How UPI is Worsening the Financial Math & Health of Indian Self Employed?

A study to understand the impact of the UPI disruption on the financial planning of self-employed Indians

At BadhatX, we have conducted extensive on-the-ground research over the past five months in Tier 1, 2, and 3 cities in India, to gain insights into the financial planning habits of self-employed individuals. Our research has involved interviewing over 600 individuals, including shopkeepers, cab drivers, freelancers, plumbers, and others.

Indian shopkeepers is a big chunk of indian self-employed individual and play a significant role in the country’s economy and social fabric. They form the backbone of small businesses that are the cornerstone of local communities, providing essential goods and services to residents.

Traditionally, most Indian shopkeepers are self-employed, running small family-owned stores that have been passed down from generation to generation. They work long hours, often seven days a week, and are highly dedicated to their trade. This hard work and dedication are rooted in the cultural values that prioritize entrepreneurship, self-reliance, and a strong work ethic.

Role of Black Money in their savings

In India, when cash was the dominant form of currency, a large portion of the population’s earnings went unrecorded. This made it difficult for them to invest in the formal sector. Instead, they would save their money in cash, gold, property, and local chit funds. The only formal saving option available to them was a bank fixed deposit, which offered long-term security and the convenience of an overdraft facility.

Additionally, it’s worth mentioning that the lack of access to formal banking services also made it challenging for these individuals to manage their finances, plan for their future, and make use of other financial products and services such as loans, insurance, and other investment opportunities. This not only limited their potential for financial growth but also put their savings at risk.

The adoption (UPI) has been a game-changer for the population in India. With UPI, a large portion of previously unrecorded earnings is now accounted for, providing individuals with more transparency and accountability in their financial transactions. As a result, many people are now more open to investing in formal modes of investment to ensure the safety of their money. This shift towards formal banking and digital financial services is not only improving the overall financial literacy and stability of the population, but it’s also providing them with greater access to a wider range of financial products and services, thereby empowering them to take control of their financial future.

Their Income & Saving pattern

One thing very core to Indian Self-Employed people is their variable income pattern. Based on the type of business, their income may significantly vary on a daily, monthly or per season basis. This increases the unpredictability of their final take home saving after a stipulated time period but the expenses remain constant. This mismatch and poor financial planning worsen the already weak fiscal condition of a business.

Before the introduction of the Unified Payment Interface (UPI) in India, shopkeepers typically saved money in a variety of ways. Some common methods included:

1. Cash savings, Bank deposits, Investments, Informal savings groups (Local chitty, kitty funds)

Just a few years ago, cash was the primary mode of payment in many parts of India, and businesses often collected payments in cash on a daily basis. This would result in a buildup of physical cash, which the business owners would then deposit in a bank or store in a locker for safekeeping. Over time, as the savings accumulated, they would invest in assets such as land or gold.

Let’s take a closer look at the difference between a salaried individual and a self-employed individual earning 30,000 INR per month. A salaried person can easily save 3,000 INR at once when their salary is credited, but a self-employed individual faces a challenge in saving the same amount all at once. This is because a self-employed individual typically earns around 1,000 INR per day and saving 3,000 INR at once would impact their working capital and daily expenses. To achieve the same saving goal of 3,000 INR, a self-employed individual may need to adopt a different approach.

A salaried person can fulfill the fixed commitment like rent, utility bill, EMI, SIP and others in the salary week without any pain but a self employed person has to save and keep money aside on a frequent basis on a month to fulfill the commitment.

Earlier Behaviour of Managing Financials

An Indian Sweet shop owners Cash Drawer In Tier 3 City

In the past, it was common to observe merchants bundling their cash into separate stacks and securing them with rubber bands. This practice was performed on a daily basis to allocate funds for various expenditures such as loan payments, party expenses, rent, and monthly contributions to savings groups (Chit Funds). This simple yet effective method of organizing funds helped merchants avoid the temptation of misusing funds earmarked for specific purposes.This approach might seem simple, but it’s actually quite savvy. By physically separating their money, they were able to avoid the temptation of dipping into funds earmarked for other purposes. It’s almost like they were giving each stack of cash its own “budget.” What a clever way to manage one’s finances!. Clearly a DIY version of savings account.

2016 Recurring deposit Passbook of bangalore based auto parts shop

As a self-employed individual, traditional methods of saving can be challenging due to the inconsistent and fluctuating nature of their income. However, there are still many cooperative banks and societies operating in smaller cities that provide an alternative solution. These banks send their agents to visit local shops on a daily basis to collect daily installment payments for their savings accounts. The shopkeepers have the flexibility to contribute a varying amount each day, depending on their daily earnings, making saving a more manageable and painless process.

The Problem arises

Indeed, cash has been a prevalent form of currency in India for generations and its usage has become a deeply ingrained habit in the population. In the past, managing finances in a physical form was the norm, and it allowed people to easily keep track of their savings and expenses. However, with the shift towards digitalization, businesses now primarily operate through a single current or savings account, accepting payments and making expenditures on a daily basis. This has made it challenging to set aside funds for fixed commitments, as it becomes difficult to distinguish between working capital and personal expenses. The shift towards digital finance has brought with it many conveniences, but it has also posed new challenges in managing one’s finances effectively.

One of the statement that an indian sweet shop owner told us when asked about the efforts it takes to manage financial was “ For a salaried individual, the process of financial planning can be relatively straightforward with a fixed salary that requires only twelve efforts a year. However, for us, the task of financial planning can be significantly more complex. With a variable income and the added pressure of generating a steady flow of revenue, we have make over 300 efforts each year ( Total Business Days) to effectively manage our finances and with so much to do in a day doing this is not possible for us now”

At BadhatX

At BadhatX we are working towards financially empowering Indian Self employed people.

Contact : suyash@badhatx.com