10
Nov

Conversations with the newly banked in Indian cities

By Bindu Ananth

Initially, Kanhaiya[i] was wary of speaking to us. He was clutching his wallet tightly and declared upfront that he would not be showing us his ATM card. As we spoke more about his journey as an agriculturist in a small village in Madhya Pradesh to a plaster of Paris contractor in Ghaziabad, he started opening up. He told us about the many times he didn’t get paid for his work but this one time, he was so angry that he destroyed his own creation. More recently, his ATM card had broken and when he went to the branch to withdraw cash to pay his workers, he was refused because his signature didn’t match. While he is waiting to be re-KYCed, he has taken a loan to make payments to his workers. He resignedly concluded to us “dhokha bahut hota hai”. Before he left us, he made us write down on a chit of paper “Recurring Deposit”. He wanted to take it to his bank to ask them how he could open one of those things for his 2 year old daughter.

We met Salim in a cramped room in Tughlakabad, Delhi where he was executing an elaborate design on a bridal lehenga. He lives and works in this room with eight others. His family lives in Nawabganj village of Bareilly. He used to work in a company previously but left because he felt disrespected. When we ask him about how he plans his finances, he laughs and says “only rich people can plan their money”. He talks about losing savings balances to minimum balance fees and not being disciplined enough to sign up for chit funds that many of the other workers are a part of.

Dinesh Gowda moved to Bangalore from Mysore three months ago armed with a Bachelors in Mechanical Engineering degree and found a job at a metallurgical unit, earning Rs. 15,000/month. He spoke to us passionately about starting an auto-parts business back in Mysore after a few years of acquiring skills & experience. His brother-in-law is his money manager. He withdraws his entire salary from his bank account every month, hands it over to his brother-in-law every month and receives a fixed allowance for expenses. We met him around Diwali and he was waiting to get his allowance to buy gifts for his parents and sister back in Mysore. When we asked him how he felt about this arrangement, he shrugged and said, “family knows best”.

Our[ii] conversations with Kanhaiya, Salim and Dinesh were part of a series of 100 + interviews across Mumbai, Shimoga, Bangalore, Chikmanglur, Kochi, Thiruvalla, Delhi, Gurgaon and Ghaziabad where we tried to understand the journeys of the “newly banked”. We defined this as a category of people, who by virtue of migration from the village to the city or starting out at a new job, have recently gained access to a bank account and a smart phone. Our hypothesis is that this combination becomes an important on-ramp for the broader suite of financial services (credit including mortgages, investments, insurance) that are relevant to people. What we found on the ground for now is a dogged duality – almost everyone we spoke to had a bank account (this would not have been the case even 3 years ago) that they opened either as a salary account or to facilitate remittances in the case of rural-urban migrants, but relied heavily on the informal sector (friends, family, chits) to manage their broader financial needs.

Should’ve, could’ve, didn’t (invest)

The apparent reasons for this duality are not surprising. We consistently heard that it is difficult to scale the relationship with the bank beyond the savings account. While there is a strong desire to save/invest for long-term goals, there are no good solutions to solve for challenges around income volatility (a few people spoke to us about lapsed LIC policies due to inability to make regular payments) and behavioural aspects (illiquidity preference, mental accounting). Talking about investments evoked considerable feelings of “FOMO” amongst everyone – everyone had a sense that they may be leaving money on the table but were not comfortable approaching banks with their questions. Interestingly, there doesn’t seem to be a clear “action point” or “go-to brand” when it comes to figuring out investments, people talk about the market as a whole or in abstract concepts. A notable exception was a lady tailor in Delhi who asked us how she could get in on the Bitcoin bandwagon! By and large, LIC endowment policies are the way people invest for long-term goals. This is also true of educated, new-to-the-workforce millennials who follow parents’ advice on investments. The LIC ecosystem doesn’t seem very inter-operable for migrants. People routinely spoke about going back to their villages to make payments[iii].

