India is among the world’s most efficient financial markets in terms of technology, regulation and systems. It also has one of the highest savings rate in the world – our gross household savings rate, which averaged 19% of gross domestic product (GDP) between 1996-97 and 1999-2000, increased to about 23% in 2003-04 and has been growing ever since. While savings are more in India, where the savings are invested is a cause for concern. Investments by households have been more into either bank fixed deposits, risk-free government-backed securities and low-yielding instruments, or in non-financial assets.
A majority of our households do not use modern financial markets. As per an RBI report, only 1. 4% of household savings was invested in equity, mutual funds and debentures in 2003-04. Though this went up to about 4% in 2005-06, it is still very small. Unless the common person becomes a wiser investor and is protected from wrong doings, wealth creation for the investor and the economy will remain a distant dream. We need to convert a country of savers into a nation of investors. Which one should you use?
Such questions and choices appear tough to even urban population not to talk of those in rural areas, where most of India’s population is. When it comes to financial solutions, investors tend to use thumb rules or seek advice from friends and relatives, which are often poor approximations compared to those that follow from a systematic process. If they get bad advice, their outcomes will be poor, and they will start to lose faith in the financial sector. A big improvement of financial knowledge of households is necessary so that they participate continuously in financial markets.
Financial literacy plays a significant role in the efficient allocation of household savings and the ability of individuals to meet their financial goals. It also means the ability to seek sound financial advice. Financial literacy has assumed greater importance in recent years as financial markets have become increasingly complex and the common man finds it very difficult to make informed decisions. Financial literacy is considered an important adjunct for promoting financial inclusion and ultimately financial stability.
Both developed and developing countries, therefore, are focusing on programmes for financial literacy/education. In India, the need for financial literacy is even greater considering the low levels of literacy and the large section of the population, which still remains out of the formal financial set-up. To understand financial planning, a person should be financially literate to understand the importance of preparing household budgets, cash-flow management and asset allocation to meet financial goals.
Everyone saves money for future needs but the approach is to save surplus money without preparing household budgets, without prioritizing personal financial goals, without properly allocating investments in different asset classes and without understanding the real rate of return (after adjusting for inflation). Financial literacy has become an immensely popular component of financial reform across the world.
As a response to the recent financial crisis, the United States government set up the President’s Advisory Council on Financial Literacy in January 2008, charged with promoting programs that improve financial education at all levels of the economy and helping increase access to financial services. In the developing world, the Indonesian government declared 2008 “the year of financial education,” with a stated goal of improving access to and use of financial services by increasing financial literacy.
Similarly, in India, the Reserve Bank of India launched an initiative in 2007 to establish Financial Literacy and Credit Counseling Centers throughout the country which would offer free financial education and counseling to urban and rural populations. The World Bank also hasn’t been missing out on the trend – it recently approved a $15 million Trust Fund on Financial Literacy. But what do we know about financial literacy? Does it work, and if so, through what mechanisms? Despite the money being ploughed into financial literacy programs, we know very little to address these important questions.
While it is true that there is a large and growing body of survey evidence from both developed and developing countries that demonstrate a strong association between financial literacy and household well-being, we are still in the process of learning whether this relationship is causal. While survey analysis can control for all observable variables in the survey questionnaires such as income, gender, age, education, etc. , there may be some unobserved variables, such as ability, that may be driving the positive correlation between financial literacy and use of financial services.
In addition, people who choose to participate in surveys or literacy seminars may be quite different in terms of their interests in financial matters, for instance, than those who do not participate. The positive correlations may therefore be driven by endogenous selection. Further, survey evidence cannot distinguish the direction of causality: greater financial literacy may lead to greater use of financial services, or just as likely, individuals who use more financial services may score better on financial literacy assessments based on their experience in financial markets.
Experimental studies on financial literacy, similar to medical drug trials, allow for overcoming the problems of selection and endogeneity that are associated with survey analysis. There are only a handful of completed studies on financial literacy, though more are in the pipeline. In the developed world, research evidence that financial education can affect decision-making comes from a randomized evaluation conducted at a major university in the United States.
Duflo and Saez (2003) implemented an “encouragement design,” in which they randomly offered some administrative employees a small financial incentive ($20) to attend a session which provided information on retirement products. Those receiving the incentive were significantly more likely to attend the training session, and this had a small, but significant impact on their savings decisions, as more individuals in the treatment group enrolled in tax-deferred retirement accounts.
