Financial Literacy: Challenges for Indian

Economy
Dr. Anjali Sane
Abstract
Financial System Plays An Important Role In The Growth And
Development Of A Nation. The Growing Complexity Of Financial
Products Over The Past Decade, Coupled With Financial Innovations,
Has Put Enormous Pressure And Responsibilities On Shoulders Of
Financial Investors. Financial Services Are Becoming Freely
Accessible, But, Increasingly Complex Financial Services Market
Offers The Consumers Myriad Of Products With Intricate Features
And Services, Which Leave Many People Ill Equipped To Cope Up
With The Sophisticated Financial Needs. The Economies Around The
World Have Increasingly Considered Financial Literacy As A Key
Pillar For The Development Of Financial System Of A Country. As
Financial Markets Become More Sophisticated And Households
Assume A Growing Share Of The Responsibility And Risk For
Financial Decisions, Financial Education Is Necessary To Ensure
Sufficient Levels Of Investors And Consumer Protection As Wells As
The Smooth Functioning Of The Financial Markets. Creating
Financial Literacy Can Play A Critical Role In Equipping The
Journal of Commerce & Management Thought
Vol. 5-3, 2014, pp.475-487
DOI : 10.5958/0976-478X.2014.00335.8
475
Consumers With The Information, Fundamental Knowledge, And
Skills To Evaluate Their Options And Enables Them To Understand
The Implications Of Alternative Financial Decisions. Through This
Paper, Author Would Explain Importance Of Financial Literacy And
Challenges Faced By The Indian Economy In Inculcating Financial
Literacy.
Keywords: Financial Literacy, Organization for Economic Co-operation
and Development (O.E.C.D), Financial Regulator
Introduction
Indian Economy Is At Tipping Point. And, The Youth Of This Country
Will Determine The Direction The Economy To Move. As Per The Census Of
India 2011, The Population Under 35 Years Is More Than 41 Percent,
Which Is Referred As Demographic Dividend On One Hand And Also As
Demographic Disaster. So, Is Our Burgeoning Youth A Bane Or Boon? In
The Early 1980s, China Was In A Position That India Finds Itself Today. But
Today, Chinas Current Economic Boom Is Said to Be the Direct
Consequence of the Large Proportion of Youth in Its Population. This
Predominance Of Youth In The Population Is Expected To Last Until 2050.
While The Average Age Of An Indian In 2020 Is Expected To Be 29 Years,
The Average Age For China Would Be 37 Years Thus, With Proper Education
And Job Openings, Our Youth Are Sure To Tip The Economy In The Right
Direction. This Would Be The Major Working Class Which Will Generate
Income, Save And Create Demand For Products And Services.
As The Youth Population In Indian Economy Is High, It Is Necessary To
Create Awareness Among Them About The Significance Of Financial
Literacy. There Are A Number Of Initiatives Taken By The Reserve Bank Of
India (RBI) In This Direction. Some Of Them Include A Dynamic Website
Containing Updated Information About The Various Schemes Of Banks In
Simple Terms With Illustrations, Opening Counseling Centers By Public
Sector Banks In All Cities, Conducting Short Term Courses Etc. Financial
Literacy Is Very Much Desired For All Those Excluded And This Has Been
Elaborated In Many Of The Reports Of Reserve Bank Of India.
Journal of Commerce and Management Thought 5 - 3 476
The Paper Examines The Concept And Importance Of Financial
Literacy, Need For Financial Literacy Among Indians And The Challenges
Faced By Indian Economy In The Current Changing Scenario.
