By Deepti George, IFMR Finance Foundation

Continuing on our series on ‘Consumer Protection’, we will take a look at how consumer protection has found its place within the regulatory architecture of select countries, namely Australia and South Africa. A previous post had dealt on the emergence of the twin-peaks model in Australia. In this post, we briefly describe the regulatory principles that form the basis for the Australian regulatory reform process that began with the Government’s implementation of the Wallis Inquiry recommendations.

In June 1996, the Financial System Inquiry¹ (known as the Wallis Inquiry) was established to:

i. Examine the results of the deregulation of the Australian financial system
ii. Examine the forces driving further change, particularly technological; and
iii. Recommend changes to the regulatory system to ensure an ‘efficient, responsive, competitive and flexible financial system to underpin stronger economic performance, consistent with financial stability, prudence, integrity and fairness.

Chapter 5 of the Wallis Inquiry report outlines the regulatory principles that the new structure was based on. The Inquiry identifies five regulatory principles, as given below:

Competitive Neutrality

Competitive neutrality requires that the regulatory burden applying to a particular financial commitment or promise apply equally to all who make such commitments. It requires further that there be minimal barriers to entry and exit from markets and products; No undue restrictions on institutions or the products they offer; and that markets are open to the widest possible range of participants.

Cost effectiveness

A cost-effective regulatory system requires a presumption in favor of minimal regulation unless a higher level of intervention is justified; an allocation of functions among regulatory bodies which minimizes overlaps, duplication and conflicts; an explicit mandate for regulatory bodies to balance efficiency and effectiveness; a clear distinction between the objectives of financial regulation and broader social objectives; and, the allocation of regulatory costs to those enjoying the benefits.

Transparency

Transparency of regulation requires that all support/guarantees from the regulator or the government to financial institutions be made explicit and that all purchasers and providers of financial products be fully aware of their rights and responsibilities, and that financial promises (both public and private) be understood by all parties concerned.

Flexibility

The constant evolution of the financial system makes flexibility critical. The regulatory framework must have the flexibility to cope with changing institutional and product structures without losing its effectiveness.

Accountability

Regulatory agencies should operate independently of sectional interests and with appropriately skilled staff. In addition, the regulatory structure must be accountable to its stakeholders and subject to regular reviews of its efficiency and effectiveness.

The Twin-peaks model of Australia encompasses two agencies, besides the Reserve Bank of Australia: The Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC). ASIC is Australia’s corporate, market and financial services regulator, which includes being the regulator for consumer credit. The Australian Securities and Investments Commission Act 2001 made ASIC responsible for the following:

1. Maintain, facilitate and improve the performance of the financial system and entities in it
2. Promote confident and informed participation by investors and consumers in the financial system
3. Administer the law effectively and with minimal procedural requirements
4. Enforce and give effect to the law
5. Receive, process and store, efficiently and quickly, information that is given to it
6. Make information about companies and other bodies available to the public as soon as practicable

ASIC’s priorities therefore include ensuring that investors and financial consumers are confident and informed, promoting fair and efficient financial markets and ensuring efficient registration and licensing.

ASIC administers the following functional areas through specific legislations:

Australian Financial Services License (AFS)

ASIC administers the Financial Services Reform Act 2001 that introduced a single licensing regime for all financial services and products. This piece of legislation was later incorporated into chapter 7 of the Corporations Act 2001.This legislation requires those who carry on a business of providing financial services to hold an Australian Financial Services (AFS) licence. An AFS licence is required for entities that:
• Provide financial product² advice³
• Deal in a financial product
• Make a market for a financial product
• Operate a registered managed investment scheme
• Provide a custodial or depository service
• Provide traditional trustee company services

The obligations of an AFS licensee, as mandated by law, include:

• Obligation to ensure that financial services offered are provided efficiently, honestly and fairly
• Obligation to meet adequate financial requirements (e.g. solvency and cash obligations) to provide financial services and to carry out supervisory arrangements
• Obligations to meet compliance and risk management requirements if the licensee is not a APRA-regulated body
• Obligation to maintain competence to provide financial services (both technological and human resources)
• Obligations of monitoring, supervising and training of authorised representatives in order that they comply with the financial services laws
• Conduct and disclosure obligations
• Obligation to manage conflicts of interest
• Obligation to establish and maintain dispute resolution (internal and external) mechanisms
• Obligation to have prescribed compensation and insurance arrangements
• Obligation to comply with requirements set out by ASIC from time to time

In the next post in this series, we will focus on the conduct and disclosure obligations that need to be met by all AFS license holders and its implications for providers and consumers of financial services.