In a paper I coauthored with Shawn Cole and Thomas Sampson, we provide the first study in this direction in the developing world, through a randomized evaluation of a financial literacy training program in Indonesia. Participants in this study consisted of unbanked households, half of whom received an invitation for a free financial literacy seminar 2-3 hours in length. Although take up of the training is high, we find no effect of the program on the likelihood of opening a bank account in the general population.
We do, however, find that the training has a significant impact on unschooled and financially illiterate households, increasing the likelihood of opening a bank account by 12% and 5%, respectively. These results suggest that financial literacy training programs should be carefully targeted at these subgroups of individuals. Additionally, a more comprehensive financial literacy program that is delivered over several weekly sessions, rather than a single session of a few hours, may be required to change financial behavior among households in the general population. The need for a more detailed and extensive financial education
program is also reflected in research by Cole, Gine et. al (2009) on rainfall insurance for low-income farmers in Andhra Pradesh, India. Specifically, they randomize the provision of an education module about converting the measurement of rainfall in millimeters to soil moisture. Since farmers typically decide when to sow using soil moisture whereas insurance payouts are calculated using millimeters, the education module should improve farmers’ understanding of the insurance policy. However, results indicate that the education module had no significant effect on insurance participation, possibly because the intervention was quite minimal.
The education component only involved using a ruler to demonstrate a length of 10mm and 100mm, and subsequently showing a chart of how 100mm of rain translates into average soil moisture for a particular soil type. Moreover, the information was presented quite briefly, taking no more than 2 to 3 minutes. Thus, a modest amount of financial education appears to be insufficient in inducing households to participate in financial markets, and a more thorough financial literacy program may be necessary to do so. There are even fewer ongoing studies attempting to look at other aspects of financial literacy behavior.
Exceptions include Cole, Shapiro and Zia, who are conducting a randomized evaluation of a video-based financial literacy training program in India, which includes modules on loans, savings, budgeting and insurance. Elsewhere, Hastings and Mitchell are conducting an experiment among Chilean households, to determine whether or not financial literacy has an effect on an individual’s ability to make optimal financial decisions; and Karlan, McMillan and Kutsoati are carrying out a randomized control trial in Ghana where rural bank customers receive six 15-minute financial literacy lessons.
The jury is still out on whether financial literacy is a useful and cost-effective tool for promoting financial access. The studies mentioned here and many more that are in development should enhance our understanding of what works, how it works, and for whom it works. Indians have better financial literacy levels than most others globally and rank second out of 10 leading nations in having a basic financial literacy level, a survey said. “Indians turn out to be the second out of 10 leading nations in the world to have a basic financial literacy level (55 per cent), just behind the Japanese, an ING Consumer Resourcefulness Survey, said.
A majority of Indian consumers have not only shown better skills in managing their household financial budget but are also confident of facing any financial impediments in future as compared to citizens of nine other countries, the survey said. The survey was carried out amongst 5,000 consumers across ten major nations, including India, the USA, Mexico, The Netherlands, Romania, Poland, Belgium, Spain, Korea and Japan. The survey shows that a whopping 84 per cent of Indians prefer buying life insurance products as compared to 54 per cent globally.
A similar percentage of Indians believe in maintaining a household budget with a focus on savings. School for Investor Education & Financial Literacy (SIEFL) Financial Literacy Programmes through schools: NISM intends to introduce financial education in schools through the Pocket Money program. Currently the program covers more than 4300 children from 32 schools across North, South and East India. The program is in the process of being introduced in the schools in the Western region. The Spread of Financial Literacy
It is better to start early with the process of financial education as discipline in money matters is an important characteristic of an individual. Children should be taught the benefits of saving and introducing the age old concepts of having a piggy bank can be a welcome start. Schools need to inculcate these habits in students and gradually introduce them to the basics of personal finance. A beginning has already been made by introducing subjects on basic finance in the school curriculum at certain centers.
Reserve Bank of India is promoting this early education of children by adopting a friendly and entertaining way through the medium of comics. They are also encouraging the young to participate in contests, the winners of which are awarded scholarships. It is the vulnerable sections of society like women, senior citizens, the rural and urban poor who need to be adequately educated and equipped. The Financial Literacy programme of RBI is tackling all these issues through different means. Their website is a store house of knowledge provided there is an urge to learn.
