Income from short term savings or capitalisation of future income - a better path

The simple equation of financial parameters of human life is to generate income, expend major part thereof to meet needs, and to save the remainder. Savings generate fund for onward investment. Financial intermediaries work on the supply of, and demand for, savings. There are different types of people depending on earning categories. Fundamentally, they are employers and employees. Employers are innovative classes. They are eager for continuous investment. They are risktakers as well. Entrepreneur class is reported to take exposure of 100 units with a money of 10 units. These classes support the economy to move forward. There is an inverse relation between employees classes and employers classes.
If all people are within the bracket of employers classes, they need to work themselves. But employment activities are run by employees classes. In such situation, all are producers of outputs, exchange of which is made among them. This is in real sense a primitive society. Modern society consists of employers and employees. The former ones are few, and the latter are huge in number. There is a fundamental difference between these two classes. Employers are risktakers and pursuing innovation. Employees are risk-avoiders and devoted to systematic works.
The savings amassed by employers are reinvested in productive activities. Their savings are used as capital for new venture. But capital is not enough for ventures, more funds are needed. Employees' savings are not so big at individual level; these are invested through intermediaries like banks and other savings-mobilising institutions. Intermediaries use savings in the form of lending to employers classes. They work as paths bridging between employers and employees in an invisible way from transforming savings into investment.
Employers' savings bring output as profits. On the other hand, interest or profit income is generated by employees against the placement of their savings to intermediaries. Employers' investment in the form of capital is perpetual, but savings of employees are used for a certain period of time. Savings earn income whatever the path is. But investment by employees is risk-free, tenure of which is medium to longer term. The output of such investment is used for big ticket purchases.
Employees classes are people under fixed income bracket. The income is not supportive to purchase durable goods. These are purchased out of savings. Long term placement of savings brings handsome amount. Employees classes cannot dare to invest the amount in the same way as employers classes do. They use the proceeds to buy something durable like home, vehicles etc. As said earlier, they are under fixed income category. Their salary income does not increase frequently, rather once a year. The incremental income does not help much due to change in price level. As such, they face problems in case of new recurring expenses appearing before them. Big ticket purchases are involved with recurring cost. Examples of which can be cited in this regard. Purchase of home increases recurring expenses on account of service charges, maintenance fees etc. Vehicle purchases lead to increase costs like drivers' salary, fuel cost, maintenance cost etc. Considering the points in view, there comes a question whether savings help or lead to a vicious cycle of expenses. This is a reality for employees class.
Financial inclusion is a much talked about issue these days. In this context, traditional financial system is found changing to a radical scale. Mobile financial services are a pathway for inclusion of people into financial system, it is said. Mobile financial services facilitate transactions without paper notes for transferring money, settlement of merchant payments, utilities bills payments and so on. These are financial services. Can they include people financially? It is a question. It is observed that few services such as services with banks and multinationals support their employees with loan benefits. Employers calculate capitalisation of future income to be earned by employees. Based on the calculations, employees avail loan facilities. These are non-repayable, rather adjustable with future income. The loan proceeds are used for big ticket purchases for which regular savings remain safe and generate income leading to increase in overall income of employees. The capitalisation in granting loan is in true sense financial inclusion; transactions facilities by banking system can never be considered as financial inclusion. On the other hand, employees without loan facilities from employers can access such loans from banking system. Availing such facilities leads employees to face financial crunch over the repayment period of the loan because repayment size is not sustainable for maintaining regular expenses of borrowers. This is a situation which can never be termed as financial inclusion, rather a situation of financial exclusion. After a period of time, borrowers may face defaults which will lead them to be excluded from financial system. Banks will realise payments through sales of the big tickets which were purchased by loan proceeds.
From the discussion, it is observed that big ticket purchases out of savings and income thereon cannot provide cost-fee support. On the other hand, use of loan proceeds from traditional system for purchase of big tickets results in default since regular income does not support repayment size. Only employers can support capitalisation of future income in the form of loan facilities to purchase big tickets, with reasonable adjustment of loans from future income. But all types of employers do not have the capacity to extend loans to employees. Only banking and its allied sectors including multinationals can help employees to capitalise future income through loan facilities for big ticket purchases. What about for other sectors is a question. Current savings will accumulate fund in future. Savings bring incremental income with a byproduct of inflation. As such, what is received as benefits in future out of savings is a matter of analysis. Intermediaries offer savings products to savers but these are not ways for financial inclusion. As said earlier, payments from one to another cannot bring people to be financially included. Only capitalisation of future income can help for financial inclusion. Capitalisation means people get money out of their future income today in the form of loans which will be adjusted from earnings in the coming days. Banking system can include people financially. They are doing the work of financial inclusion for corporates in the form of loans which are repaid in installments out of future income. But in real situation, repayments become defaulted in case of disruption of cash flows since cash flows from business operations are uncertain. On the other hand, repayments consist of principal amount and interest payments. The later one is corporate expense but principal amount is paid from the fund created out of depreciation. Repayment size of principal amount needs to be equal to depreciation. Oversize cannot ensure regular repayments resulting in default. On the other hand, employees classes are within fixed income group. Except few exceptions, most people enjoy regular cash flows. They should enjoy capitalisation of future income. People employed in banking and other relevant sectors enjoy such facilities. Except them, all others cannot have the same scope. But they are involved in financial system since they receive salary through banking channel; they maintain bank accounts for savings. Still, all of them cannot capitalise their future income though availing loans. They may be financially included but excluded to have facilities for capitalising future income.
People cannot enjoy equitable treatment in society unless they have what they need. Savings can support to a little extent, but capitalisation in the way of loan facilities can change the overall situation. However, capitalisation of future income is not so easy, traditional path of financial inclusion cannot move towards the ultimate goal. As a result, investment in short-term savings can enhance regular income.
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