Literature Review:
While Several Widely Used Definitions Of Financial Literacy Exist, All
Of Them Generally Imply The Ability Of Individuals To Obtain, Understand
And Evaluate Information Required To Make Decisions To Secure Access To
Banking And Insurance As Best As Possible. Noctor, Stoney And Stradling
(1992) In Their Study Undertaken On Behalf Of National Westminster Bank
In The U.K., Where They Have Introduced, Conceptualized And Defined The
Term Financial Literacy As The Ability To Make Informed Judgments
And To Take Effective Decisions Regarding The Use And Management Of
Money. Anthes (2004) Stated That Personal Financial Literacy Is The
Ability To Read, Analyse, Manage And Communicate About The Personal
Financial Conditions That Affect Material Well Being. OECD (2005)
Defines Financial Education As The Process By Which Financial
Consumers/Investors Improve Their Understanding Of Financial Products
And Concepts And, Through Information, Instruction And/Or Objective
Advice, Develop The Skills And Confidence To Become More Aware Of
Financial Risks And Opportunities, To Make Informed Choices, To Know
Where To Go For Help, And To Take Other Effective Actions To Improve
Their Financial Well-Being.
Several Surveys Demonstrate That Lack Of Basic Financial Literacy
Often Results In Poor Financial Decisions. Lusardi And Mitchell (2007a,
2007b) And Lusardi And Tufano (2009) Found That Low Levels Of Financial
Information Resulted Into An Inability To Understand Basic Financial
Concepts And Poor Judgment In Borrowing Decisions And Retirement
Planning And Hence Poor Financial Management. The Poor Financial
Decisions Can Mire Households In Debt And Lead To Much Lower Living
Standards. Cole, Sampson And Zia (2009) Found That There Is A Strong
Association Between Understanding Financial Concepts, Better Financial
Financial Literacy: Challenges... 477
Decisions, And Household Well-Being. Financial Illiteracy Or Low Level Of
Financial Literacy Resulted Into Financial Stress. Bagwell (2002) Found
That Poor Financial Management Leads To Greater Absenteeism At Work.
Hendrix Et Al. (1987) And Jacobson Et Al. (1996) Found That Financial
Stress Was One Of The Stressors That Affect Absenteeism. Ullah (1990)
Found That Financial Stress Influences Psychological Well-Being And Also
Mediates The Effect Of Income And Mental Health. Drentea And Lavrakas
(2000) Found Individuals Who Reported Higher Level Of Financial Stress
Showed Higher Level Of Physical Impairment And Illness Than Lower Level
Of Financial Stress. RMR (2003) CBF (2004a) Supported That The High
Number Of People With Low Levels Of Financial Literacy Presents A
Serious Problem For Both The Economic Well-Being Of Nations And The
Personal Well-Being Of Such Individuals And Their Family.
Several Studies Have Also Attempted To Examine The Level Of
Financial Literacy In India. Most Of Them Report That The Level Of
Financial Literacy In India Is Poor. For Instance, The VISA (2012) Study
Ranked India At The 23rd Position Among The 28 Countries Surveyed.
Adopting The Questionnaire Developed By The Organisation For Economic
Co-Operation And Development (OECD) To Facilitate International
Benchmarking, This Study Attempted To Further The Knowledge And
Understanding Of Financial Literacy Is India. Compared To Some Of The
Other Studies, The OECD Approach Is More Comprehensive As It Attempts
To Measure The Influence Of A Range Of Explanatory Variables On The
Three Dimensions Of Financial Literacy, Namely, Financial Attitude,
Financial Behavior And Financial Knowledge.
Journal of Commerce and Management Thought 5 - 3 478
Consequences Of Financial Illiteracy Can Be Summarized In The Form Of
The Following Figure:
Need For Financial Literacy in India:
1. Increase In The Life Expectancy, Changes In Pension Agreement
And Transfer Of Risk: Increase In The Life Expectancy Means The
Possibility Of More Time Spent In Retirement And Thus, A Greater
Need Of Financial Planning, Expanded Insurance, And Provisions Of
Health Care Related Expenses To Cover Unpredictable Eventualities.
Coupled With Major Trend In The Country, The Shift From Defined
Benefit Plan To Defined Contribution Plan, Known As New Pension
Scheme (NPS). Since The Last Decade, There Has Been A Widespread
Transfer Of Risk From Both Governments And Employers To
Individuals. The Governments Started To Reduce The State-Supported
Pensions, And Some Are Reducing Healthcare Benefits. Defined
Contribution Pension Plans Are Quickly Replacing Defined Benefit
Financial Literacy: Challenges... 479
Pension Plans, Shifting Onto Workers The Responsibility To Save For
Their Own Financial Security After Retirement. Most Surveys Show
That A Majority Of Workers Are Unaware Of The Risks They Now
Have To Face, And Do Not Have Sufficient Knowledge And Skill To
Manage Such Risks Adequately, Even If They Are Aware Of Them
(OECD, 2008).