–
1 – http://fsi.treasury.gov.au/content/FinalReport.asp
2 – As pre Corporations Act 2001, Chapter 7.1, Div 3,“For the purposes of this Chapter, a particular facility that is of a kind through which people commonly make financial investments, manage financial risks or make non cash payments is a financial product even if that facility is acquired by a particular person for some other purpose”.
3- Financial product advice is a recommendation or a statement of opinion, or a report of either of those things, that is intended to influence a person or persons in making a decision in relation to a particular financial product or class of financial products, or an interest in a particular financial product or class of financial products.

By Kenny Roger, Center for Microfinance, IFMR Research

A recent report titled “Latest findings from Randomized Evaluations of microfinance” by Jonathan Bauchet, Cristoball Marshall, Laura Starita, Jeanette Thomas and Anna Yalouris, throws a lot of interesting insights into the realm of randomized evaluations and how they are being increasingly used by researchers across the globe to better understand financial services for the poor and the impacts achieved when an appropriate financial intervention is introduced.

Some of the recent interventions include the following:

• Researchers evaluated the impact of access to credit by randomizing the placement of MFI branches across a particular region in India. Though its early days to say there has been a considerable impact, it is notable that some households increased non-durable consumption, others reduced expenditure on temptation goods and instead invested in their business or bought more durable goods.
• Fingerprinting intervention in Malawi saw borrowers take smaller loans for instance, when they knew they could be identified, and were more likely to repay as well because of the fingerprinting.
• Changing term structure of debt actually witnessed borrowers investing a greater portion of their loans in businesses and thus registering higher average profits.
• One study in Kenya showed that access to formal savings accounts for market stallholders led to increased business investment and personal income growth.
• There are also instances wherein farmers who had access to rainfall insurance began to shift more towards risky and rain-sensitive crops owing to its capability of generating high profits.

These studies have however studied only one financial product or aspect at a time. The needs of the poor are varied like any other income group and the scope of availability of a wide range of financial services to the same as we all know may not be good enough.

To put things into perspective, consider, Mr A, a farmer by profession who has a bank account, has taken an MFI loan, borrowed money from moneylenders, has remittances from a direct relation and has a life insurance policy. We need to realise that Mr. A, like anyone, is involved in a wide range of financial products or services regardless of whether the provider is formal or informal. A study looking at such a wide set of financial services and how access to the same impacts a person has not been done yet.

To address this, the Center for Microfinance (CMF), IFMR Research, along with Harvard University is studying the impact of access to a broad range of financial services provided by Kshetriya Gramin Financial Services (KGFS) in two districts of Tamil Nadu. KGFS uses a thin customer-facing front-end with robust back-end technology to bring a full range of financial services, along with wealth management advice, to entire communities under its coverage area.

Using a randomized control trial methodology the study aims to understand the specific pathways in which access to a range of financial services can impact not only individual households but also the entire village economy. The outcomes of this study will help in designing products and delivery channels for low income households, as well as inform policy on financial inclusion both for India and the rest of the world.

Highlights of this study will be shared as a series in subsequent blog posts.

IIM Ahmedabad recently interviewed Bindu Ananth and Nachiket Mor for their publication ‘The Efficient Frontier’. The publication was recently rebranded to mark the institute’s Golden Jubilee year.

In this interview, Bindu Ananth and Nachiket Mor discuss the applications of financial engineering to low income  households.

Excerpt from the interview

In your experience with low income households, what are some of the risks which you have seen them facing and which you feel could be solved by financial engineering? What are some of the products that can be used to mitigate these risks?

