Does family culture drive investments in bank deposits?

Abstract

Indians are traditionally known for their orientation towards savings and preference for safe investments. Post independent India has been continuously witnessing higher rates of savings. The increase is more pronounced during the recent years. On the investment side, many new instruments have been introduced during the last two decades to attract the public. As a result the level of awareness about investments such as the stock market securities is more. Against this background, this paper attempted to study the preference of investors from the educated and business backgrounds in a cosmopolitan city and the reasons for their investment behavior. The results indicate that people prefer to invest in safer avenues with a large number of them preferring assets such as bank deposits. Further analysis of the data indicates that the family culture plays a dominant role in investments decisions.

Introduction

India has one of the highest saving rates in the world. Traditionally Indians showed a higher preference for safer avenues such as bank deposits. Since the 1990s changes have been introduced in the financial system and there has been an increasing awareness about different avenues, particularly the stock market investments. This paper presents a summary of the investment preferences of different groups of people and the background for such preferences with the help of three different studies conducted in the city of Coimbatore during the period of three years between 2004 and 2007.

Saving rates in India

It is well known that Indians are one of the huge savers in the world. The saving rates of the different sectors of the economy, namely the household, private corporate and government sectors, for the different decades beginning from the 1950s are given in Table 1 below.

Table 1

We could see the savings rate of the economy doubling from the 1950s to the 1980s, from around 9 per cent to more than 18 per cent, and increasing further to 34.8 per cent in 2006-07. Such a high increase in savings has been achieved mainly through the efforts of the household sector. Here, the family owned non-corporate entities involved in business are also included under the category of households.

Composition of household savings

It may be useful to note that the share of physical savings is slightly higher as compared to the financial savings of the household sector. In the category of financial savings, the largest saving avenues are generally the net deposits, small savings, insurance and provident funds. Table 2 below provides the percentage share of different financial assets in the total financial savings of the country from 2000-01 to 2004-05.

Table 2

Table 2 clearly reveals the preference of the Indian public towards claims on government, insurance funds, provident funds and bank deposits. The table shows the preference of the investors towards secured investments. This only indicates that the Indian citizens are cautious by nature. It is important to note that the percentage of funds invested in stock market securities has remained less during the above period. This shows that the capital market instruments are not in the priority list of investments among the Indian public, though the stock markets have become popular during the recent years.

Traditional and indigenous avenues of savings

The traditional avenues such as gold and indigenous mechanisms are more common among Indians. India remains one of the largest buyers of gold in the world. In the past, the Indian demand was more than 20 per cent of global consumption. McKinsey Report 2005 noted that the amount invested in gold was much larger than the aggregate capital raised from the stock markets. It mentioned that Indians possessed $200 billion worth of gold, equal to nearly half of the country’s bank deposits, and during the previous year bought $10 billion worth of gold which was nearly twice the amount of foreign direct investment into India. Vaidyanathan (2004) notes: “If we include gold alone in the savings, then the savings rate would be higher by another two percentage points.” There are other types of indigenous avenues in different parts of the country such as chit funds that are used to save funds.

Capital markets

The growth of Indian capital markets since the 1980s is significant in the history of post-independent economy. While only nine stock exchanges were established over a period of hundred years, between 1875 and 1978, thirteen exchanges were set up in different parts of the country in the next two decades. By any yardstick - the amount capital raised or the numbers of investors or the number of companies listed or turnover -, the capital markets have seen higher rates of growth during the last quarter of a century.

Capital markets have been witnessing radical changes especially since the 1990s more in tune with the developments at the global level. The major initiatives introduced during the period include policy changes, newer systems, innovative products, nationwide exchanges, electronic and paperless trades, moving settlements and professionalism. As a result the markets began to attract the attention of more number of people.

Table 3 shows the important indicators related to the two major stock exchanges, namely the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) for the last three years.

Table 3

The Indian markets are presently counted among the important markets at the international level. In the recent years, they have emerged as the major destination for parking funds by the foreign investors. Portfolio investments have increased gradually in the stock markets, from around $ 2 billion in 1995-96 to more than $ 20 billion in 2007-08 (RBI, Oct 2008)

Studies on Savings and Investor Preferences in Coimbatore city

Three studies were conducted among different categories of people in Coimbatore city to find out their savings, investment and spending preferences during 2004 and 2007. The sample for the first study consisted of school teachers, college teachers and doctors (Kanagasabapathi and Gayathri, 2004). The second study was conducted among bank officials, business persons, professionals such as engineers, chartered accountants and sales persons ( Kanagasabapathi and Sivaranjani, 2004). The third study specifically targeted the women academicians working in selected colleges (Kanagasabapathi and Nancy, 2007). These groups were chosen because they are better educated and comparatively more informed groups in the society, earning assured incomes. About 30 percent of the sample in the second group has education below the degree level, but their exposure in businesses makes it possible for them to know and analyse different investment avenues and take judicious decisions. Coimbatore was chosen for the studies as it is a major industrial and educational centre in South India with a cosmopolitan outlook.

