Financial Choice of the Hapless Households of India

by Ajay Shah

In February 2010, I had the opportunity to visit Pudhuaaru KGFS (Kshetriya Gramin Financial Services) in Thanjavur.  This is a remarkable project which helps us see the interface between households and the financial system in a wholly new light.

What a difference 17 months makes!  On that visit, I had found a little tenuous Reliance CDMA cover at just one place in Thanjavur city.  On my current visit, I found 3g or Edge cover in many remote places. On the first visit, the ride from the airport at Tiruchirapalli to Thanjavur took two hours. This time, it got done in 30 minutes on the new NHAI (National Highways Authority of India) road, with a peak velocity of 110 kph. While there are many reasons to be gloomy about the problems that India faces, some things are moving along merrily.

The KGFS approach to households and finance

KGFS emphasises the very important idea that for households to correctly engage with the financial system, this relationship must be (a) rooted in high quality advice, (b) which is grounded in a state of strong information about the household. The first is achieved by focusing on the incentives of the front line staff, by pushing them to think about household financial choice in its entirety instead of thinking about one product at a time, and by having no sales commission.

The removal of asymmetric information matters in many ways. On one dimension, if credit is extended to the household, a state of high information helps ensure better credit decisions. But more generally, across an array of financial products, when the advisor knows a lot about the household, the advisor would be able to synthesise an appropriate mix of sophisticated financial products which add up to an improvement in household welfare.  In time, the advisor will increasingly lean on an expert system to help him do this better:  it’s a good approach today and it will get better in coming years.

I think there is enormous value in this approach. I believe that KGFS is doing a great job of building this kind of information about households in their present rollout (which involves going into really small villages at three locations, in Thanjavur, in Uttarakhand and in Orissa).

The typical KGFS front-end is a three-man branch in a village, where the three employees live in that very village.  Remote villages in India are an environment of radical transparency.  The households are relatively trusting.  The three people in the outlet know an incredible amount about the households that surround them.  Households and dwellings in small villages are rather stable:   there is relatively little action through migration / change in financial conditions, etc.  If there was ever an environment where asymmetric information is being removed, it is this.

The line between household finance and small business finance cannot be drawn.  An adaptation of the KGFS approach can be quite effective with small business also:  the KGFS branch would obtain a full picture of the firm, and deliver a portfolio of financial services to it.

A nice feature of the places where KGFS branches are being rolled out is the lack of alternatives.  At a time when Indian financial regulation does not do much to check the behaviour of conventional financial distribution, a few high pressure sales agents can queer the pitch for the KGFS staff.  By being in remote places that are being ignored by distributors, the KGFS staffpeople have the luxury of dealing with households without the households being tugged by various high pressure sales tactics of rival sales agents.

Urban households are being mistreated by finance

I also realised some limitations of this approach.  Looking forward, India is urbanising.  At first blush, it may appear that there is a big problem with the utilisation of finance in rural India.  But there are big problems with the utilisation of finance in urban India.

The urban middle class and upper class is deluged with sales pitches by a variety of sales agents of financial firms.  But these agents are almost always mis-selling, given their drive to push a product (through commissions) and given their lack of knowledge about the household’s overall financial problem.  Almost all financial products that are pushed in India (i.e. sold and not bought) seem to be mis-sold.  I also feel that when the conversation between a sales guy and the household is about a product and not the overall household financial choice, it is almost always leading to the wrong answers.  It’s tantamount to a salesman who sells a drug without knowing anything about the patient.

What is out there, in urban finance, is a scandal, and I am embarassed to be an accessory to the crime (in however peripheral fashion).  While in Thanjavur, I got the odd sense that, at its best, a rural household that’s well connected to a local KGFS outlet is doing better on utilising the power of finance, when compared with most urban households who are victims of the sales practices that are mainstream in Indian finance.