For most low-income households – human capital, in the sense of present value of lifetime net incomes, tends to be the biggest asset in their portfolio. Given fairly low levels of financial capital/wealth, the reliance on human capital is very high in order to successfully meet household goals over a period of time. Anything that impacts this human capital then tends to become very critical for these households….

Click here to download the publication.

In the current edition of Economic & Political Weekly, Anand Sahasranaman of IFMR Finance Foundation has published a paper on Panchayat Finances based on an analysis of three villages – Pallavapuram, Pandiyapuram and Cholapuram in rural Tamil Nadu. The paper outlines the different aspects concerning their finances and infrastructure and argues that with judicious increases in their tax and fee regimes, all three will be in a position to self-finance a substantial portion of their infrastructure and service needs, resulting in improved local governance and quality of life of local citizens.

Abstract from the paper below:

One of the key tests to real empowerment of panchayats lies in the ability of local self-governing institutions to finance their own expenditures through internal generation of resources. Based on an analysis of three villages in Tamil Nadu, this paper argues that many gram panchayats are today in a position to substantially finance themselves and build a culture of self-sufficiency, independence and accountability to their citizens, reducing their dependence on devolutions from state governments. It concludes that by incentivising competition among panchayats and instituting a rural development fund to enable them to access debt capital, the perverse incentives they now face can be mitigated to a large extent, leading to several significant positive outcomes.

To read the full paper click here.

The Centre for Micro Finance, IFMR Research, published its latest report “Five Years of Researching Financial Services for the Poor” at its recently concluded annual conference held in association with RBI’s College of Agricultural Banking.

Founded in 2005, the report presents the different research studies, which CMF has undertaken over the years in the area of financial services for the poor. The report, organised thematically, under its broad focus areas of “Financial Inclusion”, “Livelihoods” & “Social Objectives”, describes the organisation’s current work and summarises key findings from completed studies. The report also identifies potential areas for future research and recommends ways that financial services practice could evolve to meet the needs of low-income households.

Some of the studies that are profiled in the report include:

• Miracle of Microfinance? Evidence from a Randomized Evaluation
• The Impact of Access to Finance in Rural Tamil Nadu: Evidence from a Randomized Control Trial
• The Economic Returns to Social Interaction: Experimental Evidence from Microfinance
• Targeting the Hard-Core Poor: An Impact Assessment
• Measuring the Impact of Providing Futures and Spot Prices of Crops to Farmers

To read the full report click here.

India is rapidly urbanizing and the rate of urbanization is expected to climb steeply over the next few decades. The urban population of India will be close to 600 million by 2030, as compared to 340 million in 2008. The next three decades will, therefore, see the unfolding of a variety of urban issues, the responses to which will ultimately determine the long-term course of India’s development. Therefore, the design and implementation of appropriate urban policies based on data and evidence will be crucial in addressing these emerging urban issues and providing the ballast for sustained, long-term development of the nation.

In this backdrop, the India Urban Conference 2011 was envisaged as a series of events designed to raise the salience of urban challenges and opportunities in the ongoing debate on India’s development. The conference intended to bring together central, state and local policy makers, policy implementers, academics, students, civil society, and industry stakeholders to identify challenges and chart strategies for India’s urban development. The Conference saw the successful completion of its first year with three events that took place at Yale (April 2011), Mysore and Delhi (November 2011). It was jointly organised by Janaagraha Centre for Citizenship and Democracy, and the Indian Institute of Human Settlements, in partnership with Yale University.

IFMR Finance Foundation anchored one of the eight themes covered in the India Urban Conference, namely “Financial Inclusion and the Urban Economy” . In recent times, with the growing realisation that financial services are in the nature of a public good, this was an opportunity to accelerate the national economic and financial policy towards ensuring complete access to financial services for all Indians. Therefore, the theme delved in detail, into issues underlying access to finance to the three critical segments: low-income households, small and medium enterprises and local governments.

The sessions were organized into three main plenary sessions and four smaller workshop or deep-dive sessions. All these sessions delved deep into a number of issues such as: (i) quality of financial access to households and enterprises in the informal sector; (ii) challenges faced by practitioners in operationalising financial inclusion; (iii) city government finances and the issues in public infrastructure and service delivery; and (iv) efficacy of data generation through participatory planning processes.

