Spotlight
New
Delhi, 14 November 2020
Financial Literacy
KEY TO PRACTICAL INCLUSION
By Moin Qazi
Financial services
are analogous to safe water, basic healthcare and primary education— these are
essential to enable people to participate in the benefits of modern
market-based economy. Ideal financial societies are those which provide safe
and convenient ways that enable people to navigate their daily financial lives.
The poor need to set aside money in times of plenty and draw it in lean times.
In addition, they should be able to borrow, make and receive payments, and
manage risk.
Without a safe place
to save money, it’s difficult to cope with the unexpected or to plan for the
future such as the unprecedented pandemic. Without access to affordable credit,
it is difficult to acquire an asset or set up a business. Without insurance,
all your security can be wiped out by one misfortune.
When
the Pradhan Mantri Jan Dhan Yojana (PMJDY) was announced in August 2014, it
could not be anticipated how successful a scheme it could be in respect of
financial inclusion of the masses. The Jan Dhan account-holders are to be
brought under a social security cover, with the two schemes; an auto-debit
of ₹330 and ₹12 annually gives separate life and accidental coverage of ₹2,00,000 for those in the age group of 18 to 50 years and 18 to 70
years, respectively.
While
we are nearing universal financial access, we still have to go a long way in achieving
greater usage of these accounts. That is the real challenge of financial
inclusion.
In order for people to be able to use financial services, account holders need
to be literate enough to understand the basics of these monetary affairs.
Merely opening physical accounts as flag posts of financial identity won’t help
unless they are actively used by people for managing their money.
To make this possible
people have to be imparted an ability to understand and execute matters of
personal finance, including basic numeracy and literacy, budgeting, investing,
and risk diversification. 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 financial
well-being.
In simple terms, it
refers to a set of skills that allow people to manage their money wisely along
with some understanding of essential financial concepts, not the least of which
is an appreciation of the trade-off between risk and return. It is the single
biggest skill that can ensure economic well-being and freedom.
People with robust financial skills and a strong
grasp of financial principles are able to better understand and negotiate the
financial landscape and avoid possible traps. Conversely, people with a lower
degree of financial literacy struggle to understand money matters and their
potential impact on financial well-being. Financial
ignorance carries significant costs and results in people spending more on
transaction fees, getting overextended with debts since they are ripe prospects
for predatory practices. They usually fall prey to aggressive marketing and end
up with troublesome financial products.
In the past few years
financial literacy has gained great momentum because it is seen as an assured
path to universal financial inclusion. However, the financial environment is now populated by a huge range of complex and
nuanced products. In such a situation, literate and working populations tend to
feel overwhelmed by the range of options and the arcane financial and digital
vocabulary in which these options are couched. To keep abreast,
even those who are financially literate need to brush up on the latest.
We need to develop a
full suite of financial literacy interventions so that more youth and women
develop the confidence and skills to manage their own finances. On account of
financial illiteracy, they get saddled with risky levels of debt.
Financial inclusion
and financial literacy are two sides of the equation. Financial inclusion works
on the supply side by providing financial market/services that people demand
whereas financial literacy stimulates the demand side by making people aware of
what they need. Therefore, financial inclusion and financial education must
move in concert; each trigger supportive reaction in the other.
People believe that
the triad of financial inclusion, financial literacy and financial stability
will be extremely relevant in the coming times because our financial lives are
going to become complex. The depth and breadth of financial systems determine
the financial stability of any society.
Everybody is happy
while getting a loan. The problem begins when you have to repay the loan. It
should be dinned into borrowers’ minds again and again that excessive borrowing
(taking multiple loans) and sub-lending or ghost lending (allowing the use of
your identity for a loan that someone else uses) can be extremely toxic for financial
lives – for communities at all levels of income.
Financial literacy
has now acquired nuance with the onset of digital financial services (DFS),
considered the most powerful tools for financial inclusion. Offering basic
financial services through mobile phones, point-of-sale devices, and networks
of small-scale agents, DFS have the potential to reach more people, at a lower
cost, with greater convenience than traditional “brick and mortar” banking
services.
However, millions of
people cannot read, write, or understand the long number strings necessary to
transact on mobile phones. We need to aggressively train the end-users on the
nuances of digital finance that will empower them to adopt technology with
ease. Women are eager to learn how to use digital payments because it gives
them greater privacy and financial control – something they value a great
deal.
At a time when
individuals are increasingly being called upon to make complex financial
decisions, a large fraction of households have only a rudimentary understanding
of basic concepts. Moreover, participation in financial markets is far from
universal, and individuals with low levels of education and financial literacy
are the least likely to participate in these markets. These correlations have
motivated policy makers to devote substantial resources to financial literacy
education. Functional proficiency in core money skills and their subtle nuances
is crucial if they are to successfully manage their future money needs. The
complex nature of our financial lives has given rise to a new concept – financial
capability.
There is still lot of
illiteracy on issues relating to loan defaults and how they can be handled. A
deferment of repayment of loan instalment, which borrowers and their representatives
usually clamour for in such events, doesn’t give any real benefit to the
borrower; it is not even a palliative. A loan holiday or deferment is actually
just a postponement of a liability on which the borrower will continue to incur
cost by way of the accruing interest, thus actually increasing his financial
burden.
Here is a strong need
for collaboration and convergence between those working towards financial
literacy. A particular weakness has been the absence of a strong conduit for
transfer of knowledge and practice between institutions and geographies having
successful experiences. This can lead to cross
learning and cross-pollination and sharing of best practices unique experiences
and breakthroughs, and both successes. Policy makers will do well to act in
interest of the people. ---INFA
(Copyright,
India News & Feature Alliance)
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