More than four decades ago, the field of microcredit was born out of a radical concept: poor people, when lent small amounts of money, pay back in a timely manner. In the meantime, that money can be put to use in ways that help boost income — goat-farming, say, or carpet-weaving — and, ostensibly, raise a family’s standard of living.

As impoverished borrowers began defaulting on debts at alarming rates in recent years — sometimes with fatal consequences — many organisations began questioning the power of credit. It led to soul-searching by the industry and to the rediscovery of a new radical idea: that the thing people really need, more than business loans, is a safe place to save their money.

It’s what development expert Robert Vogel famously called the “forgotten half of rural finance”. It is now being universally acknowledged that the most basic and universal instrument of personal finance is: the piggy bank.

Access to right financial tools at critical moments can determine whether a poor household is able to capture an opportunity to move out of poverty or absorb a shock without being pushed deeper into debt. The poor don’t need simple banking tools; they need tools that can help them navigate their complex financial lives that are marked by many needs and inconsistent income.

Given the variability of their income, the poor are vulnerable to disruptive events such as sickness or death in the family or weather shocks which overwhelm family finances and may prevent families from hanging on to accumulated assets (including productive assets). These shocks can quickly sink families into spells of extreme duress. As a result, the poor lead precarious, anxiety-ridden lives with risks looming much larger than opportunities.

The benefits of microcredit are often extolled, but debt remains debt — it always increases risk and borrowers are sometimes overstretched. Savings help people manage risk affordably and conveniently, with less monetary burden . And savings matter, especially to women. Even in traditional societies, no matter how oppressed women are or how unschooled, they are often stewards of family savings.

Early adopters of ‘savings-led microfinance’ find that the demand for savings accounts far outstrips the demand for loans. Research shows that when they are offered side by side with loans, people chose savings over loans at rates of up to 12:1.

Savings increase their capacities to manage cash-flow, smooth the bumpiness of uneven incomes, reduce the impact of the lean season, become more resilient in the face of shocks, build assets or invest in a family business and, most importantly, become empowered to improve their status in their households and communities. A safe and smart savings account can transform villagers’ lives.

Savings also serve as a form of self-insurance and enhance the sense of well-being. They are a gateway to self-employment and job creation. Lower-income families can convert savings into home purchases, education and microenterprise.

The key to effective financial inclusion is a safe and confidential savings account for every woman. The older ones advise the younger ones to keep a store of value that other family members don’t know about. When there is an emergency, they will appreciate you.

Despite conventional wisdom, poor people actually do save, even if it’s just pennies each day. They use a variety of informal mechanisms: hiding cash at home, loaning funds to relatives, participating in rotating savings groups with their neighbours, engaging deposit collectors, buying livestock or other physical goods such as jewellery or construction materials. This surprising diversity of savings mechanisms is in fact because none of them is reliable and safe.

We must think beyond the standard microcredit model. Modern microfinance — savings and insurance, and more flexible credit products — often has generated larger impacts than simple credit, according to microfinance researcher Dean Karlan, who is also the founder founder of Innovations for Poverty Action.

As former RBI governoer Raghuram Rajan emphasised, credit should follow and not lead. “Savings habit, once inculcated, not only allows the customer to handle the burden of repayment better, it may also lead to better credit allocation,” according to him.

The writer is the author of Village Diary of a Heretic Banker