By Misha Sharma
Nine in every ten Indian adults are worried about facing severe financial hardship as a result of the disruption caused by the Covid-19 pandemic and are largely anxious about meeting their financial goals, according to the World Bank’s Global Findex 2021 Database (Findex 2021). Findex 2021 is a survey of 125,000 adults in 123 economies documenting the state of financial inclusion across the globe.
The 2021 edition makes a unique contribution to the measurement of financial inclusion by adding a set of questions on aspects of financial well-being such as an individual’s ability to manage and recover from shocks and their confidence in managing current and future financial obligations. This makes the Findex 2021 database well-rounded and holistic as it goes beyond measures of access and usage and expands the narrative to an outcomes-based approach.
Financial well-being as an impact metric of financial inclusion has gained acceptance over the last one decade. According to a report by the United Nations Secretary-General’s Special Advocate for Inclusive Finance for Development, financial well-being is broadly defined as the extent to which a person or family can smoothly manage their current financial obligations and have confidence in their financial future. Specifically, it measures whether individuals can manage their day-to-day finances, cope with emergencies, and plan for their medium- and long-term goals.
Its merit as an impact metric lies in the fact that it is specific and directly related to the functions performed by financial products and services. For example, a household with a health insurance should be able to use the product in times of a medical emergency without facing any financial hardship. Similarly, households with a volatile income should be able to save formally during periods of excess income and dip into their savings during low-income periods.
Financial products should also help households meet their long-term goals such as planning for retirement. Therefore, a measurement framework that allows us to capture and track financial well-being over time helps us in understanding if accessing and using formal finance leads to financial well-being.
What does Findex 2021 say about financial well-being of Indian adults?
Findex 2021 captures individuals’ confidence in their financial future by asking them how worried they are about meeting their short-term and long-term financial needs. The results indicate that Indian adults are largely anxious about meeting their financial goals.
Close to 80% of Indian adults report being ‘somewhat worried’ or ‘very worried’ about not having enough money for their old-age and not being able to pay for medical costs in case of a serious illness or accident. Similarly, 67% are worried about not being able to pay for school fees while a staggering 81% are worried about not having enough money for monthly expenses.
In terms of people’s ability to access liquidity, 83% of Indian adults have reported being able to come up with emergency funds within 30 days. This is a 35-percentage point increase from what was reported for the comparable statistic in Findex 2014.
Yet, at the same time, the predominant source of these emergency funds continues to be friends and family and their larger social networks. Barring people’s ability to access liquidity, together, these results indicate that the state of financial well-being among Indian adults is not so good.
The responses reflect a lack of financial control and freedom in the individuals’ perception of their financial life and, to an extent, an absence of confidence in the formal financial instruments that belong to them.
High levels of account ownership coupled with low levels of financial well-being in the Indian context highlights that firstly, in addition to bank account ownership, usage of bank accounts for accessing other banking services such as formally saving, borrowing, and investing is equally important to the financial inclusion story and secondly, the state of financial inclusion in India, at least in its current form, has not spurred perceptions of high financial well-being among individuals.
If financial well-being is the answer, what is the question?
Financial well-being is about financial stability, security, control, and freedom and is a result of several factors. According to the UNCDF’s Centre of Financial Health, an individual’s socio-economic context in terms of their education, income, and nature of occupation are some of the fundamental factors that determine their financial well-being. Other factors include exposure to shocks, an individual’s financial habits and decisions, and access to and use of suitable financial products and services.
While financial inclusion is integral to financial well-being, it must be noted that it is only one part of the picture. This perspective has two key implications. One, financial service providers are uniquely positioned to serve the financial needs of customers and should consider strategies that can help individuals and households meet their financial goals, smoothen out consumption, and manage risks. Two, in addition to financial inclusion policies, other policies that support financial well-being should be measured and tracked. These range from livelihood and employment generation policies to policies that support universal health care, education, and other basic needs such as clothing, nutrition, housing, and other benefits to disadvantaged and vulnerable groups.
This means that financial well-being as an impact metric is relevant not just in the financial inclusion policy landscape but is also relevant in the context of other development programmes and should be considered in the monitoring and evaluation frameworks of these programmes. As the popular saying goes, what gets measured, gets done. By building a culture of measuring financial well-being, we might be able to steer the focus towards improving the financial well-being of Indian households.
The writer is Practice head (household finance), Dvara Research