The sample for the first study consisted of 279 people, with 51 percent of them being males and the remaining females. Care was taken to include people belonging to different age groups, marital status and income levels. The educational qualifications of the respondents were high with more than 77 percent of them having post graduate and professional degrees. The study revealed the following facts.

1. Out of the ten different investment options given, the first three priority items were investment in house, bank deposits and gold. The last three items were shares and bonds, chit funds and mutual funds. Insurance, post office savings, land and savings certificates were the other items in the order of priority.

2. The percentage of respondents investing in shares was 6.8 percent, bonds 2.5 percent and mutual funds 6.1 percent. The percentage of respondents investing in chit funds was much higher with 30 percent.

3. When asked to rank the reasons for investment, financial security and future of children were given the first two ranks.

4. 67 percent of the respondents said that they would deposit their funds only in banks even when the interest rates were reduced. As for alternative investments, nearly half of them preferred chit funds while 35 percent of them opted for insurance. Only 11 percent mentioned that their preference would be shares and bonds.

5. While a majority of the respondents have opined that they are more conventional in investments, about 33 percent had said that they would make experiments.

6. While 87 percent of the respondents noted that they were happy with their investments, less than 2 percent mentioned that they were not happy.

7. It was significant to note that 60 percent of the respondents preferred to buy assets in the names of their spouses, children, parents and even grand parents.

The sample for the second study consisted of 260 persons belonging to three major groups namely, bank officials, business persons and others consisting mainly of professionals. The sample covered in the study included engineers, chartered accountants, administrators and sales persons. 53 percent of the sample consisted of males and 47 percent females, with people from different age groups, marital status and educational backgrounds. The following are the some of major findings of the study.

1. Among a list of ten popular investment options indicated, the top three ranks go to bank deposits, insurance and ownership of house, while the bottom three places are secured by chit funds, shares and bonds and mutual funds. The other options are gold, post office savings, land and saving certificates.

2. Bank deposits emerged as the most preferred form of investment in this sample. Insurance policies came out as the second important avenue with about 59 percent of the respondents holding policies.

3. Among the least preferred avenues, 29 percent of the sample opted for investments in chit funds, 9.62 percent shares and bonds, while only 4.23 percent preferred mutual funds.

4. When asked to indicate the reasons for investments, financial security and future of children emerged as the top two reasons. Interestingly tax benefits were identified as the least important reason.

5. While the reduction in interest rates during the earlier periods was a cause for concern among the respondents, about 52 percent of the respondents said that they would still invest in banks.

6. When asked what they would do if each one of them were given Rs.10 lakhs, 48 percent of them said that they would deposit the same with a bank.

The third study collected details from 40 lady college teachers belonging to different age, income and family groups. Combined with the other incomes in the families, the total family income of most of the respondents were higher. The study revealed the following information.

1. 25 percent of the respondents were saving between 40 to 50 percent of their incomes and 10 percent between 30 to 40 percent, while the rest were saving below 30 percent. A high rate of savings among more than one third of the respondents could be most probably due to more than a single income in the families with spouses spending more on the family expenses.

2. When asked to mention the reasons for savings, while 50 percent of them mentioned future security and 42.5 percent the well-being of children, only 5 percent noted higher returns.

3. Overall, banks were rated as the most important avenue for savings. While 60 percent of the respondents gave the first rank to bank deposits as the preferred mode of savings, another 35 percent gave them the second rank. Post office instruments were the second most preferred form of investment.

4. While 30 percent invested in jewellery, 27.5 percent invested in land and buildings and more than 35 percent in insurance schemes.

5. More than two third of the respondents had given the least preference to stocks. While 5 percent of the respondents ranked stocks as the most important investment avenue, 7.5 percent of them mentioned that they would never consider them as an investment option.

6. Asked to give the reasons for making investments, while 70 percent of them mentioned safety, only 5 percent noted high returns.

7. While 47.5 percent of the respondents felt that the stock markets were risky, 37.5 said they found it difficult to understand the developments relating to the markets and 15 percent mentioned that the required information was not available to them. As a result 65 percent of them opined that there was no probability of making investments in the stock markets.