The rich discussions yielded a number of insights into the types of data gaps that prevent: (a) the development of high-quality financial products to serve the needs of the informal economy and (b) the design of optimal policy responses for financial inclusion.

These data gaps include: household level financial information, government banking data and official statistics that are not public, real costs of service delivery to the bottom of the pyramid, housing arrangements of the urban poor, city level finances, public infrastructure quality and performance levels among others. While this lack of data emerged as a major constraint in promoting the cause of financial inclusion, it also became apparent that institutions with available data sets were not translating this data, through analysis, into meaningful and usable insights. In the context of data generation for public infrastructure, the discussions revealed that the processes of planning needed to be re-looked at so as to ensure meaningful citizen participation in generating data about cities.

The detailed outcomes of the day’s discussions will be presented in the form of conference proceeds in the coming months.

By Anand Sahasranaman and Vishnu Prasad, IFMR Finance Foundation

In the second blog in the Consumer Financial Protection series, we explore insights from behavioral economics that could fundamentally impact the design of legislation and regulation for consumer protection in finance.

Neo-classical economic theories like expected utility hypothesis and efficient market hypothesis are based on the assumption that the consumer is a rational agent. However, recent insights from behavioral economics point out that the consumers do not always behave as time-consistent, rational utility maximizers. Consumers are, in fact, beset with a number of cognitive limitations and biases which influence their decision making and make them acts in ways contrary to the traditional model of hyper-rationality. We will explore some of the insights from cognitive psychology and experimental economics that could impact the design of consumer protection legislation and regulation in the future.

Prospect Theory:

The work of behavioral economists Daniel Kahneman and Amos Tversky provided early insights into consumer behavior. Their seminal work found evidence to suggest that consumers do not make decisions that expected utility theory predicts. The central insights of this theory help explain observed consumer behaviors such as:

a. Loss Aversion: People are extremely sensitive about losses and exhibit deep seated loss aversion to even small amounts of money. In fact, there is evidence that individuals are more sensitive to losses than profits – in fact, people value moderate losses more than twice as much equal sized gains (Tversky and Kahneman: 1991). This translates into financial decisions that would be at significant variance from the theory of expected utility.

b. Incorrect Probability Calculations: People have a tendency to overweigh small probabilities and under-estimate risks with larger probabilities. This explains why people more readily buy insurance on refrigerators and TV sets, but are less likely to buy life or accident coverage. Individuals also tend to be more sensitive to differences in probabilities at higher probability levels.

c. Response to Framing: People make different choices in identical situations because of the way the choices have been framed for them. The way in which a problem is described can be responsible for upto a 30-40% shift in preferences (Barberis and Thaler: 2003). The fact that framing can fundamentally impact consumer choice means that investor welfare could be seriously compromised in the absence of countervailing regulation.

d. Mental Accounting: The process people use to formulate financial problems for themselves is called mental accounting (Avgouleas: 2006). One classic case of mental accounting is “narrow framing”, where individuals evaluate a particular gamble (or financial transaction) as if it were independent of everything else in the world and not assess its utility in terms of the gamble’s effect on the individual’s overall wealth.

Biases and cognitive limitations:

Human beings also exhibit biases and other cognitive limitations that can contribute to poor decision making. In the context of financial products, consumers are prone to take decisions that can have negative future consequences for themselves (also called internalities).

a. Self-restraint: Consumers often behave in ways that compromise long-term well-being for short-term gains. This bias of present consumption out-weighing future welfare manifests itself in various forms such as the failure to save for retirement. It is also observed that consumers discount future benefits/costs in a time-inconsistent manner. For example, if offered $100 now and $200 a year from now, a consumer is likely to choose the immediate $100. However, when offered $100 five years from now and $200 six years from now, a consumer is likely to wait the additional year even though the it is the same choice she makes five years from now. This time inconsistent, present biased model of discounting is referred to as hyperbolic discounting.

b. Herding: Consumers often mimic behavioral patterns of peer leaders or peer groups, leading them to ignore signs and indicators that would lead a rational consumer to take different decisions. Such irrational behavior is fueled by overconfidence (in peer leaders or rating agencies and in assessments of new financial products) and can often threaten systemic stability. History is replete with examples of irrational behavior leading to economic bubbles, from the Tulip mania in the 1600s to the present financial crisis caused partly by the real estate bubble in the USA.

