Understanding India’s Unbanked Parents

The Problem

Through my placement at an affordable private school (APS) in Hyderabad, I’ve learned that timely and full payment of school fees is one of the universal challenges in virtually every APS. These schools rely solely on monthly and term fees—typically between $5 and $20 per month—to pay their bills. Many schools struggle to maintain financial sustainability because fees aren’t paid in full or on time. School owners use a number of mechanisms to attempt better fee collection including discounts or other leniencies, incentives, and regular journal and SMS reminders. Because school owners and administrative staff are so entrenched with the community, they have a difficult time not providing fee payment extensions and discounts to their neighbors. If school fees aren’t paid by exam time, students are forced to sit out of class or exams, which affects student learning and progress. One mother, a maid, recently mentioned to me that her two children missed a whole week of school because she couldn’t pay fees. While some parents have the money and simply don’t pay on time, most parents are truly struggling to meet school fees payments.

Parents are unable to pay school fees on time for a number of reasons. One of the main reasons is that many parents are daily laborers that live with unpredictable and irregular low wages, which makes paying school fees in a bulk amount at the same time every month difficult. There may be other less known reasons for late fee payment as well, including lack of parent accountability. [1] Stories about fathers having money to pay fees but instead spending it on alcohol are not unheard of. School owners also tell of the phenomenon of parents not paying fees at one school until the school kicks them out, then going to another school in the area, not paying fees there, and continuing the cycle.

Background Research

In trying to determine the root causes of the school fee payment problem, and how to develop potential solutions, I’ve developed an interest in better understanding low-income finances including spending and savings practices. I’ve since learned that India has the largest unbanked population in the world—145 million households. [2] Despite this fact and the common notion of “but how can the poor save if they don’t have money,” research from 2007 shows that 81 percent of Indian households do save in some form. [3

I’m currently reading the book Portfolios of the Poor: How the World’s Poor Live on $2 a Day, which helpfully describes the spending and saving mechanisms of the world’s poorest populations, including households in India. The book explains that low-income households use a complicated mix of a variety of financial mechanisms, from microfinance and loans to “shoebox savings” to bank accounts. Looking at cash flow alone is insufficient when examining the finances of low-income households because many households use non-financial assets as a form of money and savings. One problem for low-income populations is that incomes are not just low, but irregular and unpredictable, and there are not enough financial instruments to effectively manage the uneven flow. This issue causes a cyclical problem of unpredictable finances in low-income communities. For example, it directly affects school fee payments, resulting in the same problem for the schools, which in turn are unable to predict cash flow or pay salaries on time for teachers and staff, whom live in the same community and whose children attend the same school.

I also recently met with someone who has worked in financial inclusion in India for years. She explained that contrary to common perception that low-income populations are financially illiterate, finances and financial decisions play an important role in their daily lives, making them very financial literate and aware. However, low-income populations do lack awareness of the financial products available to them and perceive saving accounts as not applicable to them at their income level.  She argued that for these reasons, instead of calling trainings and awareness efforts “financial literacy,” we should call them “financial education” or “product awareness.”

In addition, she explained that research with low-income populations has determined that the term “savings account” turns off low-income individuals because they perceive these accounts to be for more wealthy individuals. But low-income households will use “commitment accounts” because the concept and name resonates with them more. Commitment savings accounts are essentially the same as any other low-income savings account option (usually a No Frills Account with a zero or low balance minimum), where customers are encouraged to save for a particular goal.

First-Hand Accounts

To further understand the major stakeholders in this issue—the parents that pay school fees—I held a meeting with a dozen parents who were at my school for parent-teacher meetings. With the help of a friend who translated in Telugu and Hindi, I asked the parents a series of questions in informal conversation on their saving habits.

Of the dozen parents, only a couple had formal saving practices with a bank or otherwise. The most impressive parent, a Muslim mother of two who had passed Class 10, spoke of the multiple savings plans they have for their children including land ownership and a life insurance plan, which they learned to set up through a government employee relative. They aren’t wealthier than others in the community—she is a housewife and her husband works on a dairy farm—but they make decisions on a daily basis to prioritize their child’s education over their lifestyle, such as foregoing meat for dinner in order to save for monthly school fees. Another father mentioned putting savings away in order to pay fees on time. While there is not enough data or examination of other factors to determine a correlation, the parents who saved regularly expressed no problem in paying fees in full or on time, and also had children with higher grades at school.

The other parents lacked a general knowledge of the savings options available to them, thought that their income was too low to save, or only saved by putting some money aside in the equivalent of a shoebox. Some of the parents less aware of savings options were mothers who were housewives or maids who didn’t finish school past Class 8.

All the parents I spoke with were interested in learning about saving options for their children, especially in regard to long-term savings for college and the future. Just the fact that I was asking them questions related to their savings practices was enough to spark their interest.

Finding Solutions

As part of a working group of fellows, we are currently examining several potential solutions to address the unbanked parents and school fees issues. I believe that these issues are intertwined, and if we can encourage savings awareness and practice among parents, regular school fee payment can increase and schools will become more financially sustainable.

We’ve explored a few options, including financial education courses held at the school, and the potential of offering child savings accounts linked to APS. I created this graphic below for an assignment for my fellowship, which outlines my theory of change thought process (based on several major and unconfirmed assumptions) for how child savings accounts for low-income households could lead to better quality education in India and eventually help break the cycle of poverty.

If you have experience or expertise on this issue, I would love to hear from you and exchange ideas. 

[1] If this is an accurate assessment, it is an important counter-argument to James Tooley’s notion that APS “are the solution.” Tooley’s main argument for why APS work is because schools and teachers are accountable to parents. But this line of reasoning ignores the accountability factor for the parents and that accountability does in fact need to work both ways for APS to provide quality education. My thoughts on this are for a different post.

[2] “From Social Banking to Financial Inclusion: Understanding the Potential for                             Financial Services Innovation in India,” Eric Tyler, Anjana Ravi, Sunil Bhat, Minakshi Ramji, and Anjaneyulu Ballem, October 2012

[3] “From Social Banking to Financial Inclusion: Understanding the Potential for                             Financial Services Innovation in India”


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