Sat, Oct29, 2011
India's paradox of savings and investments is not just unique but also one that has takeaways for other emerging markets. Despite being an economy with high savings rate, the country is starved for funds when it comes to infrastructure or corporate investments. The steep interest rates not only reflect high inflation but also demand for funds from government and corporate sectors. The missing link here is that most of the saving is unbanked. Also there is very little coordination between a large part of the savers and the major investors. Result being that small and ignorant savers often get lured towards unsafe investments that neither benefit them nor the economy.
The latest case of the Sahara Group duping rural investors of a whopping Rs 240 bn (US$ 4.9 bn) is a case in point. Although everyone from the government to the central bank is harping about financial inclusion, the outcome leaves a lot to be desired. But the case highlights the fact that very large quantities of savings in rural India is looking for lucrative investment options. The catch here is that most of the savings is in cash and the investors are either illiterate or with very limited financial literacy. Most are therefore averse to documentation necessary for bank transactions. As a result schemes that offer high returns with little entry barriers lure the cash rich rural investors. No wonder, the Sahara Group's bond issue raised more money than the Coal India IPO - the country's largest public issue ever. Moreover, its 30 m investors exceed the total number of retail investors in India's entire universe of listed stocks! This by no means is a small feat for a fund that offers little transparency or safety of capital. Moreover, since the bond issue was not under the purview of Securities and Exchange Board of India (SEBI), the group may even escape the SAT (Securities Appellate Tribunal) verdict to repay the funds to investors.
Hence despite having a young and pro-savings population, India runs a substantial risk of losing out on investment opportunities. Unlike India other fast emerging economies may be able to access large pools of domestic savings through better financial literacy. Data from the National Council of Applied Economic Research (NCAER) shows that 81% of rural households save but only half keep their savings in bank deposits. In fact, 36% prefer to keep cash in hand. Also only 2% of households opt for any kind of insurance. With such kind of disarray in the financial system, India's economic future could remain in the shadow of its emerging market peers.
sourced EquityMaster
India's paradox of savings and investments is not just unique but also one that has takeaways for other emerging markets. Despite being an economy with high savings rate, the country is starved for funds when it comes to infrastructure or corporate investments. The steep interest rates not only reflect high inflation but also demand for funds from government and corporate sectors. The missing link here is that most of the saving is unbanked. Also there is very little coordination between a large part of the savers and the major investors. Result being that small and ignorant savers often get lured towards unsafe investments that neither benefit them nor the economy.
The latest case of the Sahara Group duping rural investors of a whopping Rs 240 bn (US$ 4.9 bn) is a case in point. Although everyone from the government to the central bank is harping about financial inclusion, the outcome leaves a lot to be desired. But the case highlights the fact that very large quantities of savings in rural India is looking for lucrative investment options. The catch here is that most of the savings is in cash and the investors are either illiterate or with very limited financial literacy. Most are therefore averse to documentation necessary for bank transactions. As a result schemes that offer high returns with little entry barriers lure the cash rich rural investors. No wonder, the Sahara Group's bond issue raised more money than the Coal India IPO - the country's largest public issue ever. Moreover, its 30 m investors exceed the total number of retail investors in India's entire universe of listed stocks! This by no means is a small feat for a fund that offers little transparency or safety of capital. Moreover, since the bond issue was not under the purview of Securities and Exchange Board of India (SEBI), the group may even escape the SAT (Securities Appellate Tribunal) verdict to repay the funds to investors.
Hence despite having a young and pro-savings population, India runs a substantial risk of losing out on investment opportunities. Unlike India other fast emerging economies may be able to access large pools of domestic savings through better financial literacy. Data from the National Council of Applied Economic Research (NCAER) shows that 81% of rural households save but only half keep their savings in bank deposits. In fact, 36% prefer to keep cash in hand. Also only 2% of households opt for any kind of insurance. With such kind of disarray in the financial system, India's economic future could remain in the shadow of its emerging market peers.
sourced EquityMaster
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