dey Wishlist Capital Author: No Room For Less - The Great Indian Retirement Crisis (Notion Press, August 2022) Contact Details: Email : [email protected] Phone : 9830267965 Search keywords: personal finance, saving, investment, retirement, pension, retirement planning, investment planning, asset allocation, mutual funds, pension funds. 3

ONE TRIUMPH AT A TIME PENSION FOR THE URBAN POOR Micro Investment Programme for Beginners Part One: PREAMBLE The only way of discovering the limits of convenience is to venture a little past them into the inconvenient That quote, attributed to acclaimed science-fiction writer Arthur C Clarke, sums up the spirit with which a programme like this has been conceived – namely, introducing financial literacy concepts to first-timers, and hand-holding their efforts to save and invest in an organised manner, keeping in mind retirement planning objectives. It has covered willing participants selected from among individuals associated with two NGOs: • Joyjeet Das Memorial • Udayan Care – Kolkata Unit While the two organisations differ in terms of scale and characteristics, their underlying principles are very nearly similar. Both aim at imparting education to the weaker sections of contemporary Indian society so as to empower individuals, a number of whom are drawn from the broad group that may be loosely defined as the “urban poor”. Joyjeet Das Memorial (JDM), which runs a school for young children (it caters largely to parents in the locality), has a relatively smaller set-up. The Kolkata unit of Udayan Care (UC), which is a considerably bigger enterprise in comparison, provides various skill-development programmes across disciplines. The two organisations have, each in its unique way, contributed to the cause of furthering education over the years. The Micro Investment Programme, which each participant has onboarded in a purely voluntary manner, has three critical components. All participants are first-timers. These conditions are common to both JDM and UC. 1. Explanation of key financial literacy concepts such as risk and returns 4

2.Initiation and execution of the investments for regular income and appreciation of capital 3.Follow-up procedures, including servicing, till withdrawal/redemption or earlier The process, from the very beginning, commences with an introductory session for the target group. The session is essentially a familiarisation exercise – participants are introduced to vital concepts, especially those related to everyday economic phenomena like inflation. The latter – now at over 6%, considering the Consumer Price Index (CPI) – has caused considerable distress for the general populace. The trend is to be seen in the backdrop of a definite global inclination towards inflation. There are, at the moment, great worries stemming from commodity price increases, a tendency attributed partially to geo-political tensions, especially the Russian invasion of Ukraine, February 2022 onwards. Reference #1: Reserve Bank of India https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=54541 Part Two: PREPARATION Given recent inflationary trends, the central bank in India has made specific attempts to measure consumer confidence and general householders’ expectations on price rise. At the same time, it has sought to assess the performance of the corporate sector, especially in view of the contemporary credit-offtake scenario. Broad segments of the economy – manufacturing, infrastructure and services – have been analysed as well. The banking regulator has, in its recent statements on the policy rate, increased the repo rate under the liquidity adjustment facility. For the record, the repo now stands at 6.50% (April 2023). The clear contraction of RBI’s accommodative stance, which served as the hallmark of its monetary policy till recently, is in keeping with current inflation. The banking authorities, it may be pointed out, have tried to ensure that retail inflation stays within the target range. For the record, RBI aims at a medium-term target of 4% within a band of +/- 2% without sacrificing growth. Insofar as inflation is concerned, the average Indian householder is well 5