We asked people specifically who they turn to for advice if they received an unexpected bonus or extra income. This always led us in the direction of some member in the extended family who was relatively speaking better-off and seemed in control of his (in all cases, a man) finances. There was blind faith in these trusted advisors. One young respondent who worked in an IT firm in Bangalore had signed up for unit-linked plans with ten year lock-ins on the advice of his uncle in Patna.

Almost everyone we met had a smartphone and was an active user of whatsapp, FB and Youtube. While the educated, urban respondents used the apps of their banks typically for checking balances and Paytm for sending friends money and bill payments; there was no dominant financial app being used in an integrated manner.

Opportunity for a new, customer-centric architecture

One upshot of all the technological innovation in finance in recent times is a significant reduction in fixed costs & entry barriers. In India, we have identity-as-a-service (Aadhaar), KYC as a service (e-KYC) and payments as a service (UPI) that is already catalyzing a remarkable number of start-ups who are specialized and are innovating at the application layer. Experts[iv] in this space have already predicted the “unbundling and re-bundling” that is likely to occur in retail financial services and the emergence of new players and value propositions. Banks are unlikely to be able to serve this newly banked customer base effectively given the continuing challenges with cost-to-serve. This was clear to me when I was at a panel recently with Mr. P.N Vasudevan of Equitas Small Finance Bank. He noted that their liability customers are completely distinct from their credit customers because of the need for minimum balances in the former and this is a bank whose ethos is deeply about frugality and has a ready base of millions of micro-customers.

The early wave of business models among fin-techs, however, continues to be product-driven (digital credit, digital investment platforms) while leveraging the digital infrastructure for efficiencies. However, for the generation of customers who are new to the formal system, the product lens is not intuitive and often, drives them back to familiar arrangements of friends and informal channels.

In our view, what would be transformative is a proliferation of segment-specific (students, free-lancers, migrant) interfaces and solutions that enable the on-ramp from the bank account to the broader universe of financial services. Automated savings apps such as Digit are a good example of this. A deep understanding of the needs of the customer, converting that into a meaningful and trusted solution and getting interface design right will matter a great deal. Building trust is also obviously a big factor when going beyond credit and small-value payments. Despite poor service and experiences, people repeatedly go back to Public Sector Banks and LIC because of the sense that their money will be fundamentally in safe hands[v].

Watch this space for further updates on our own work on this front.


[i] All respondent names have been changed

[ii] This is joint work by Dvara Research and Pensaar Design. A lot of my thinking on this topic was triggered during a recent stint as an entrepreneur-in-residence with the Omidyar Network

[iii] One merchant we met told us that LIC APIs are not available for integration with third-party platforms such as remittance service providers.

[iv] https://www.omidyar.com/blog/now-fintech-has-unbundled-our-financial-lives-can-it-re-bundle-them

[v] Separately, the virtue of Public Sector Banks being focused on providing access to savings and term deposits and limiting the asset side of their balance sheet to rated debt securities and government securities (https://www.bloombergquint.com/opinion/2017/10/09/do-indias-weak-banks-need-a-stronger-dose-of-corrective-action) needs to be seriously explored.

19
Sep

The Nature of Financial Advice for Low-income Households

By Bindu Ananth

I was at an excellent behavioural finance conference organised by the Michigan University’s Centre on Finance, Law & Policy last week. One of the panels on investor protection debated issues including the impacts of disclosures, choice architecture and social norms marketing on investor behaviour. There was also an interesting discussion on role of advice and advisors in de-biasing investors or exacerbating weaknesses.

In the audience Q & A, in response to a question on the role of financial advice for low-income investors, one of the panelists responded that failures in the market for advice were less of an issue here since by and large, the right answer in most cases is just “save more for the future”. I found myself disagreeing with this notion strongly and one more reminder that the field of household finance has failed to examine the financial lives of low-income families in sufficient detail. In this post, I attempt to share from our KGFS work what are some of the other important aspects where advice seems to matter.