The individual has to be proactive and be eager to grasp the necessary knowledge to safeguard himself and thereby his money. RBI is making extra efforts to be as transparent as possible in the larger interest of the common citizen by reaching out to them through their out reach programmes. These pro-grammes which were held during the 75th year of RBI in 2010 in far corners of the country were primarily to educate the masses about the activi-ties of RBI and how to utilize the available banking services for their betterment.
Most banks also have their financial literacy departments and credit counseling centers where personal problems are addressed. How much of these centers are successes is deba-table because a very small percentage of people know about these facilities and even if they know there is an inherent hesitation to seek their help. The websites of banks and financial institutions also have all the details about their products and services. In case of doubts it is advisable to refer to these portals to avoid making any wrong or improper decision.
The concern is that incomplete or half baked knowledge is not used to take decisions which are repented later. BCSBI or Banking Codes and Standards Board of India have been set up by RBI as an apex body to improve the working of banks and introduce systemic changes wherever necessary for better treatment of customers. While their primary focus remains on customer service they are also participating in disseminating information on different aspects of banking. For an effective literacy campaign it is important that information asymmetry between service provider and customer is reduced.
In this connection banks have unilaterally undertaken to comply with a Code of Commitment to Customers detailing the nature of services provided by banks, the normal time taken for rendering these services and the various obligations of banks who have signed these codes. Only when there is awareness can the customers use the code to their benefit. It is for the individual to take advantage of the provisions provided there is willingness to learn. BCSBI also publishes a quarterly newsletter which is both informative and educative.
The importance of promoting financial literacy and the enormity of the task is being gradually understood. This has made many organizations enter this field to make their presence felt. Innovative ways have been adopted to keep the literacy efforts simple and user friendly for maximum benefit. Websites, print media and audio visual communications relating to financial education are easily accessible for the average individual to improve his under-standing of the financial market, its products and services.
National dailies, banks, financial institutions, private organizations are individually contributing through easy to understand pamphlets, comic strips, newsletters etc. to reach the consumer covering fundamental issues. Seminars, conferences, interactive sessions are often arranged to address issues of common concern and dissemination of information. Spreading of information and awareness is critical for an emerging economy like India. If the vast population of deprived people is brought into the mainstream it would be of immense benefit both as a social necessity as well as an economic push.
The call for financial inclusion in the country has therefore become an immediate priority and is engaging the attention of policy makers for effective execution. It would reap dividends only when the targeted people are financial literate. Only then would they be able to make the most appropriate choice of the products and services which would improve their position. The vast majority of our people are extremely vulnerable as they depend upon informal sources of finance for meet-in their needs.
Only by empowering them with the adequate knowledge can we hope to improve their lot and that of the economy as a whole. The penetration of banking and insurance services is extremely poor in India and if the coverage is extended by simultaneous spreading of financial literacy it would be a huge progress for overall growth. The formal channels of money transmission has to be introduced for all round benefit as for far too long the poor, gullible people have suffered at the hands of the money lender and his brethren.
The international body Organization for Economic Development OECD is putting its weight behind RBI in promoting financial literacy in India. There is no running away from this hard fact for which the financial service providers are also being trained to encourage the dissemi-nation of information in as comprehensive a way as possible. However it is the individual as the consumer who needs to grasp and absorb the knowledge for his betterment and safety. Money creation through the legitimate way is hard and painstaking but can be lost in no time if there is improper financial planning.
Financial awareness is a critical component in the process of protecting and enlarging the corpus of funds that an individual may have. | | | | | | | The survey shows 84 per cent Indians prefer buying life insurance products compared to 54 per cent globally and a similar percentage of Indians believe in maintaining a household budget with focus on savings. Indians are averse to borrowing money. They borrow money only in case they have to buy a house (50 per cent) or a car (43 per cent).
Compared to 33 per cent globally, 87 per cent of Indian households have an emergency fund. The survey was conducted by New York Stock Exchange-listed, ING Groep, and research consultancy firm, Epiphany, amongst 5000 consumers across ten nations, including India, United States, Mexico, Netherlands, Romania, Poland, Belgium, Spain, Korea and Japan. It was to gain a better understanding of how consumers’ financial literacy level influences their attitudes and behaviours and identify the potential similarities and differences across countries, age and gender.
Courtney from Study Moose
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