aware of contemporary tendencies, particularly in relation to food and fuel. The primary drivers of monthly family budgets, prices of which have escalated markedly in recent years, are also the reasons why the ordinary citizen must mount serious efforts to allocate more on these two fronts. Ergo, budgets are being stretched, which in turn compounds financial distress that is already prevalent among a formidable section of the populace. The average householder in India, it may be pointed out, is overwhelmingly invested in fixed-income bearing securities. The domain of financial products is historically tilted towards assured returns. According to the banking regulator, historical savings patterns have clearly displayed a preference for deposits and similar guaranteed-performance assets. Moderate yet predictable returns are their most critical features. Assured-returns holdings, despite being benign assets that offer relative stability and liquidity, have tremendous limitations in the contemporary, fast-paced world. Average returns hardly outsmart the rising pace of inflation. This is one of the most brutal modern-day facts that fixed- income seekers must contend with in their everyday lives. Inflation and income tax remain their twin adversaries. Returns, therefore, must move beyond their restricted realm. The need for variable, market-linked returns is thus the need of the hour. It is abundantly clear that savings and investments need a firm push. Enormous efforts, by both the government and the private sector, must be organised to motivate the marginalised sections on this front. The idea is to encourage them to join the savings/investments mainstream, keeping in mind their investment objectives (not to mention retirement goals). To emphasise a simple point, Indian households must actively seek to increase their allocations to dynamic, well-managed asset classes such as equity. Equity, which can potentially deliver superior returns in the long term, is fraught with tremendous risks. Volatility and uncertainty caused by market forces beyond the common man’s control determine returns on this front. For small investors, nevertheless, equity can be accessed with the help of mutual funds. Indeed, mutual funds are already the preferred route for many. A well-regulated environment, professional fund management, ease of operations together render these instruments a definite edge. Small 6

investors often allocate to funds with the help of SIPs (systematic investment plan). While all asset management companies actively encourage ordinary investors to take up such systematic plans, a section of India’s fund houses have lately opened their doors to welcome micro allocations as well. All in all, mutual funds are rapidly entering the nation’s collective consciousness; a far greater number of Indians now want them for investment planning. Professional intermediaries have seized the opportunity to conduct outreach programmes. This has already accelerated the pace of growth in financial literacy. The experience can now be extended to impart retirement and pension- related education as well. Asset management companies, both in the public domain (such as those promoted by leading financial institutions like LIC and SBI) as well as the privately-managed ones, can complement the functions of pension regulator PFRDA in this regard. The use of funds, added to NPS (New Pension System) which can serve as the core, will make a difference to retirement planning for countless ordinary people. It may also be pointed out that financial inclusion (and efforts to expand its ambit) has assumed greater importance today than ever before. While a key function of the country’s legislative framework now relates to inclusion, efforts put in by the government need to be supplemented by the private sector, including standalone private enterprises, non- government organisations, trade bodies, socially-motivated think tanks, charitable institutions and even committed individuals working alone or in close-knit groups. Part Three: PRIMER The core values of the Micro Investment Programme are clearly in sync with the National Strategy for Financial Inclusion, 2019-2024, for which an approach paper was outlined by RBI in January 2020. The idea was to “accelerate financial inclusion to promote economic well being, prosperity and sustainable development”. The approach paper, which marked the vision and aim of inclusive policies, is seen as a cohesion of various plans and programmes. Some of these are aimed at allowing greater access to formal financial services. As for first-timers (who are specifically the target) easy and convenient access is critical. 7

Reference #2: The National Strategy for Financial Inclusion 2019-2024 https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=1154 The Micro Investment Programme keeps within its target audience various representatives of the urban poor. The two organisations that have played a central role – to repeat their names, JDM and UC – have been tagged as its first flag-bearers. The plan now is to carry the message of micro investment to larger audiences, well beyond the limited ambit of these organisations. The strategy may be seen through the prism of three separate but linked elements: • Promoting financial literacy and awareness, especially keeping in view retirement needs • Facilitating access to formal investment services, including end-to-end transactions • Ensuring affordability, ease of operation, convenience – that is, keeping transaction costs well under leash, keeping in view all statutory conditions In this context, financial inclusion for select urban strata, particularly in relation to investment services, is the focus here. The Indian experience, which has by and large assigned primacy to micro credit, must be extended to micro allocations to cover modern market-linked investment and retirement products. Mutual funds and pension funds (under NPS) may be seen as ideal vehicles for investments. To reiterate a point made earlier, such funds are already identified as suitable for retail investors. Both MFs and PFs allow and indeed welcome small-ticket allocations. The selected urban audiences, despite all limitations, are not without modern technology. This is reflected in the rapid growth in the use of smartphones. In fact, the trend is expected to strengthen with the passage of time. Already, younger sections of the market are almost fully familiar with mobile telephony. This is a boon for investment products such as mutual funds and pension funds. The involvement of professional intermediaries, who serve as a vital bridge between product managers and their clients, will also intensify in the context of technology. This is already evident from higher inflows into funds, thanks to digitally-enabled intermediation. A considerably larger section of the 8