The Implementation Of New Pension Plan Asks The Workers To Make
The Various Decisions Regarding Contribution To Plan. As Government
Will Not Be Longer Enough To Provide Social Security, Increasing
Responsibility Come On The Shoulders Of An Individuals. Thus
Individuals Need To Consider Not Only Investment Risk And Return
Trade Off, But Also Uncertainty Regarding Their Life Expectancy,
Attitudes Towards Risk, Current And Future Earning Potential And
Likely Changes In The Personal And Social Circumstances.
2. Increase in an Individuals Responsibility: Nuclear Family Structure
Asks an Individual to Make Number of Financial Decisions Related to
Spending, Saving, Investments, Credit Etc. Not Only For Him But Also
For His Family. People Also Need To Assume More Responsibility For
Funding Personal Or Family Healthcare Needs. Moreover, Increasing
Education Costs Make It Important for Parents to Plan and Invest
Adequately for Their Childrens Education.
3. Financial Product and Services Innovation: Growing Numbers Of
Consumers Have Access To A Wide Range Of Financial Products And
Services, From A Variety Of Providers And Delivered Through Various
Channels. Deregulations And Liberalization Have Brought The Many
Newer Financial Products And Services Tailored To Meet Very Specific
Market Needs. These Financial Product And Services Innovations
Provide Consumers With More Choices To Park Their Savings. The
Understanding Of These Innovations Is Crucial On The Part Of
Consumers, And As A Result, These Innovations Do Not Only Provide
Journal of Commerce and Management Thought 5 - 3 480
More Choices To Consumers But Also Challenges To Understand The
Benefits Of Innovations.
4. Entry Of Financial Firms In The Financial Services Industry:
Globalization And Privatization Have Played An Important Role To
Develop The Domestic Financial Markets. Post 1991 Period, The Many
Important Sectors Of Financial Services Industry Kept Open For Private
Players To Gain Wider Access To Consumers. As A Result, Not Only
The Giant Non Financial Domestic Companies Made Their Entry In
The Financial Services Industry But Also Foreign Companies Entered
Into The Indian Financial Systems. As Conservative Investments Do
Not Allow The Investors To Bring The Expected Rate Of Return And To
Cope Up With The Inflation, Companies Have Started To Provide
Generalized And Customized Financial Solutions To Consumers, Made
The Credit Easier To Obtain, And Compete Strongly To Gain The
Market Share.
5. Multifaceted Features Of Financial Products: Due To Increased
Complexity of Financial Products and Services, Financial Decisions Are
Mostly Annoying to Many of Todays Individuals. Perhaps The
Confusion Has Been Arisen Not Only Because Of The Speed At Which
Financial Markets And New Financial Instruments Have Emerged Or
More Number Of Institutions Providing The More Complex Financial
Products, But Also Because Of The Inability To Understand Basic
Financial Concepts The Financial Services Are Divided Mainly Into
Two Categories: Saving/ Investment Services Can Be Viewed As The
Instruments For Financing Future Consumptions Based On Current
Earnings And Credit Services I.E. Loans/ Liabilities Are The
Instruments For Financing Current Consumptions Based Upon The
Future Earnings. Later, Is Dependent On Individuals Financial Needs
(Or Objectives) And Abilities (Resources) To Acquire These Financial
Financial Literacy: Challenges... 481
Assets And Liabilities. The Combination of Financial Need Priorities
and Resource Availability at Different Stages of Households Life Cycle
Influences the Sequence in Which Financial Services Are Acquired by
the Household. But, Nowadays Consumers Are Faced With The Various
Financial Instruments Offering The Range Of Benefits And Options
With Respect To Fees, Interest Rates, Length Of Contract, Exposure To
Risk Etc. Resulting Into Greater Perceived Risk, The Greater
Information Search To Make Comparison Across A Number Of Factors,
More Decision Making Complexity And Ask More Decision Making
Involvement, And Subsequent Delay In Making Purchase Decision
Making.
