A very irate 70-year-old spoke to me sometime back about his bugbear with the inflation stories he was reading in the papers. The inflation numbers had just been announced and the papers had stories about the rising real return on deposits. The stories celebrated the fall of inflation leading to positive real returns. This means that an inflation number of 4% and a deposit rate of 6% gives a ‘real’ return of 2%, as against an inflation number of 8% and deposit rates of 6% giving a negative real return of 2%. People don’t understand that they are better off, said the stories and comments, they just see the lower nominal return and feel poorer even when they are not. “It’s not as if the price of milk or vegetables has come down,” the septuagenarian grumbled. He’s right. The bite of inflation is such that even when inflation numbers go down, it just means that prices are still rising, but not as fast as before. What the commentators forget is that inflation too has a compounding effect. If compound interest on savings makes our money grow faster, the compounding of inflation makes our money buy less and less. For a retired person sitting on a fixed pot of savings and living off its interest, falling rates of inflation also mean falling deposit rates and that means insufficient funds to live on.
This would easily qualify as one of the worst moments of your life. That ping which says: your account debited with Rs30,000, and your current balance is now Rs2,467.20. Your blood chills and hands shake as you realise that you’ve been robbed—this is not a transaction you just made. Did I schedule a payment and forget about it? Did my spouse, who has my personal identification number (PIN), make a transaction? But I did not get a one-time password (OTP). You feel exactly the same way as you would, had somebody physically snatched your purse out of your hands. Robbery leaves the same feeling of disbelief and damage, whether it is virtual or not—the loss is very real.
While the loss you take home when cash is ripped out of your hand is yours, the responsibility is that of the bank when it happens in the virtual world. The banking regulator, Reserve Bank of India (RBI), has taken forward the draft it had released in August 2016 that thought through liability issues of electronic theft of money. The bank will now have to make good your entire loss if it happens through an unauthorized transaction or if the electronic theft happens due to a fault within the bank’s systems. You don’t even need to report this. For instance, when the data of nearly 3.2 million debit cards was compromised between May and July 2016, it was due to a virus in the systems of Hitachi Payment Services, the firm that manages the bank’s ATM network. In an event such as this, you do not have to report the loss of money, the bank will have to make good on it because its system failure caused the loss and many people are affected.
How much money we need to retire at age 60 can be answered in many ways. I wrote earlier (you can read it here: bit.ly/2ruHEtK) that you need eight times your annual income at age 60 to retire comfortably. Plenty of people wrote back to say that a more useful benchmark will be an expense multiplier rather than an income multiplier. An expense multiplier is, in fact, a better way to crack the same problem because at the same level of income, different families will have very different expense behaviour. I know families that don’t know where their money goes and others who have tiny expenses because of their chosen lifestyle. An expense multiplier assumes that you know how much you spend. Many families are clueless of their annual expense number—money comes in and money goes out. So get a hold on how much you spend in a year as a first step.
I don’t think there will be many people in urban India who do not have a bank mis-selling story to share. The systemic use of bank branches to mis-sell life insurance products and to churn mutual fund portfolios is now part of the urban Indian discourse. The problem is not new. I remember first raising the issue of banks mis-selling insurance and mutual fund products in 2007 with one deputy governor of the Reserve Bank of India (RBI). I was treated to lunch and anecdotes from those in the room of how people close to them were ripped off by banks. In fact, subsequently, in every committee I served on—Swarup Committee 2009 (bit.ly/2tLat6F) and Bose Committee 2015 (bit.ly/2rS3xmK)—the offline conversations included stories of bank branches turning into dens of tricks and traps. I’ve raised the issue of mis-selling with RBI, and with the ministry of finance, and so have others who work in this space, most notably Moneylife magazine (bit.ly/2t7r5HJ and bit.ly/2sHtN6b), which has raised it on multiple occasions. But the messaging that came down from the towers of oblivion on Mint Street was always the same: not our problem; let the sector regulators deal with this.
As a kid I remember getting irritated whenever the old people would get together. Now they’ll start talking about how expensive everything is, I used to mutter. Back in those days, kids couldn’t utter aloud all the insidious little comments that were swimming around in their heads when adults were around. “Arrey, on a salary of twenty rupees you could run the house and then have something left over? That shawl mamijee wears, no? That cost a full five rupees. Now toh, you can’t buy it for five thousand only.” Everybody shakes their heads. “Tch tch. Zamana hi kharab hai (these are bad times).” As a kid I remember buying sweets for 5 paise and bus tickets cost 25 paise (and I’m on my way to irritating the life out of kids in the family). My daughter has never seen coins below one rupee. Her daughter will probably say the same for fifty bucks. The fall in purchasing power is the reason that we worry about meeting our expenses when we retire.