One, given that human capital (NPV of net lifetime earnings) dominates financial capital (wealth) for a low-income household, all of the issues around protecting that human capital is critical because that might make the difference between bankruptcy & resilience in the face of illness/accident/death. Most advice tends to focus on investments and the portfolio allocation question and surprisingly, pays little attention to insurance. Ibbotson et al (2007) provide a comprehensive framework to understand how human capital interacts with investment and insurance decisions. With limited resources, which members of the household should buy insurance? How much insurance should you buy? We find these are important aspects where households benefit from good advice. Specifically, insuring young, adult members of the household for the full value of their human capital is an important step. (One dilemma we faced was that a significant investment in increasing human capital that is made by households is higher education for children. The return to this investment depends greatly on the specific program and employability potential. We did not have the expertise to advise clients on this aspect but it feels like an area closely linked to the role of a financial advisor in this context)

Second, low-income households are typically saving and borrowing simultaneously despite a significant wedge between lending and savings rates (upwards of 20% most times). We don’t understand very well the determinants of this behaviour. Clearly, it is not always the right answer to save. High rates of return on micro-enterprises have been documented by Christopher Woodruff and others. Often it makes sense for households, particularly with surplus labour to borrow to put together the initial capital required to undertake such enterprises. Similarly, households with low but stable cash-flows (the village municipal worker for instance) may find it reasonable to borrow to build a house rather than wait to save up for the same. Working with the household to determine when to borrow and when to save and even combination strategies such as save for the down payment or borrow to save strategies could be very valuable interventions.

Third, the balance sheet of a low-income household has a combination of physical and financial assets. Physical assets such as land and gold dominate. On the liabilities side, there is a combination of formal and informal loans of different maturities. It requires serious skill to arrive at the APR of some informal loans! Which loans to refinance now that advances in financial inclusion are making formal credit more accessible? Which assets may be “dud assets” (ex: a piece of land that is not being cultivated) that could be sold to bring down debt burden? Which loans have a repayment structure that adds to the financial stress of the household? Working with the household to arrive at this comprehensive “balance sheet view” seems like an important role of an advisor.

Of course, there are significant challenges in converting advice into action and requires more careful work and business model experimentation. Equally, careful research and creating the building blocks for good advice for low-income households is also necessary and cannot be extensions of existing advice frameworks. The myth that these households have simple problems that require simple fixes & simple products needs to be challenged by researchers and pioneering providers.

31
Jan

All’s well that repays well? Not necessarily.

By Vaishnavi Prathap, IFMR Finance Foundation

The past year has seen many commentaries on the rapid expansion of microfinance in India warning of the imminent consequences of unbalanced growth. The most striking statistic in this context — that the average client’s dues more than doubled in just four years (between 2012 and 2016), far outpacing only moderate growth in numbers of branches, employees or clients, and surely clients’ incomes — was estimated from data that, at best, captures only a large proportion of the microfinance market. While this has triggered ruminations of an emergent repayment crisis, these fears have been tempered on two grounds. First, the enforcement of new regulations since 2012 limit the risk of client over-indebtedness. Second, delinquencies have consistently remained low over the expansionary period, and wherever reports of distress have surfaced, they seem mostly uncorrelated with the sector’s growth rate.

But do these arguments show us the full picture? Considered against primary evidence from the financial diaries of low-income households in India, we find that often they do not. The data, collected by IFMR Finance Foundation during a study supported by the CGAP Customers at the Center Financial Inclusion Research Fund, provides rich detail on the financial lives of borrowers in a competitive and mature microfinance market. It reveals that the indicators cited by both arguments above are poorly correlated with the incidence of over-indebtedness and with the ways in which borrowers experience and cope with repayment distress.

Timely repayments and borrower distress are not mutually exclusive

Aggregated data from lenders’ administrative records, such as delinquency estimates published by credit bureaus, have traditionally served to indicate portfolio quality. When delinquencies are low, it is interpreted as a signal of positive borrower outcomes. However, the repayment record may not fairly represent borrowers’ experiences if lending practices emphasize timely collection above all else.

The financial diaries of over-indebted borrowers illustrate this fact. Of the 400 households we studied, nearly one of every five borrowers reported repayment obligations higher than they could reasonably afford, given their incomes and minimum living expenses. Yet, as many as 85 percent of those over-indebted borrowers never missed a repayment on formal loans, arguably since they had strong incentives (both institutional and social) to do so.