c. Information Overload: In the previous blog post, we mentioned Akerlof’s seminal study of the used-car industry, where information asymmetry leads to market inefficiency. Contrary to expectations, a regulatory response to provide the consumer with additional information (beyond a point) can be counterproductive. This happens due to the phenomenon of information overload, where the consumer is unable to assess the quality and amount of information given to them. Examples of this phenomenon include consumers casually flicking through tens of pages of terms and conditions when insurance is bought online, without understanding the risks and clauses involved.

Systemic irrationality and regulatory responses:

There are several limitations to the use of insights from behavioral economics in consumer financial protection.

Work in experimental economics argues for the emergence of rational behavior in the context of a repetitive market activity. Consumers display rational behavior in the long run, through a trial and error adaptation process and repeated market activity and spurts of irrationality are characteristic only of the short run. So, consumer irrationality, it is argued, can only be a factor in the policy of consumer protection, not the starting point. Second, behavioral economics is yet to come up with an all-encompassing theory of the market or consumer choice that can challenge the existing neo-classical theories; it has only pointed out deficiencies of the latter. Third, behavioral economics does not formulate any normative principles, which can be used either for empirical testing as economic models or for normative use as a guideline to an efficient market mechanism.

Even if consumer irrationality is an exception to the norm of rational behavior, the insights of behavioral economics alert us to the possible risks of systemic irrational behavior and the consequence this can have on the financial system. Any regulatory mechanism should therefore be designed to be able to respond to systemic irrationality. However, regulators should be required to tread carefully before intervening in a situation of perceived systemic irrationality. At the very least they must have to demonstrate indications of irrationality in the system, provide plausible explanations of how such irrationality can have a financial system-wide impact and finally make clear the case for how their proposed regulation will be effective in countering the irrational behavior.

To ‘nudge’ or not to ‘nudge’?

If consumers cannot maximize their own welfare (due to lack of cognitive capability or financial literacy), it is argued that regulation needs to ‘nudge’ the consumers into making those decisions which reflect the presumed judgment of what consumers would want, were they fully informed or well advised. This approach is referred to as libertarian or asymmetric paternalism.

The idea behind libertarian or asymmetric paternalism is not to restrict the consumer’s autonomy; rather it seeks to counter the harmful effects of cognitive biases without affecting the choices of the less behaviorally challenged consumers. Some of the suggested regulations include increased pluralism in information disclosure formats and in the prescribed volume of information reaching different investor classes, mandated use of structured and edited investment contracts that consumers can easily comprehend and mandatory use of long term performance reports. These suggestions imply that regulators must drop the ‘one size fits all’ approach as consumers’ decisions vary depending on factors such as income, education, age, attitude and the type of financial product they consume.

There are, however, strong arguments against the ‘nudge’ principle on the grounds of its interventionist approach, implied restrictions of choice and possible impact on rational consumers. These arguments speak to the heart of debates around behavioral economics and consumer protection today.

References
1. Backstrom, Hans. Financial consumer protection- goals, opportunities and problems. Economic Review. 2010
2. Campbell, John Y., Jackson E Howell et al. Consumer Financial Protection. Volume 25, Number 1. Pp 91-114. Journal of Economic Perspectives. 2011
3. Spindler, Gerald. Behavioral Finance and Investor Protection Regulations. Journal of Consumer Policy. 2011
4. Emilios, Avgouleas. Cognitive Biases and Investor Protection Regulation: An Evolutionary Approach. 2006. Available at SSRN: http://ssrn.com/abstract=1133214
5. Kahneman, Daniel and Tversky, Amos. Prospect Theory: An Analysis of Decision under Risk. No. 2, Volume 47. Econometrica. 1979
6. Kahneman, Daniel and Tversky, Amos. Loss Aversion in Riskless Choice: A Reference-Dependent Model. 106, Quarterly Journal of Economics. 1991

By Anita Kumar, Centre for Development Finance

According to a Monitor Group report there is a ‘vibrant housing market in urban India’ seen from the spectacular growth in housing finance at 36% CAGR for more than a decade. However, formal housing finance has not reached lower income groups in India, even in urban areas. This is because of the high perception of risks in lending to this income group, the difficulties of verifying incomes in the informal sector, and the high transaction costs of collecting repayment relative to the size of the loans. Despite the very limited availability of formal housing finance, families living in informal housing settlements have clearly been able to build homes, and to make regular incremental improvements to their homes.