The results of the three studies indicate that that the conventional investment avenues such as bank deposits and gold are still the most preferred methods, while insurance schemes and post office instruments are getting increased attention. It is significant to note that bank deposits have emerged as the single most preferred item in two of the above studies, while it was ranked as the second major avenue in the other study. Another interesting point to be noted is that the stock market securities command a lower attention even among the well educated and comparatively more informed sections of the society. This is surprising as most of the respondents are either already aware of or in a position to understand the developments related to the capital markets easily. A good number of college teachers covered in first and third studies teach finance and investment related subjects to their students.

This leads us to know as to what could be the reason for majority of the people preferring bank deposits and other items such as insurance and gold, while giving lesser importance to stock market instruments that are expected to give comparatively higher returns at least during certain periods? In this connection it is interesting to note that even chit funds, which are not discussed widely in the academic and policy making circles, command a higher priority than stocks and bonds. There could be many possible reasons for this attitude. But the most important of all of them seems to be the safety of their investments. Why Indians are more concerned about safety than higher returns?

Further analysis of the data shows that 82 percent of the respondents in the first study have noted that family is their single most concern in life with 99 percent of them stating that their life was fulfilled if they could provide a happy home for their families. The second study revealed similar findings. While 83 percent of them said that their families are the most important concern to them, more than 92 percent of them mentioned that their lives were fulfilled if they could provide a happy home for their families. More than 92.5 percent of the respondents in the third study noted that the future security and well being of the children as the prime reasons for their investment preferences. It is to be remembered that for most of the working women who constitute the sample in the third study, their income is only a part of the total income of the family. But even when the families of the women academicians get more than one income, they do not want to take risk. The interest of the family is uppermost, whether the income of the family is through one or more sources or whether it is high or low. This probably seems to be the major reason for investment preferences towards safe and traditional assets in India. People try to avoid risky assets and opt mostly for risk- less and risk- free instruments as any risk- taking might result in affecting the security of the families and children.

Conclusion

The above studies indicate that investment preferences are more due to the cultural and family orientations than other reasons. This seems to be the most important reason why even when the saving rates remain low, the general preference of the society towards bank deposits and other safe avenues are higher. In these circumstances it is no surprise to see that the conventional and risk- free investments are the most preferred avenues even among the educated and informed sections of the society, even in an industrial and cosmopolitan city such as Coimbatore.

References:

1. Farrel , Diana and Lund, Susan, ‘Reforming India’s Financial System’, 2005 Special Edition Mckinsey Quarterly

2. Kanagasabapathi, P. and Anitha Gayathri M., ‘ A study on identification of spending and investment pattern of working people in Coimbatore city’, Unpublished report, P.S.G. College of Technology, Coimbatore, 2004

3. Kanagasabapathi.P. and Sivaranjani, S., ‘ A study on identification of spending and investment pattern of working people in Coimbatore city’, Unpublished report, P.S.G.College of Technology, Coimbatore, 2004

4. Kanagasabapathi.P and Amanda Nancy U., ‘ A study on the savings, investment and consumption pattern of women academicians’, Unpublished report, P.S.G. College of Technology, Coimbatore, 2007

5. Vaidyanathan, R., ‘The least acknowledged big savers’, The Hindu Business Line, July 15, 2004

6. Reserve Bank of India, Handbook of Statistics on Indian economy, RBI, September 2006

7. Reserve Bank of India, Macroeconomic and Monetary Developments in 2007-08, RBI, April 2008

8. Reserve Bank of India, RBI Bulletin October 2008

Table 1

Saving rates in different sectors of economy, 1950-51 to 2006-07

( as % GDP at current market prices)

Items/ Year	1950-51	1960-61	1970-71	1980-81	1990-91	2000-01	2006-07Q
Gross Domestic Savings	8.6	11.2	14.2	18.5	22.8	23.7	34.8
Household sector	5.7	6.5	9.5	12.9	18.4	21.6	23.8
Private corporate sector	0.9	1.6	1.5	1.6	2.7	3.9	7.8
Public sector	2.0	3.1	3.3	4.0	1.8	-1.8	3.2
Household sector to Gross Domestic Savings (%)	66	58	67	70	81	91	68

Source: Economic Survey 2007-08, A-10

Q: Quick estimates

Note: Household sector to Gross Domestic Savings percentages are the author’s calculations based on the above figures.