Further, the records submitted to bureaus seldom distinguish between repayments made by the client and payments made by group members on her behalf. Thus, perhaps as an unintended consequence of the design of joint liability, the administrative data reveal few meaningful insights at a sector-level on borrowers’ distress or well-being.

Not consumption smoothing but repayment smoothing

How is it possible for so many borrowers to consistently avoid delinquency while carrying multiple, unaffordable loans? The data suggest they are using several coping mechanisms, such as lowering consumption or postponing essential expenses; raising resources from friends and social networks; and using large formal loans when available to settle old debts, including smaller informal ones accrued in past months. This use of coping mechanisms in the face of shocks is not unlike previously documented evidence. Low-income households use a variety of strategies to insulate their consumption and standard of living from the risk of volatile incomes; alternatively, they try to minimize the impact of income volatility by diversifying their occupations and resources. These strategies have a limited ability to protect households from poverty, and it has been shown that severe or persistent shocks are a major cause for chronic poverty.

The use of coping mechanisms by over-indebted borrowers differed from these practices in one regard — the incidence of coping behavior was highly correlated with the unaffordability of household debt and appeared to revolve around insulating repayments rather than consumption. Borrowers with more unaffordable debt used negative coping mechanisms more often and to a greater degree than others. Their financial behavior was not unlike the expected response to an income or health shock. But in this case, the shock came in the form of multiple non-negotiable loan repayments. Unlike a random occurrence, these “repayment shocks” persisted month after month.

Additionally, not only was the level of debt correlated with distress, but also with certain product features embedded in the loan contract. For example, a subset of borrowers experiencing highly volatile cash flows might have more trouble meeting repayments at certain times of the year. We found that these borrowers, for whom repayments were occasionally unaffordable (when calculated against a given month’s income instead of the average), experienced higher levels of distress, almost on par with those for whom the repayments were almost always unaffordable.

The implication for microlending is that poorly matched repayment schedules and other product features could be just as harmful as too much debt — and more harmful if combined with high levels of debt. This is a critical dimension of the experience of over-indebtedness, yet it is often overlooked.

New lending rules to prevent unsuitable loans

It is evident from the observed level of financial distress that current practices to prevent over-indebtedness are not effective. In fact, critical fault lines in their implementation have created an environment where unsuitable credit remains the primary coping mechanism even for over-indebted borrowers. It is also concerning that they focus heavily on limiting the amount of client debt while ignoring other aspects of borrowers’ cash flows that are significant in mediating financial distress. These include large seasonal or cyclical effects for specific lines of income or, even more generally, total income volatility (the median household in our sample experienced monthly income swings as high as plus or minus 45 percent) as well as large and significant uninsured (but insurable) risks.

Beyond better repayment assessments

Microfinance in India is no longer dominated by monopolistic or mono-product markets. With the licensing of several large lenders as small finance banks, the expectation is now that low-income households will have access to better financial services. This means not only easier access to a wider set of services, but services provided by institutions that are better equipped to respond to low-income households’ primary needs and vulnerabilities.

Many have argued that the continued success of lending to low-income households will require the evolution of robust mechanisms to assess clients’ capacity to deploy credit and manage repayments. By itself, this will not be enough to prevent borrower distress since repayments alone do not signal that a loan is suitable.

Lenders must also adequately detect clients’ cash-flow vulnerabilities and respond to them with appropriate design and service improvements, complementary savings and insurance products, flexible repayment schedules where appropriate, and best practices for delinquency management.

Read the latest version of the paper here. This article first appeared on the CGAP blog.

19
Jan

Guidelines for Suitability in Lending to Low-Income Households

By Vaishnavi Prathap, IFMR Finance Foundation

Img_1In December 2014, the Reserve Bank of India published the Charter of Customer Rights as a commitment to protecting the interests of consumers of financial services. The charter includes the Right to Suitability, defined as the principle that “products offered should be appropriate to the needs of the customer and based on an assessment of the customer’s financial circumstances and understanding”. The MFIN and Sa-Dhan, in a joint Code of Conduct, also enshrine a similar principle but specific to the context of lending: “We, as part of the Microfinance Industry promise the customers that we will […] conduct proper due diligence to assess the need and repayment capacity of customer before making a loan and must only make loans commensurate with the client’s ability to repay”. Both the RBI and the SROs directed financial institutions to understand the parameters of suitability within the context of their respective product offerings and to formalize policies to prevent unsuitable sales to customers.