In this sense, the real problem for India is not the tawdry state of financial inclusion of the very poor in remote places.  The real problem for India — one that influences the bulk of Indian GDP and the households that matter greatly for India’s growth — is the tawdry state of financial planning of the typical urban household.

The KGFS approach is valuable and important to the places where it’s being rolled out.  But the burning challenge is that of fixing the mainstream.  The mode of India is not brutally poor and isolated; it is middle class urban.  Improving the interface between middle class and urban households, and the financial system, matters on a GDP scale.

An unrelated rumination: How important is rural deprivation in thinking about India?

The discussion above is a recurring theme in Indian economics.  A variety of incentives (development journals, first world aid agencies, government rhetoric) make it fashionable to emphasise rural deprivation.  But India is changing and the sweet spot has shifted.  The emphasis on poverty and rural is increasingly off centre.  To stay relevant, and do the most important things in today’s India, we have to keep our eye on the ball.

To fix intuition, it’s useful to look at the distribution of annual household income, over April 2010 to March 2011, from the CMIE household survey (Center for Monitoring Indian Economy) 143,000 households:

Percentile Household income
10 45,700
20 59,900
30 72,800
40 90,000
50 112,200
60 142,500
70 180,000
80 240,000
90 348,500

As an aside, I think it’s useful for anyone who thinks about India to memorise these nine numbers. Or at least memorise these three numbers: the 25th percentile is Rs.66,000; the median is Rs.112,200 and the 75th percentile is Rs.208,500.

Middle India today has a household income from Rs.66,000 a year (at the 25th percentile) to Rs.208,500 a year (at the 75th percentile). The old-style Indian story of rural deprivation is (roughly speaking) about the 20% of households who are below Rs.59,900 a year (and the size of that group is shrinking).  The main story of India is about the remainder.

An emphasis upon exotic poverty is as misplaced, in thinking about today’s India, as an emphasis on designer clothes.  Perhaps a bit worse, looking forward, since the extremities of deprivation are being extinguished by growth, while designer clothes are a superior good.

Urban households are a much harder problem

So it’s natural to ask: How can the KGFS approach be applied to urban India?  When dealing with the urban poor and middle class, it seems that things are much harder.

Rural households tend to be more trusting, particularly in an environment of ethnic homogeneity and the repeated game that prevails in the village setting.   But in urban India, households are more skeptical given the lack of ethnic ties and given the greater experience with people who have finked in prisoner’s dilemmas.

Rural households tend to be a stable household in a stable dwelling place.  Urban households tend to be physically mobile with greater fluctuations in the household composition.

Until deeper reforms on consumer protection take place in Indian financial regulation, urban households will be constantly tugged by unscrupulous sales agents of financial firms pushing products based on high pressure tactics.  Even if a KGFS tried to be patient and thorough, the very presence of such high pressure sales tactics would contaminate what a KGFS and its ilk can do.

It is relatively easy to construct information about the economic environment of a farming household (though seasonality and revenue volatility is a serious concern).  I feel it may be relatively hard to even put together a picture of an urban household, particular when there is informality of labour supply coupled with entrepreneurship.  This makes it difficult to do financial planning for such households.

On the other hand, in urban India, the revenue per household would be higher, and perhaps households could be persuaded to pay for advice qua advice.  Or, the government could move on giving out advice vouchers to households, thus spurring the rise of an unconflicted advice industry.


I think KGFS is a great approach and it will be fascinating to watch them execute their agenda in the really remote places of India. What they are doing is path-breaking and important. This should help us set our sights higher on the problems of urban India.  I have traditionally felt gloomy, in the knowledge that most households in India are being scammed by the agents selling financial products.  As I look at KGFS, I find myself thinking:  Can’t we do something like this in mainstream India? I think this is an important question to ask.  At the same time, there are some visible hurdles which suggest that this will be hard.


I am grateful to Bindu Ananth, Ramesh Ramanathan, S. G. Anil Kumar, Kshama Fernandes and K. P. Krishnan for many conversations which helped in improving this post.

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