6. Technological Changes And Market Innovations: Developments In
The Technology Advances Have Transformed Every Aspect Of
Processing, Marketing And Delivery Of Financial Products And
Services. The Use Of Internet As A Mean Of Communication And
Delivery Of Financial Services And/or Products In The Efficient Way Is
A Boon For Financial Services Providers And It Has Also Removed The
Limitation Of Geographical Boundaries For Consumers. These
Technological Advances And Market Innovations Ask For The
Individuals Not Only To Identify Appropriate Providers And Delivery
Channels From The Vast Array Of Possibilities But Also To Use These
Innovations For Saving Time And Make The Financial Transactions
Speedier.
Journal of Commerce and Management Thought 5 - 3 482
To Sum Up What Is Different In The Indian Context Can Be
Explained By The Following Figure:
Source: Chakrabarty Report, Reserve Bank Of India
Challenges Faced In Financial Literacy Programme:
The Reserve Bank Of India Has Taken A Number Of Initiatives To Fulfill The
Need For Financial Literacy. Some Of The Steps Include:
1. Evolving Regulatory Guidelines With Development Perspective
2. Deepening Banking Reach And Coverage- Financial Literacy Centres Set
Up In Most Of Districts (650+) And Rural Bank Branches (35000+) Have
Been Set Up To Conduct Awareness Camps.
3. Introduction Of Innovative Products
4. Encouraging Use Of Technology KYC Norms Have Been Made
Mandatory And Stringent. Financial Education Website Has Been
Designed And Has Been Made User Friendly.
Financial Literacy: Challenges... 483
World India
Socially Well developed
General Literacy levels-
Comparatively better
Per capita income is higher,
Population below Poverty line is
less
Financial Network already in
place
Financial Inclusion is more about
knowledge of fair and transparent
financial products
Financial Literacy objective-
Informed decision making-
Consumer protection
Developing Society General
Literacy Level- Low
Per capita income is lower,
Population below Poverty line is
high
Low banking penetration- Many
habitations unbanked
Access to formal financial
services -Basic financial
products. More focus required on
Financial Literacy
Financial Literacy objective-
Financial planning- Awareness of
basic banking products
5. Financial Literacy And Financial Inclusion- Synced Approach-A
Technical Group On Financial Inclusion And Financial Literacy Under
Aegis Of Financial Stability Development Council FSDC Has Been
Established To Coordinate The Efforts Of All Financial Sector
Regulators; National Strategy On Financial Education Has Been
Prepared. It Is Proposed To Include Financial Education In School
Curriculum As Well.
However, In Spite Of The Above Initiatives Taken Up By RBI, Many
Challenges Are Faced In Promoting Financial Literacy.
Challenges Faced In Financial Literacy:
1. Infrastructure Issues- Digital And Physical Connectivity Is A Major
Concern In Our Country. Apart From The Fact That Many Rural Areas
Are Not Having Physical As Well As Internet Connectivity, Even In
Urban Areas, There Are Locations Wherein Internet Speed Is Very Slow
Leading To Glitches.
2. Technology Issues- Availability Of Handheld Devices, Cards,
Technology Partners, Operational Glitches, Turnaround Time Is
Another Concern Related To The Point Above.
3. Engaging Bcs- Associated Risks - Lack Of Professionalism Of Bcs
Continues To Be A Problem.
4. Less Transactions-Non-Operational Accounts- Low Volume Small
Value Transactions- High Cost -Viability Issues- Inadequate
Remuneration- BC Attrition-Nonpayment Of Commission.
5. Scaling Financial Inclusion- Appropriate Business Model Yet To
Evolve- Need To Move From Cost Centric Model To A Revenue
Generation Model By Offering A Bouquet Of Deposit, Credit And Other
Services.