In a new research paper published as part of our Working Paper series, we focus on biggest barrier that financial institutions might face in complying with this directive – a lack of clarity on what may be deemed suitable and how this is to be determined for each client. Towards this end, our new research investigates the nature and incidence of unsuitability in a competitive lending market and the variety of ways in which low-income borrowers may experience or cope with loan-related financial distress. Our findings are both a reality-check on the effectiveness of the current approach to customer protection (particularly the efforts to prevent borrower over-indebtedness) as well as a guide to how, going forward, lenders can institute formal processes to prevent unsuitability.

In our previous writing on this topic, we have acknowledged that successful suitability practices must be iterative and that even at-best, they can in no way guarantee positive outcomes for clients. The focus of both compliance and supervisory efforts must rest instead on understanding patterns in product-client interactions – especially when such interactions result in substantial hardship to clients – and meaningfully improving sales processes to prevent unsuitable sales.

Key Findings

The primary data for this study was collected in a year-long panel survey of 400 low-income households in Krishnagiri district, Tamil Nadu; the full sample included clients of 7+ MFIs and 20+ formal financial institutions. The survey adopted a financial diaries approach and a detailed socioeconomic survey was administered every 4-6 weeks to capture the dynamics of households’ cashflows. The resulting dataset has a primary focus on the details of borrowing and loan servicing but also rich detail on the volatility of occupational income, the frequent incidence of small and large shocks to household budgets and the use of other income sources, resources from social networks and a variety of financial instruments to smoothen consumption, repayment obligations and other expenses.

From the survey, we were able to create a full picture of borrower indebtedness across multiple institution types – perhaps more completely than the credit bureaus for microfinance clients. Comparing the sum of monthly repayment obligations to borrowers’ average monthly incomes, we found that one of every five borrower households in the sample held an unaffordable level of formal debt. If we included informal loans or factored in the volatility of incomes, an even higher proportion held unaffordable levels of debt for a few or all months of the loan tenure. However, the incidence of repayment delays or the proportion of delinquent borrowers was much lower, and only weakly correlated with households’ debt levels. Even at very high levels of unaffordability, borrowers were prioritizing repayments on formal loans over essential expenses, and willing to take on even further unmanageable debt to get through a difficult period.

Further, the average households’ incomes varied month-on-month by as much as 45% and as a result, even borrowers with sufficient year-end surplus were observed experiencing periods of distress and using harmful coping mechanisms comparable to those whose incomes were much lower.

Implications for Suitability Practices

These patterns in borrower behaviour are perhaps not new to experienced practitioners of microfinance and further, may only be a reflection of practices designed to achieve repayment discipline. What is alarming however, is the relative ease with which some over-extended borrowers remained undetected, and were able to continuously receive new formal loans on the same terms as others.

NBFC-MFIs are subject to regulatory directives that restrict the level of indebtedness per client and additionally, a large part of the non-NBFC microfinance lending is also required to be reported to credit bureaus so that it may be available at the time of loan appraisal. Notwithstanding, we find that critical faultlines in the preparation and use of credit reports placed as many as 33% MFI clients in the sample at risk of being mis-sold an unaffordable loan.

More critically, the types of client assessments that inform loan-making are largely unregulated and often do not triangulate borrowers’ actual repayment capacity (relying instead on unverified or indicative measures, peer selection and group enforcement). Our results show that in a mature and competitive market, clients with similar incomes and livelihoods may in fact have very different borrowing portfolios and vice versa. In this scenario, universal lending limits— such as those currently in effect— poorly safeguard customers’ interests.