populace is now familiar with the idea. As this author has pointed out earlier, the surging SIP numbers make it abundantly clear. Much of this is on account of ordinary retail investors. Indeed, the retail segment contributes overwhelmingly to the aggregate assets under management. Some statistical pointers, released by the Association of Mutual Funds in India, will provide a clear idea. All data relate to September 2022 and thereafter. • Since December 2014, there has been a steady increase in investor accounts from 4.03 crores to 13.81 crores as on September 2022 • Across fund types, most accounts are those of retail investors. A high 91.1% of the aggregate is contributed by retail. In terms of asset size, this represents 12.58 crores. • The average account size in the retail category is Rs 69,180. • Individual investors held Rs 22.75 lakh crores in funds, up from Rs 20.39 lakh crores in September 2021, an increase of 11.60% Reference #3: Association of Mutual Funds in India https://www.amfiindia.com/research-information/other-data/industry-data-analysis It is a delight to note that the nation’s experience with funds finds a loud and clear resonance in the pensions space as well. That there is a marked change towards organised retirement savings is quite clear from recent statistical pointers. In this context, the words of Shri Sashi Krishnan, Chief Executive Officer, NPS Trust, underscores a sense of hope. “The overall improvement in domestic sentiment had a positive impact on the National Pension System (NPS) too. The year saw a 23% increase in subscriber base, with the number of subscribers now at 5.20 crores. Assets under Management (AUM) for the NPS schemes saw a year-on- year growth of over 27%, and stood at Rs 7.37 lakh crores at the end of the year.” Reference #4: Message from the Chief Executive Officer, NPS Trust Annual Report & Audited Accounts for the Financial Year 2021-2022 9

For the purposes of this paper, the trend may be seen through the prism of subscriptions recorded in urban areas, including metropolises. This will provide an idea of the extent of penetration and room for development in such centres. It may be mentioned here again that the two NGOs (JDM and UC’s Kolkata unit, which have collectively served as a veritable ‘ground zero’) both operate primarily in metro localities. In this context, statistics collated by NPS Trust, related to subscriber bases for three successive financial years (FY2020, FY2021 and FY2022) can be used to paint an overall picture. The data underlines a definite contrast (in size) between metros and non-metros. FY 2020 FY 2021 FY 2022 Metros: 30,91,062 Metros: 35,78,265 Metros: 48,39,273 Non-metros: Non-metros: Non-metros: 3,14,63,839 3,88,61,430 4,71,81,260 Non-metros, NPS Trust has pointed out, have a subscriber base of 4.72 crores, which is about 91% of the total (that is, 5.20 crores). Subscribers have grown by 0.83 crores in the financial year 2022 to 4.72 crores. This represents a 21% escalation over a one-year period. Metro subscribers have grown by 0.13 crores to 0.48 crores in the same period (fiscal 2022), which amounts to a 35% advancement over a year. Reference # 5: Subscriber Trends in Metros and Non-Metros, NPS Trust In the days to come, critical data from PFRDA will help researchers to arrive at key inferences in the urban context. This paper will be unable to cover a wider ground in the absence of all-round data. However, for purposes of research that may be conducted in future, a few indicators will be helpful. These will include: 1. The rate of growth in the number of urban subscriptions in recent years. 2. The average size of investment in NPS today in the urban market (as in 2021-22). 3. Change in the average ticket size, if any. 4. The contribution of small subscribers, assuming that the annual base- line for allocation is Rs 12,000. 10

