Financial Literacy for Financial Inclusion

The majority of the working poor in India, especially those working in the informal sector like small and petty vendors, home-based workers, artisans, labourers, maid servants, desperately need financial services from formal financial institutions. The reason is that they are involved in economic activities in which they need working capital. They also need credit or term loans to buy business equipment like sewing machines or cutting machines or livestock or handlooms.

There is also a need for credit for improving their huts or houses, for adding water and drainage services in their living place, or for getting electric connections.

These are all their needs for running economic activities, mainly because they are self-employed or working on their own. Because of their nature of work (mostly manual labour), poor living and working conditions, and low income level, they are very vulnerable and susceptible to many types of risks, i.e., personal risks like sickness, accident death, or natural disasters like floods, cyclone and fire. They need to be protected under these risks. They also want to build little savings for their future needs. Women want to "save for rainy days". Vulnerability during their entire working life does not allow them to build or plan for their old age.

What we need is a two-step financial literacy programme — developing personal financial management skills and developing financial operation skills — to make financial inclusion successful

The poor need credit, insurance, savings and pension services. But because of lack of access to these financial services from formal sector, they have to depend on informal financial sources, i.e., private money lenders. Not only are these informal sources exploitative, they provide only credit services and do not provide other financial services like savings, insurance, pensions and remittances. As a result, the poor are caught in a debt trap; they borrow at very high interest rates for all types of life-cycle needs, whether it is a business need or a personal need like sickness or accident, or a social need like marriage. If our objective is to bring these economically active poor out of the vicious cycle of poverty and help them build their own capital assets and business, we need to ensure that they get access to integrated financial services, and that too from formal financial institutions at a reasonable price.

The current ‘financial inclusion’ policy has all the components that are required to ensure that poor get access to financial services. Most importantly, the policy does not talk about only credit service, but also about integrated financial services. It provides for "door-step" banking, which is needed by the poor. It talks about bank appointing business facilitators and banking correspondents. It seeks to allow the poor to open "no frills" accounts. Banks are given targets and they are strictly monitored. There is the necessary political will as well as positive response from the formal financial sector, especially banks.

Though targets are supposedly being achieved, it is yet to be seen that it is bringing a positive change in the life of the excluded population. Thus, while "no frills" accounts have been opened, few accounts are being meaningfully operated.

Probably the gap is at the demand side; may be the needy are not ready to avail of these services in a meaningful way; because this is the first generation of the population which we are trying to link with formal financial services. They are taking time to get used to such services. They are used to deal with informal financial service providers who provide 24-hour service at their doorstep with the simplest procedures. May be, they are reluctant because they are scared to follow procedures.

We need to ensure that the poor get access to integrated financial services, and that too from formal financial institutions at a reasonable price

For a few services like savings and insurance, there is a need which needs to be converted into demand. There is also a need to help them change their financial behaviour – they normally live on day-to-day basis and also think on a day-to-day basis. We need to build their awareness to help them think for long-term lifecycle needs. There is a need to help them to change their habit of making financial decisions like impulsive borrowing without thinking or understanding its terms and conditions, and their repaying capacity. There is need to teach them to differentiate between productive and consumptive use of money, specially borrowing.

What we need is a two-step "financial literacy" programme to make "financial inclusion" successful and meaningful. One is developing personal financial management skills and the other is developing financial operation skills for availing various financial services.

Personal financial management literacy includes the component of awareness building for financial planning and changing impulsive financial decisions, understanding importance of regular savings, borrowing only for productive purpose, minimising risks through availing insurance services and also understanding financial principles. These include the following:

· the principle of fungibility of money;

· principle of power of compounding;

· principle of productive versus unproductive use of money;

· principle of borrowed versus own capital; and,

· principle of insurance.

A proper understanding of the principle of power of compounding will make the provision of "no frills" accounts meaningful because poor will understand the importance of regular savings for the long term. Similarly, the principle of productive versus unproductive use of money will reduce the use of borrowed money for productive purpose and the principle of fungibility of money may help them to save and plan for different purposes or different life-cycle needs. Personal financial management literacy should be accompanied with financial operational literacy, like account opening procedure, explaining a nomination facility, types of saving accounts or how to avail credit from a bank.

The financial inclusion programme can become meaningful if parallel work is done on both the demand and supply side. Excluded population should be prepared to avail of financial services from formal financial institutions and financial literacy can play a very important role in bringing in the desired results. Of course, it will be too much for banks to play this role of preparing people for availing financial services or converting need into demand. Thus, a parallel financial literacy movement should be encouraged, may be through the media, even as we build a cadre of financial counsellors at the grassroots level to educate people by building financial awareness.

Jayshree Vyas is Managing Director,
Sewa Bank