Table 2

Financial assets of the household sector during 2000-01 to 2004-05

(at current prices)

(in percentages)

Item	2000-01	2001-02	2002-03	2003-04	2004-05
Currency	7.26	11.38	11.20	12.88	12.18
Net Deposits	33.62	28.70	29.0	29.06	16.17
Shares and debentures	4.11	1.80	2.34	1.25	2.56
Net claims on government	17.55	20.64	22.06	24.76	32.88
Life Insurance funds	15.18	18.63	16.33	15.73	19.78
Provident and Pension funds	24.26	18.84	18.96	17.67	17.43

Note: The percentage figures are the author’s calculations based on data taken from the Handbook of Statistics on Indian economy, RBI, Sept. 2006

Table 3

Stock Market Indicators, 2005-06 to 2007-08

BSE NSE

	2005-06	2006-07	2007-08	2005-06	2006-07	2007-08
BSE Sensex / S&P CNX Nifty (End- period )	11,280	13,072	15,644	3,403	3,822	4,735
P/E Ratio#	20.9	20.3	20.1	20.3	18.4	20.6
Listed Companies	4,781	4,821	4,887	1,069	1,228	1,381
Cash Segment Turnover (Rupees crores)	8,16,074	9,56,185	15,78,856	15,69,556	19,45,285	35,51,038
Market Capitalisation ( Rupees crores - End- period)	30,22,191	35,45,041	51,38,014	28,13,201	33,67,350	48,58,122

# Based on 30 scrips included in the BSE Sensex and 50 scrips included in the S&P CNX Nifty.

Source: BSE Ltd. and NSE Ltd. Quoted in Macroeconomic and Monetary Developments in 2007-08, Reserve Bank of India, April, 2008

(JIMS 8M – The Journal of Management & Strategy, Volume15, No.3, July-September, 2010, New Delhi)

PROSPEROUS INDIA-5

Superior performance of Indian economy since the earliest times

India being an ancient nation with thousands of years of history and background, the necessary details of her economy since the earliest periods are not available. Moreover the quantitative yardsticks that are used now to measure the worth and performance of the economies of different countries are the creations of the last few decades. As a result we rely on the available details from different sources to understand the status and performance of the ancient Indian economy. But fortunately, the Gross Domestic Product (GDP) figures for different countries/ regions in the world are available for different periods at least from the beginning of the Common Era (CE), i.e. for the last 2010 years.

So first let us see the GDP figures for different countries/regions during 0 CE, as provided by the noted economic historian Angus Maddison to get an idea about the position of the Indian and other economies of the world. Table 1 below presents the details.

Table - 1: World GDP - 0 CE

( million 1990 international $)

Year	0 CE
Total Western Europe	11115
Eastern Europe	1900
Former USSR	1560
Total western Offshoots	468
Total Latin America	2240
Japan	1200
China	26820
India	33750
Other Asia	16470
Total Asia (Excluding Japan)	77040
Africa	7013
World	102536

Table 1 shows the total GDP of the world at that time was $102.5 billions. India’s GDP during that period was $33.75 billions and she was the largest contributor to the global GDP. China was following India with a GDP of $26.82 billions. Africa’s contribution was $7.01 billions, while that of Japan was $1.2 billions. The GDP figures are not available for the other countries individually, as most of them came into existence in their contemporary forms only in the later centuries.

Now let us look at Table 2 and see the shares of different countries/ regions in the GDP of the world during those times to know their relative performance.

Table-2: Share of Countries/ Regions in World GDP - 0 CE

Year	0 CE
Total Western Europe	10.8
Easter Europe	1.9
Former USSR	1.5
Total Western Offshoots	0.5
Total Latin America	2.2
Japan	1.2
China	26.2
India	32.9
Other Asia	16.1
Total Asia (excluding Japan)	75.1
Africa	6.8
World	100

Table 2 clearly reveals the predominant position of India in the international economy during 0 CE. It shows that India’s share of world GDP was 32.9 percent, about 2010years ago. It means that India alone was contributing almost one third of the global GDP, while all the countries in the rest of the world were jointly contributing the remaining two thirds. China’s contribution during that period was 26.2 percent. While the other countries in Asia were contributing 16.1 percent, Japan’s share was 1.2 percent. The total contribution of Asia including Japan to the world GDP was an astonishing 76.3 percent. At the same time, the total Western Europe was contributing a share of 10.8 percent and Africa 6.8 percent. It is significant to note that India’s GDP was more than three times of the GDP of the total Western Europe. No other country or even geographical region was anywhere nearer to India, except China. Even when compared to China, India’s GDP was 25 percent more. To day when countries with much lesser share of contributions are called superpowers, how should we call India of 0 CE?