Instead, determined efforts should be directed towards building market capacity to conduct thorough client assessments and to respond meaningfully to clients’ financial situation. Credit reports urgently need to be strengthened to reflect a comprehensive view of all formal borrowing, without exception. On the lenders’ side, the use of comprehensive “combo” credit reports will still fall short if not also complemented by a robust understanding of what portion of household income can be made available for repayments. Further, clients with unique liquidity constraints or cashflow risks must receive adequate insurance either through appropriate products or through modified terms of service.

This research highlights not only how critical these measures are for borrower well-being, but also the challenges involved in suitably serving low-income households’ financial needs. As a step in this direction, this research outlines two minimum components for suitability assessments –

  1. All lenders should ensure that loan amounts are appropriate and the agreed repayment terms are affordable for every borrower given their income flows, outstanding loan repayments (including self-reported informal loans) and critical payment obligations.
  2. Lenders must also evaluate the harms of selling standardized products to those borrowers with highly volatile cashflows or those with unique liquidity or flexibility constraints. Uninsured cashflow risks must be provisioned for in the assessment, product design or terms of repayment.

The paper also outlines recommendations for coordinated regulatory, practitioner and research effort that can enable successful implementation. 

The working paper is available online here and we welcome both questions and comments.

18
Sep

Aggregate Risk, Saving and Malnutrition in Agricultural Households

Guest post by Dr. Anjini Kochar, Stanford University, C. Nagabhushana and N. Raghunathan, Catalyst Management

Why is malnutrition in India’s central belt, which includes the state of Madhya Pradesh and Bihar, so high and so persistent despite relatively high rates of income growth? High rates of malnutrition reflect diets that predominantly feature cereals at the expense of more nutritional foods including pulses, vegetables and fruit. In turn, high cereal intensity is believed to be a consequence of agricultural land use patterns that favour wheat and rice. In recent research, we show that the link between cropping choices and nutrition exists only because of households’ savings choices. Faced with high and variable prices for pulses, households in this region primarily save in the form of stocks of wheat, using home stocks as an inflation hedge to substitute for the consumption of high-priced pulses. The attractiveness of wheat stocks as a buffer against high prices arises not just because stocks insulate households from inflation, but also because of the high costs of transacting with formal financial institutions in this region, despite the government’s recent attempts to ensure that all households have savings accounts in formal institutions.

Recent data from the National Family Heath Survey (2015-16) estimates that 44% of children under the age of 5 in the state of Madhya Pradesh are stunted, and 45% are underweight.[1] Though detailed data from this report are not yet available, earlier rounds (2005-06) confirm the limited role of income in explaining these rates: The percentage of malnourished children remains relatively stable over the wealth distribution, falling off only for the richest quintile of households. The percentage of stunted children in the lowest four quintiles of the wealth distribution was found to be 53%, 54%, 54% and 52%, respectively, falling to 42% for the richest quintile of households. Similarly, the percentage of under-weight children was 67%, 67%, 62% and 63% amongst the bottom four quintiles and 50% for children in the richest quintile.

Poor nutrition, undoubtedly, plays a major role in explaining the pervasiveness of stunting and low weight. Diets in this belt heavily favor cereals (wheat and rice) for all households, regardless of wealth or occupation. Expenditure on cereals amounts to 26% of total food expenditure in Madhya Pradesh and 28% of expenditure in the neighboring states of Uttar Pradesh, Bihar, Chattisgarh and Jharkhand. In Madhya Pradesh, as in neighboring states, this percentage shows almost no variation across households distinguished by principal occupation; it is as high (26%) amongst agricultural households who derive their income primarily from the cultivation of their own land as it is amongst households who are primarily dependent on causal wage work in unskilled labor markets (28%).[2]

While the dominant role of cereals in the diet of Indian households has often been noted, less attention has been paid to the striking importance of consumption out of home stocks for farming households. In Madhya Pradesh, a predominantly wheat growing state, data from the NSS (2011, round 68) reveal that consumption out of home stocks of wheat amounts to 42% of total wheat consumption of all households, but as much as 81% of the consumption of agricultural (farming) households. Similarly 62% of the wheat consumption and 67% of the rice consumption of agricultural households in neighboring states is also from home stocks.[3]