A survey done in 2009 in Hyderabad showed that incremental housing happens over multiple stages as and when the need arises (e.g. adding a tiled/concrete roof, adding a room, laying some pipes etc.). In fact, incremental building accounts for 50-90% of residential construction in all developing countries. However, there is very little research available on how communities actually access the finance needed for these incremental improvements. The dearth of such information prevents the government and the private sector from crafting financial instruments that effectively address the needs of low-income residents.

Transparent Chennai, a project housed at Centre for Development Finance, IFMR Research, will be conducting a pilot research study with the support of Department of International Development, UK (DFID) that can help to fill this gap in existing research. We will be conducting a survey in two low-income areas in Chennai to identify sources, methods of access, and amounts of housing finance, types of incremental housing improvements carried out, rates of interest borrowers are paying, and whether sources of finance have any relationship to the security of tenure, in order to better understand residents’ needs and behaviors. Such research can help create financial products and policies that complement and strengthen the use of personal savings and extended family contributions towards housing investments, but which provide an alternative to high-cost borrowing, such as those from moneylenders. Such research will be important in ensuring that new programs such as the Rajiv Awas Yojana, which has a housing finance component, do not close off existing avenues of access to finance among residents. Over the next few weeks, as the project progresses, we will keep you updated on interesting data and insights from the field.

By Anand Sahasranaman, IFMR Finance Foundation

IFMR Finance Foundation is working on the agenda of consumer protection in finance as part of its mandate on financial systems design. We will be regularly showcasing our learnings on this front as a part of this new blog series called “Consumer Financial Protection”. We start off by delving into the theoretical underpinnings of consumer protection and its relevance to the provision of financial products and services.

Consumer protection is widely viewed as one of the two critically important functions of financial regulation, the other being maintenance of the financial system’s stability. While the need for consumer protection regulation seems to make intuitive sense, it is useful to dig a little deeper so as to better understand the need for consumer protection in competitive financial markets.

The basic questions that we seek answers for are these: In the case of a well-functioning market with multiple financial product and service providers, should not competition lead to optimal consumer outcomes? Why then do we need the intervention of public regulators to protect consumers of financial products?

A survey of the literature on consumer financial protection throws up a number of insights into the market failures that necessitate the need for regulation.

1. Informational Asymmetry and the problem of “lemons”:

A fundamental problem characterising the market for financial products and services is that of information asymmetry. Because of the expertise that is required for the development of most financial products and strategies, the seller of a financial product is always at an “informational” advantage over the buyer (who generally lacks expertise). This information asymmetry has the potential to adversely incentivise the seller to mis-sell the product, which could lead to poor financial outcomes for the buyer.

Akerlof’s seminal study on the information asymmetry between sellers and buyers in the market for used-cars in the US concludes that the uncertainty over product quality will progressively drive away owners of better quality cars from the market. Over time, this leads to a consistent decline in the average quality of used cars in the market and a corresponding downward adjustment of the price that buyers are willing to pay – until a “no-trade” equilibrium is reached. Such a situation minimises the welfare of buyers and sellers in the market.

In the case of financial markets, such sub-optimal outcomes on account of information failures can be prevented through suitably designed regulations (such as on information disclosure) that enable the creation of a more equitable market for buyers and sellers.

2. Nature of financial decisions and outcomes:

Many important financial decisions such as investing in a mortgage or saving for retirement are undertaken very infrequently in the course of a lifetime. The outcome of many financial investments and strategies becomes obvious only in the long term, and not immediately upon product purchase. Financial product outcomes are also complicated by the fact that market movements can have a substantial impact on product performance, and it can be difficult to pin-point the reasons behind poor outcomes: was it primarily on account of product mis-sale or the consequence of random shocks?