The concept of annual baseline needs an explanation: for the sake of convenience, an allocation of Rs 1,000 per month has been assumed. The yearly total, that is, Rs 12,000, makes it a well-rounded and convenient number. It has no empirical or verifiable basis. Such pointers, to reiterate an issue raised earlier, will be relevant for studies that may be conducted in future. Data collated here will underline significant trends in the present-day pensions/retirement landscape (part of larger savings and investment patterns) insofar as urban India is concerned. These will also lead us to appropriate comparisons between the Indian scenario and key geographies around the world. As for the general global picture, captured by studies conducted by multiple organisations, many parts of the world have witnessed several common trends related to ageing, investment and retirement planning, and old-age security. Ageing is a rather dramatic phenomenon in a number of regions, especially where “traditional family based care” (as outlined by World Bank, Reference #6) is tapering with no recourse to organised and alternative systems. Countless people around the globe have little or no access to formal retirement schemes. Social pension imposes a great burden on governments, a factor that weighs particularly heavily in the Third World. Reference #6: World Bank https://www.worldbank.org/en/topic/pensions The Indian experience, in both urban and rural areas, is no different, although remarkable changes have been brought about in recent years by affirmative policy initiatives. Yet the target audience in our case – namely, the urban poor – faces an uphill task on a number of relevant fronts. Their saving/investing habits are often flawed, results are far too moderate for their comfort, professional guidance often eludes them and retirement literacy is generally quite low. Given typical Indian complexities, the phenomenon of pension have-nots is an enormous embarrassment for the country. However, to repeat an earlier point, the evolving nature of Indian reality is also quite evident. This will be reflected in the growth of pension assets (expressed in terms of AUM or Assets Under Management) in the days to come. Micro investments in pension products will certainly play a role on this front. The growth trajectory in pension assets witnessed recently has indeed created room for hope, as stated by the then PFRDA 11

Chairman (reported by The Hindu Business Line, quoted below). Similar views have been carried by other media as well. In fact, these are far too many to enumerate. To quote HBL: “PFRDA Chairman also said that the country is well on course towards achieving a pension AUM of Rs 30 lakh crore in 2030.” Reference #7 The Hindu Business Line https://www.thehindubusinessline.com/money-and-banking/pfrda-sees-pension-assets- growth-of-28-30-per-cent-in-fy22-23/article65271333.ece The micro reality in India has parallels in other parts of the world, including in Africa and South-East Asia. While conditions are starkly different across geographies, micro platforms are generally expected to do well. Researchers at Morningstar have gauged the size of the global micro-investing platform market. Its revenues stood at an estimated US$ 392 million in 2021. This is expected to reach about US$ 3,187 million by 2032. This implies a CAGR of 21% (from 2022 to 2032). Reference #8 Morningstar, report on micro investing platform market https://www.morningstar.com/news/accesswire/722362msn/micro-investing-platform- market-is-set-to-achieve-high-cagr-of-211-along-with-humuNGOus-revenue-growth-during- forecast-period-of-2022-32-future-market-insights-inc The following points made by Morningstar are relevant in this context: 1. There is increasing awareness about micro investing, reflected in the development of apps and platforms, which provide customers a range of choices. 2. Younger audiences find these platforms quite appealing as these transcends conventional barriers to investing. 3. Developing countries like India, Thailand and Indonesia (as well as developed countries like Australia) are offering new opportunities for the micro investing platform market. 4. Mobile-based platforms are already easy to use. These will grow in line with the advancement in the mobile telephony space. The acceptance of smart phones will spur the trend. 12

Part Four: POST- TRUTH Thanks to reforms driven by our policy makers, a slew of changes have occurred on the credit side. It is time the same is repeated on the investment side as well. Micro investments, in fact, will have a formidable role to play – in the coming days, it will usher in significant socio- economic changes. Reduction in income disparity, bridging of social gaps, correction in gender discrepancies, for instance, will be possible in small but unmistakable ways. Not unexpectedly, the emergence of fintech will make a perceptible difference. The trend will be evident in the context of digital services, branchless transactions and mobile-enabled investments. Benign government policies, reflected in suitable legislation, will help product manufacturers reach out to minority groups such as women. Micro investments, therefore, need priority status. A clear policy standpoint will unleash positive forces, which will ultimately help address core issues such as inequality. It will also spur household savings and lead to greater income generation. Micro investments, just like other liberalised aspects like micro credit, will have an all-round positive impact. This author firmly believes that these will bring the average Indian householder closer to the market. For far too long (but not necessarily without reason), the aam aadmi has stayed invested in fixed-return instruments. The pattern will change, and the 75th Year of Independence is the ideal juncture to make a modest beginning on this front. In this context, a few quick predictive points: 1. Micro investments will act as the first step towards further financial liberation of ordinary Indian householders. 2. A variety of first timers (especially young adults, housewives, small business owners and so on) will particularly derive benefits that are likely to flow from such investments. 3. While the government can consider the further introduction of proactive policies, the ground work will be taken up finally by asset management enterprises (particularly mutual funds and pension funds) in both public and private sectors. 13