The hypothesis that poor nutrition reflects households’ decisions to hold large stocks of wheat as a precautionary response to price uncertainty may be surprising, only because prices of wheat and rice are far less volatile than that of other crops. This in turn is a consequence of government intervention in grain markets, both on the consumption side (through welfare programs such as India’s Public Distribution System that distribute food grains at highly subsidized prices) and on the production side (through minimum support prices). Relatively low and stable prices compared to other food crops reduces the likelihood that households will sell stocks of wheat to purchase more expensive food items, thereby lowering their value as an inflation hedge. Their value to households lies, instead, in their substitutability for other foods. Though such substitution would occur, even if households did not maintain grain stocks, these savings allow households to transfer consumption across seasons allowing more consumption in seasons characterized by poor rainfall and low incomes than would otherwise be possible. Substitution of wheat for other foods, such as pulses, does, however, come at a cost: It reduces the nutritional content of households’ diets. Additionally, the retention of wheat by farming households for consumption purposes reduces market supply and raises market prices. This adversely affects landless households. It also increases the cost of government purchases of wheat for the public distribution system.

We examined the relationship between nutritional status and savings using rich household data from a sample of approximately 2800 households from rural areas of Madhya Pradesh, collected in January 2016, matched to monthly data on market (mandi) prices for wheat and the main pulse consumed in this area, tur or pigeon pea, for the 2010-2015 period. Using this data, we tested three hypotheses. First, we assessed whether stocks of wheat are held as a precautionary response against variability in the price not just of wheat, but also tur. Second, we examined whether households’ stocks of wheat affect wheat consumption in the household in regressions that control for the effect of total savings. That is, we tested the hypothesis that the composition of a household’s portfolio of assets affects nutrition. In a final set of regressions, we considered the effect of the share of wheat in household diets on child health, as measured by their height and weight relative to WHO standards for children of the same age and gender.

Our findings support all three hypotheses. This has important implications. First, it links poor nutritional outcomes to the methods utilized by households to save against price and income uncertainty. Second, the insurance value of wheat stocks suggests that improved access to financial institutions will increase financial savings only if they offer a significant risk premium. This helps explain why the significant improvement in financial sector access in the country has not generated commensurate increases in financial savings. Finally, our research also helps reconcile two conflicting literatures. The first examines seasonality in consumption expenditures and generally finds that households are able to smooth consumption relative to income. In contrast, a second set of studies finds that children born in the monsoon months, and particularly those born in periods of low rainfall, have poorer health outcomes. We suggest that households are able to protect total food intake in the face of poor rainfall and other income shocks, but that this is achieved by increasing the share of stored grains of lower nutritional value. Thus, while they are able to maintain consumption levels and stave off hunger when incomes are low, nutrition suffers.

The findings of this paper suggest the importance of policies that help reduce price volatility, including the integration of agricultural markets. It also suggests that policies that increase the relative return to financial savings, such as flexible delivery options, lower transaction costs and financial literacy programs may also help improve nutrition. Finally, since the insurance value of wheat comes from its substitution for other crops, educating households on the value of a balanced diet may also affect household’s willingness to save in the form of stocks of wheat.

As part of our latest series of knowledge management sessions in our office, we had the pleasure of hosting Dr. Anjini who presented on this research. Here is the PPT from her session and below is the video of her talk.


[1] A child is considered stunted or underweight if his or her height for age or weight for age, respectively, is less than 2 standard deviations below that of children of the same gender and age in the reference population. The NFHS surveys calculate a household asset index that is the basis for comparisons across the wealth distribution.

[2] In neighboring states, this percentage varies from 27% amongst agricultural households to 30% amongst casual wage households.

[3] In contrast, in the southern states of Maharashtra, Tamil Nadu, Andhra Pradesh and Karnataka, characterized by lower levels of child malnutrition, while the share of expenditure on cereals (23%) is also high, only 6% of wheat consumption and 11% of rice consumption is from home stocks. Amongst agricultural households in these states, these percentages are 16% and 29%, respectively.