We have to understand that India could not have contributed one-third of global GDP without strong fundamentals and well-functioning economic systems developed over a period of many centuries. It means India must have had superior economic systems evolved over a long period of time during the periods before Common Era (BCE). Since we do not have the details of the economic performance for different years with the required figures during those periods, we have to look at different sources that are available with us to understand the status and performance of the economy during the earliest periods.

The renowned French archaeologist Jean Francois Jarrige who studied the Indus Valley sites since the 1960s noted: “ In terms of archaeological achievements, we are in the fringe of a revolution that will prove that the vegetation and domesticity of animals had existed in Indian subcontinent around 7000 BC, ……..” In this connection it is informative to note what Daya Krishna says: “Agriculture and animal husbandry began to be developed in India during the pre-Vedic times. Rig Veda has several references to hundreds and thousands of cows; …….; and to the use of wool for clothing.” It means that India must have developed agriculture, animal husbandry and stitching techniques even during those times.

Ancient India did not seem to have rested with the development of the basic sectors. She seemed to have engaged in trade from the earliest times. Kumar and Ram note that trade existed even before the Vedic periods. To quote: “Trade as an important form of economic activity appears to have existed from the Vedic or even protohistoric times in India……..” Indians seemed to have been engaged in voyages in the ocean even before the Vedic periods and as a result India remained in the forefront of ship building industry in the ancient days.

Evidences indicate that the ancient Indians understood the importance of wealth and its creation for the well being of families and the society. Rig Veda says:

“O God! Bestow on us the best treasures:

The efficient mind, and spiritual lustre,

The increase of wealth, the health of bodies,

The sweetness of speech and fairness of days.”

Creation of wealth for the betterment of lives has been emphasized continuously in scriptures, books and sayings in different parts of the country since the ancient times.

We can understand the importance given to the economy by ancient Indians when we come to know that the study of economics as a science started in India before the common era. Kautilya is credited with writing the first book on economics and politics in the world about 2300 years back. Here we have to know that Kautilya was not the originator of the subject. He himself had acknowledged that his work Arthashastra was based on earlier treatises. He had quoted the earlier authorities in more than one hundred places in his text. Hence Rangarajan notes: “The study of economics, the art of government and foreign policy is thus very old; the development of the science in India, according to some scholars, may have started around 650 B.C.”

Arthashastra notes that “the source of livelihood of men is wealth”. It advises the kings to take suitable measures to promote different economic activities including trade and continuously monitor them. Arthashastra deals with different subjects related to the economy and its management covering different areas such as agriculture, trade, treasury, sources of revenue, accounts and audit. It advises the king to run the economy with efficient administrative machinery. It gives the structure of administration of an ideal state which includes 34 chiefs dealing with different activities such as treasury, textiles, ports, trade, mines, metals and auditing.

The teachings of the texts/ learned scholars, practices and beliefs of people and the congenial atmosphere provided by the state must have made the citizens to constantly engage in diverse economic activities. As a result different activities must have been undertaken earnestly resulting in the overall development of the economy. The Greek ambassador Megasthanese who visited India during the period of Chandragupta Maurya noted that much of India’s cultivated land remained irrigated bearing two crops. To quote: “The greater part of cultivated land is under irrigation, and consequently bears two crops in a year.”

Evidences show that the activities related to the industrial, trade and services sectors were also going on successfully. When we see intellectual the contributions of Indians of the earliest periods, we can understand that people must have been constantly engaged in study and research in diverse fields related to life and beyond. It is relevant to remember here that the first university in the world was established in India about 2700 years back. We had great scholars making pioneering contributions in diverse fields. Intellectual activities of the highest order could not have take place without a strong economic base.

Based on the accounts of Magasthanese in India, the Roman historian Arrian notes that “ all Indians are free; no Indian at all is a slave.” A country could not have remained in such an exalted position without a strong economic base and equitable principles governing the economic systems.

Available evidences point out that the Indian economy remained very active and as a result she must have remained prosperous since the earliest periods. It is significant to note that India was in possession of almost one third of the global economic wealth even before the birth of the common era.

References

1. Angus Maddison, ‘ The World Economy- A Millennial Perspective’, Overseas Press (India) Private Limited, New Delhi, 2003

2. Daya Krishna, ‘Golden Age to Globalisation – 7000 years of Indian Economy’, Swadeshi Jagaran Prakashan, New Delhi, 2002

3. R.Kumar and S.Ram , ‘ Economic Ideas of the Hindus’, Crescent Publishing Corporation, New Delhi, 2008

4. L.N. Rangarajan, ‘Kautilya- The Arthasashtra’, Penguin Books, New Delhi, 1992

( Yuva Bharathi- Voice of Youth, Vivekananda Kendra, October 2010)