4. A new-generation of intermediaries, many of whom are expected to have a heavy digital presence, will emerge in the micro investments space. 5. The task of suitably incentivising intermediation and investor servicing will be left to the authorities; widespread consultations with stake-holders will be necessary to create an appropriate compensation framework. At no time should a working model stray from the ultimate goals. Bite-sized investments from KYC compliant individuals, especially from marginalised sections, must score in terms of standardisation, simplicity and affordability. In the context of market-driven performance, the objective is to provide superior returns so as to reduce the average householder’s dependence on (and inclination towards) fixed-income bearing assets. The entire process, from start of dialogue to the final transaction, not to mention follow-up services, should be made convenient and easy. At the end of the day, micro investments must be recognised by all – especially government, private enterprises, socially-motivated organisations and media – as a critical function. It will drive growth of household capital, help alleviate poverty, address bias and prejudice, and add to human dignity. In short, it will propel India towards sustainable development. To terminate this paper on an optimistic note, this author views micro investments as an opportunity for nation-building. It is evident from other policy initiatives that inclusiveness acts as a multiplier and addresses core issues such as poverty, inequality and gender gap. An inclusive framework promotes national integrity and stability. It also holds the key to equitable, sustainable development. Marginalised yet ambitious individuals are known to have pursued noble and lofty goals even in the face of severe economic odds. As historical narratives constantly remind us, their efforts have been a result of courage and determination, leading to self-reliance (“atmanirvarta”). In a diverse and complex country such as ours, inclusiveness faces steep challenges. In the days to come, the nation must keep its faith in the spirit of enterprise and aspiration, which the author feels is plainly evident in each individual participant of a programme such as this. And to draw strength from the words of Rabindranath Tagore at the very end, “faith is the bird that feels the light when the dawn is still dark”. 14

REFERENCES 1. Reserve Bank of India, press release https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx- ?prid=54541 2. Reserve Bank of India, NSFI https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx- ?UrlPage=&ID=1154 3. Association of Mutual Funds in India https://www.amfiindia.com/research-information/other-data/in- dustry-data-analysis 4. Message from Shri Sashi Krishnan, Chief Executive Officer, NPS Trust Annual Report & Audited Accounts for the Financial Year 2021-2022 5. NPS Trust: Subscriber Trends in Metros and Non-Metros (For Fi- nancial Years 2020, 2021 and 2022), as pictorially represented in Page 40 of Annual Report & Audited Accounts for the Financial Years 2021-2022 6. World Bank https://www.worldbank.org/en/topic/pensions 7. Quote by Shri Supratim Bandhyopadhyay, Chairman, PFRDA, in The Hindu Business Line (News Report) https://www.thehindubusinessline.com/money-and-banking/pfr- da-sees-pension-assets-growth-of-28-30-per-cent-in-fy22-23/arti- cle65271333.ece 8. Morningstar https://www.morningstar.com/news/accesswire/722362msn/ micro-investing-platform-market-is-set-to-achieve-high-cagr-of- 211-along-with-humungous-revenue-growth-during-forecast-peri- od-of-2022-32-future-market-insights-inc 15

Micro investment is an opportunity for nation-building and address issues like poverty and inequality. Within an inclusive policy framework it can promote national integrity and can lead to an equitable and sustainable national development. On behalf of FEAT (Financial Education And Training) WISHLIST CAPITAL