The Benefits Of Financial Literacy May Be Enormous. At A Personal
Level, Individuals May Spend Less, Save More, And Better Manage
Risk. There May Be Even General Equilibrium Effects; Increased In
The Demand For Financial Products And Services May Improve Risk
Sharing, Reduce Economic Volatility, Improve Financial Market
Journal of Commerce and Management Thought 5 - 3 484
Intermediation, And Speed The Overall Economic Development. It May
Also Facilitate The Competition In The Financial Services Sector, And
Ultimately More Efficient Allocation Of Capital.
In Order To Avail These Benefits And To Overcome The Challenges
Identified, Following Structured Solution Is Suggested:
1. Collaboration Among All Stakeholders- Major Stakeholders Such As
RBI, Other Financial Regulators, Banks, Governments, Civil Societies,
Ngos Need To Come Together And Understand That The Need Of The
Hour Is To Collaborate Among Themselves For Collective Benefit Of
Financial Education.
2. Building Required Infrastructure Such As Digital And Physical
Connectivity, Uninterrupted Power Supply Are The Need Of The Hour.
Government Must Take Initiative And If Required, Take The Help Of
The Private Sector In Providing These Basic Infrastructural Facilities.
Indian Economy Is Lagging Behind As Compared To Other Economies
Of The World As Far As Digital Connectivity Is Concerned.
3. Implementation Of EBT For Routing All Social Security Benefits
Directly Through Bank Accounts Cash Benefit Scheme In Lieu Of
Product Based Subsidies Has Already Been Initiated. However, There
Are Certain Loopholes In The System Which Need To Be Filled. People
Must Be Made Aware Of Organized Bank Transactions Rather Than
Relying On Product Based Subsidies. Awareness Must Be Created At
The Grassroots Level For All To Be Included In The Bank Network.
4. Elevate Literacy And Awareness Drives- Standard Literacy Material
Has Been Designed By RBI. In Addition, Financial Literacy Must Be
Made Mandatory In The School Curriculum As Well. Even At The
College Level, A Financial Literacy Program Can Be Designed For
College Going Students To Make Them Aware Of The Financial
Initiatives Of Banks. Professional Colleges Can Take The Initiative For
Such Programs Which May Be Funded By RBI.
5. Sensitization- Finally, An Effort To Bring About Cultural And
Attitudinal Changes In The Mindset Of All Stakeholders Especially
Frontline Bankers Is Needed. Banks Already Have Counseling Centers
Financial Literacy: Challenges... 485
To Promote Financial Literacy. However, The Work Of Such
Counseling Centers Needs To Be Promoted On A Larger Scale To Reach
Out To As Many Stakeholders As Possible.
In Conclusion, Financial Literacy Is The Ultimate Pillar Of A Sound
Financial System. It Complements The Important Aspects Like Greater
Transparency, Policies On Consumer Protection And Regulation Of Financial
Institutions. Thus, The Issue Of Financial Literacy And Financial Education
Has Asked The Attention On The Agendas Of Educators, Community
Groups, Businesses, Government Agencies, Organizations, Non Government
Organizations, Policy Makers And Regulatory Authorities And The Issue Of
A Financial Literacy Should Be Taken Care Of Either As A Policy
Perspective Or Pragmatic Perspective. On The Agenda, Financial Literacy
Should Be On A Common Structure And A Common Approach So That It
Can Be Spread In A Comprehensive Manner. These Efforts Should Aim At
Empowering Consumers To Understand And Select The Financial Products
And Services That Best Suit Their Needs, Goals And Personal
Circumstances. The Overall Efforts By Regulatory Authorities, N.G.O.S And
Community Groups Should Be Structured In The Direction To Enable The
Individuals To Develop The Ability To Make Informed Judgments, To Be
Able To Identify Financial Products And Services That Address Their Needs,
To Take Effective Decisions Regarding The Use And Management Of Their
Money And To Avoid To Be A Victim Of Bad Selling.
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The Author
Dr. Anjali Sane is Assistant Professor MIT School of Management College, Pune
E-Mail: anjali.sane@mitsomcollege.com,anjalisane@yahoo.com Received on: 25, Apr.2014
Financial Literacy: Challenges... 487
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