The unfolding of consequences over prolonged time-periods thus distinguishes consumer protection in finance from consumer protection for other products. In case of physical products (such as biscuits or soap) the outcome of the purchase becomes obvious upon immediate usage and high-quality producers can distinguish themselves through signalling devices such as warranties on their products. Financial products are, in a sense, more akin to medical services, where the treatment is administered upfront and the consequences become obvious only with the passage of long periods of time.

Financial consumer protection regulation therefore requires specialised responses (and could perhaps learn from medical consumer protection) considering the nature of manifestation of outcomes. This also opens up the debate for whether consumer financial protection regulation should sit within an umbrella consumer protection regulator that is responsible for consumer welfare across sectors or be situated in an entity specifically created for the purpose of the financial sector.

3. High Search Costs and Price Dispersion:

Despite the fact that financial service providers provide almost identical products, there can be substantial price differences between them. These price variations across sellers of similar financial products can be attributable to high search costs that consumers have to incur to meaningfully compare products and as a result, lead them to pay higher prices than they should. On the one hand, this is because of the lack of a repository of reliable information to enable price comparison and, on the other, the tendency of product sellers to market their products as being different from others in the market, even in the absence of any substantive differentiating features between them. In such a scenario, the consumer is likely to forgo her own welfare by sticking with her existing financial service provider and paying the price determined by them, thus giving them a modicum of market power, which, in a transparent market they would not be able to enjoy.

While transparent, comparable information on prices is obviously desirable from a consumer welfare point of view, there also needs to be clarity on detailed terms and conditions that can have a material impact on the usage of the financial product. This is especially so in the case of decisions which are infrequent and have long-term implications. Consumers are not in a position to generate information on their own or to get together and jointly generate information with other consumers – a classic case of co-ordination failure because of the public-good nature of the endeavour.

Well-designed financial regulation that requires financial services providers to provide access to material, meaningful and reliable information is therefore critical in maximising consumer welfare.

4. Behavioural Characteristics of Consumers:

In the past few years, there have been many new insights from the field of behavioural economics that could significantly impact the design of consumer protection regulation in the future. We will discuss these in the next blog post in this series.

This blog post draws heavily from the following sources:
Campbell, John, Howell Jackson, Brigitte Madrian, Peter Tufano, “Consumer Financial Protection”, Journal of Economic Perspectives, Vol 25, #1
Backstrom, Hans, “Financial Consumer Protection – Goals, Opportunities and Problems”, Economic Review 03/2010
Goodhart, Charles, “How should we regulate the financial sector?”, The Future of Finance, Centre for Economic Performance, London School of Economics
Lumpkin, Stephen, “ Consumer Protection and Financial Innovation: A few basic propositions”, OECD Journal: Financial Market Trends, Vol 2010, #1

This is the fourth in the series of posts under the topic “Understanding the KGFS Customer”. The authors, Sowmya Vedula and Shilpa Sathe of IFMR Rural Finance, present data regarding occupations of KGFS customer. The information is as declared by the customer at the time of enrolment or at the time of any periodic updating of data.

Notes:

• This blog post displays data of all enrolled members of the three KGFSs, Pudhuaaru (Tamil Nadu), Dhanei (Orissa) and Sahastradhara (Uttarakhand), obtained from the datasets of the Customer Management System (CMS)
• Data considered for this post is as of November 15, 2011
• Pudhuaaru has 1,29,380 enrolled customers, Dhanei has 25,654 and Sahastradhara has 20,253 which brings the number to a total of 1,75,287
• This post also uses data of family members of enrolled customers from our customer management database. The total number of individuals considered for the analysis is thus 3,35,627 for Pudhuaaru, 88,452 for Dhanei and 85,316 for Sahastradhara
• Customers can enrol at any time throughout the year and hence the data collected is at different points in time
• Categories of occupations in the database are –Agriculture and allied activities, labour, migrant labour, student, business, working abroad, salaried, unemployed, housewife, and retired/pensioner. Agriculture and allied activities include people who own land and cultivate it, people engaged in fishing and dairy, and traders of crops and agricultural products. ‘Others’ includes income from self-employment in activities other than those listed above.

