Monika Halan, Mint 8/4/2015
Goal setting, habit creation and working on problems ex-ante rather than ex-post
That Narendra Modi is a skilful orator is not news, but to hear him in person and to see him use ground-level common sense to drive home financial lessons to an auditorium full of bankers is quite an experience. The venue was the 80th birthday party of the Reserve Bank of India (RBI) at the National Centre for Performing Arts in Mumbai. And in case you were wondering, as I did, as to why celebrate 80 years rather than the global norm of 75 or 100, Modi said that 80 years is special to Indians because it marks the sahastra darshan or the 1,000 viewings of the full moon by a person who turns 80.
The Prime Minister started off by admitting that most of the conversation relating to finance goes over his head—since he’s not endowed with the needed “software” to understand it. But then he went on to demonstrate that jargon is not what is needed and that a commonsensical practical world view does just as well—in fact, better. What struck me were three lessons, two of which could have been out of a financial planning text book and the third is still to be written into financial sector regulation—but it will be.
Lesson one: goal setting. Modi wants the RBI to set a goal to get India fully financially included by the time it hits 100 in 2035. A goal that is so far away, like retirement planning, has the ability to get ignored. So financial planning 101 says, break up the goal into smaller bits, and pace yourself. Modi’s roadmap for RBI is to set event-based goalposts over the next 20 years—2019 marks Mahatma Gandhi’s 150th birth anniversary; 2022 is India’s 75th independence anniversary; and in 2025, RBI turns 90.
Lesson two: habit creation. He said that his aim is not to make financial inclusion a “programme” but to make it a swabhav—that loosely translates into the word “habit”. Financial planning is all about inculcating good money habits. Unless you make looking after your money life a habit, hands-free money management will not happen.
Lesson three: working on problems ex-ante rather than ex-post. Modi used the example of turning the gas subsidy into a direct cash transfer as an example of working on the problem ex-ante—the corruption of fake accounts declines significantly if the subsidy changes its form. The latest work in financial sector regulation is coming around to the view that removing the skew in financial products that lead to cheating consumers should be done ex-ante rather than spending on catching market failure and then punishing ex-post. Writes Luigi Zingales in his 2015 paper, Does Finance Benefit Society: “In designing rules we economists need to think about how these rules will be adapted and enforced under heavy lobbying pressure. For this reason, rules that modify incentives ex-ante rather than repress behaviour ex-post are to be preferred: enforcement can be more easily blocked by lobbying.”
The Financial System Inquiry set up by the Australian government found it necessary to improve financial consumer outcomes by mandating a design intervention—something that has been off the table in financial sector regulation as the sector had convinced policymakers that any reins on product structure will curb innovation. The Inquiry recommended better consumer outcomes through measures that “improve the design and distribution of financial products through strengthening product issuer and distributor accountability, and through implementing a new temporary product intervention power for the Australian Securities and Investments Commission”. Read it here: http://mintne.ws/1O25L8m. In other words—let’s work ex-ante to kill conflict of interest, rather than chase the white-collar criminals ex-post.
End Note: I cannot help but end this banking story with this one. Rajan Mehta, formerly with Benchmark Mutual Fund and now experimenting in the health sector, forwarded me a Whatsapp message. His comment: “Mis-selling by banks seems to have been acknowledged by common people”. Here goes:
A branch manager went to a tailor and said, “I want a suit to be made in seven days as I have to attend a wedding”. The tailor said, “Yes. It will be done.” A week later when he asked for the suit, the tailor handed him asalwar kurta with dupatta. The bank manager got angry and shouted, “Mera suit ka kya kiya (what did you do with my suit?)?” The tailor replied: “Yehi aapka suit hai (here it is).” Bank manager barked back: “Ye ladies suit hai, pagal hai kya? (this is a ladies suit, are you mad?)” and shouted angry words at the tailor. The tailor finally said, “Chup! (shut up!)” The bank manager went silent. “Ab pata chala kaisa feel hota hai jab main aapki branch mein FD (fixed deposit) karane aaya thaa aur aapne mujhe insurance bech diya (now you know how it feels when I came to do an FD in your bank and you sold me an insurance plan).”
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