Events & Issues

New Delhi, 5 July 2017

Financial Literacy

ADDRESS PAINS, NOT OFFER BENEFITS

By Moin Qazi

Indians have concluded a weeklong learning in financial education through the Financial Literacy Week shepherded by the Reserve Bank of India (RBI) last month. The entire financial sector across the country was galvanised to bring awareness of basic financial knowledge to those unlettered in financial skills. It is a laudable step towards making the entire population an inclusive financial society.

Finance is the glue that holds all pieces of our life together. Ideal financial societies are those which provide safe and convenient ways of managing these simple monetary affairs. This philosophy is known as financial inclusion. It is providing financial tools to people —tools that people can afford, that are safe and properly regulated, that people can access conveniently from institutions that treat them with respect.

These tools enable them to save and to responsibly borrow—allowing them to build their assets and improve their livelihoods. The term most buzzed in this respect is “the unbanked” — usually defined as people who don’t have a traditional savings account. These are the people who have to be brought into the orbit of formal finance.

In India, financial inclusion received a steroidal boost with Prime Minister’s Jan Dhan Yojana (PMJDY). By Jan. 04, 2017, there were over 265 million accounts under the scheme. India earned a place in the Guinness Book of World Records with a citation: “Most bank accounts opened in one week as part of the Financial Inclusion Campaign is 18,096,130.” But a disquieting feature is that public banks, regional rural banks (RRBs) and 13 private lenders have reported that as on 24 March 2017, 92,52,609 accounts were frozen under the PMJDY due to lack of transaction in the last one year.

Merely opening physical accounts as flagposts of financial identity wouldn’t help unless they are actively used by people for managing their money. To make this possible people have to be imparted literacy necessary for handling their bank accounts. This skill is known as financial literacy. It is a combination of financial awareness, knowledge, skills, attitude and behaviours necessary to make sound financial decisions and ultimately achieve individual financial wellbeing. Financial literacy is expected to impart the wherewithal to make ordinary individuals into informed and questioning users of financial services.

Thus the RBI planned the literacy week to focus on four broad themes: Know Your Customer (KYC), Exercising Credit Discipline, Grievance Redressal and Going Digital. It had issued an advisory to all banks to conduct select activities such as conducting special camps by Financial Literacy Centres; displaying posters on themes in local languages in prominent places inside the branch premises; distributing flyers and charts at the training camps; conducting financial literacy camp by rural bank branches; and hosting an online quiz for the general public to generate interest.

According to a global survey by Standard & Poor’s Financial Services LLC (S&P) less than 25 per cent of adults are financially literate in South Asian countries. For an average Indian, financial literacy is yet to become a priority. India is home to 17.5 per cent of the world’s population but nearly 76 per cent of its adult population does not understand even the basic financial concepts. Financial regulators in India—the RBI, Securities and Exchange Board of India (SEBI), Insurance Regulatory and Development Authority of India (IRDAI) and Pension Fund Regulatory and Development Authority (PFRDA)—have created a joint charter called ‘National Strategy for Financial Education’, to achieve e changes in the perceptions that an average Indian has about financial management. 

Financial services are like clean water and electricity. But opening an account does not ensure the account is used. Two-thirds of world’s 299 million mobile money accounts are dormant. A lack of comfort with technology or low literacy may discourage use, and products are not always designed with the unique needs of poor users in mind.

The National Bank for Agriculture and Rural Development (NABARD) has initiated a survey of primarily 40,000 households to study the impact of financial inclusion. The survey will track savings patterns, card usage, mobile payments and changes in patterns of usage between the young and the old. These surveys should be used for designing modules for enhancing the financial literacy of people.

Poor people operate almost entirely in the cash economy, particularly in the developing world. This means they use cash, physical assets (such as jewelry and livestock), or informal providers (such as money lenders and payment couriers) to meet their financial needs—from receiving wages to saving money. However, these informal mechanisms can be insecure, expensive, and complicated to use. And they offer limited recourse when a major problem arises, such as a serious illness in the family or a poor harvest.

To use financial services to their full potential, to protect their families and improve their lives, the low income people need products well suited to their needs and appropriate training and education for adapting to these financial services. Bringing this about requires attention to human and institutional issues, such as quality of access, affordability of products, sustainability for the provider of these services, and outreach to the most excluded populations.

The new revolution for financial inclusion both through the physical and digital system will have better chances of success if it is driven less les by financial punditry and more by empathetic governance. People take to new technologies and new cultures when they see clear benefits, have greater confidence in the services, find it convenient and can afford it.

The issue is lot more nuanced than what we are seeing today. Nuances change from culture to culture and consumer segment to consumer segment. The consumers will come into the formal financial sector  and embrace the new opportunities believing that if they change their behaviour and exert the effort to get into the new world then certain specific pains will disappear. We have thus to address real pains, not just offer benefits. --- INFA

(Copyright, India News & Feature Alliance)