Overall Occupation Distribution

Chart 1 below shows the overall distribution of occupations by categories. Students are the largest in number (26.58%) followed by labourers (22.4%) and people pursuing agriculture and allied activities (13.6%). The number of unemployed people is also significant and amounts to 13.27%.

Chart 2 shows the distribution of occupations by KGFS entity. In Pudhuaaru and Dhanei, students and labourers form majority of the population. The unemployment rate is higher in these two geographies (14%-16%). The proportion of labourers migrating within India is the highest in Dhanei as compared to the other two geographies while the number of international migrants is higher in Pudhuaaru. In Sahastradhara, about one third of the population is students followed by agriculture and allied activities (25.4%) and salaried people (13%).

Most Common Combinations of Occupations

There are 15,648 individuals (5.77% of the total earning population) who are involved in more than one occupation overall. Chart 3 shows the most common combinations of occupations followed by these individuals. For example, there are 6771 labourers who also cultivate their own land, 2037 businessmen who are involved in dairy and 1175 labourers who are also involved in dairy activities.

Gender Wise Distribution of Occupations

Chart 4, 5 and 6 show the distribution of occupations by gender across the three KGFS entities. Noticeably, it’s a good sign to see almost equal number of male and female students across the three geographies. Wage labour is the most common activity taken-up by women in Pudhuaaru (25.89%) and Dhanei (19.37%) whereas in Sahastradhara majority of women are involved in agriculture and allied activities (43.70%). Migration among women is not a common trend and only 0.24% of women in all three geographies migrate for work within the country and abroad. The percentages of women who are unemployed are as follows: Pudhuaaru – 18.78%, Dhanei – 21.16% and Sahastradhara – 17.35%.

Among men, the distribution of occupations varies widely among categories in the three geographies. In Pudhuaaru, majority of men are either labourers (30.30%) or are involved in agriculture and allied activities (14.88%) whereas in Dhanei they are more or less equally distributed among agriculture & allied activities (13.94%), business (15.20%), labour work (15.40%) and domestic migration (13.80%). In Sahastradhara however, majority of the men are salaried (22.03%), followed by business (14.91%) and agriculture & allied activities (10.93%).

Distribution of Occupations by Age-Group

Charts 7, 8 and 9 represent the distribution of occupations by age-group. In all three geographies majority of individuals between the age of 1 and 20 are students. In the age group of 20 to 60, which is the productive age, majority of individuals are labourers (25.44%) in Pudhuaaru, while in Dhanei the majority is labourers (14.32%) and businessmen (9.48%). In Sahastradhara, most people are involved in agriculture (22.73%) and salaried employment (12.71%). Overall, domestic and international migration is observed mainly within the age group of 20 and 40 (73.33% of international migrants and 65.65% of domestic migrants). In the age group beyond 60, there is a significant difference in occupations among Pudhuaaru, Dhanei and Sahastradhara. In Pudhuaaru and Dhanei most individuals in this category (39.68% and 49.50% respectively) are unemployed while in Sahastradhara, this number is less than 19%.

Distribution of Occupations by Level of Education

Next, we look at the distribution of occupations by the highest level of education completed. Table 1 shows the overall distribution, while charts 10, 11 and 12 show the KGFS-wise distribution. Overall, 37.5% of the population has an education between 6th and 12th standard. Only 6% of the population has pursued graduate, post-graduate or vocational courses and the majority of these individuals are salaried employees, businessmen or are working abroad. Around 50% of the unemployed individuals cannot read and write.

In all three geographies, majority of the people who have pursued graduation, post-graduation and vocational courses have a salaried job. However, in Pudhuaaru alone, about 20% of people in these categories are unemployed. Among people who have studied till the 10th standard, majority of them are labourers In Pudhuaaru, and labourers or business people in Dhanei. In Sahastradhara, majority of them are involved in agriculture & allied activities. Pudhuaaru has a large chunk (44%) of unemployed people who cannot read and write, followed by Dhanei (36%) and Sahastradhara (30%).

Our next blog post will talk in detail about the distribution of incomes for all the above parameters.