In India, financial literacy is seen as an adjunct to the financial inclusion exercise. However, its role in addressing the aspirations of an emerging economy deserves recognition.
Tanushree Mazumdar
At a recently held workshop on financial literacy, organised by the Reserve Bank of India (RBI) and the Organisation for Economic Co-operation and Development (OECD), it was interesting to note that even developed countries were grappling with the issue.
There was, however, a difference in the thrust of financial literacy/education drives in these countries vis-à-vis developing countries like India. So far, in India, the emphasis has largely been on financially educating the rural poor and illiterate. Whether it is the business correspondent/business facilitator (BC/BF) model or the technology-driven banking model that the regulators and banks are currently encouraging, the main focus remains the rural poor.
These models have a two-pronged focus: include the financially excluded in the mainstream financial system and financially educate the rural masses about banks, their products, services, procedures, and so on.
In developed countries (OECD to be precise), there is greater focus on educating an average family — helping it balance its budget, build assets, save for children's education and retirement planning. Financial literacy there takes the form of guiding consumers through the maze of complex financial products, taking confident financial decisions and safeguarding their financial interests, and resisting marketing pitches of financial companies by asking the right questions.
There is another difference in the objectives of financial education programmes in the developed and developing countries. In the developed countries, financial literacy is linked to consumer protection.. Better information disclosure, they believe, would go a long way in strengthening regulatory standards for consumer protection.
In India, financial literacy is seen as a means to achieve financial inclusion. The thrust is on rural areas. This is not surprising, given that 5.7 lakh out of the six-lakh villages don't have a bank branch. There is, however, a strong case for extending the efforts of financial inclusion to urban areas as well. The Economic Survey 2009-10, quoting the NSS 61 {+s} {+t} Round, says that poverty ratio in urban areas is 25.7 per cent which is only somewhat lower than the 28.3 per cent poverty ratio in rural areas.
LIVELIHOOD NEEDS
What will help financial inclusion is not financial literacy per se but linking people's livelihood needs with banking services. For example, the Aryavrat Gramin Bank in Uttar Pradesh achieved 100 per cent financial inclusion in some hamlets in UP through its tie-up with a corporate to sell solar powered lamps. The Kisan Mitra Scheme of Punjab National Bank achieved 100 per cent financial inclusion in 40 villages by linking bank finance to farming needs.
There is also the example of a pilot project in Warangal district of Andhra Pradesh, where pension payments and payments under NREGS were made through direct credit to bank accounts.
If people need banks for saving or receiving income or for remittances or loans they will avail of such banking services. In such cases, financial literacy becomes only the catalyst and not the main driving force behind financial inclusion.
Financial literacy can achieve a larger goal: that of empowering the consumer to take financial decisions confidently. And it need not be restricted to rural areas.
Urban areas in India may not be too different from developed countries in terms of the aspirations of people and the challenges they face. Some lessons from OECD countries can then be drawn for our own financial literacy programme.
Countries such as Malaysia, Singapore, and the Philippines include financial education as a part of school education. Money sense (like civic sense) is best inculcated in people as early as possible. The pilot project in Karnataka where financial education is being implemented in schools is a good step, and the outcome of the project will help in the strategising of financial education and roll-out in other States.
LITERACY STRATEGIES
In New Zealand, as a part of its financial literacy strategy, topics have been classified into three levels: everyday (financial products, services, inflation, etc.), occasional (wills, mortgage, etc.) and specialist (derivatives, portfolio management, etc.). We could think of a financial literacy strategy along similar lines.
Delivery of financial literacy is going to be the greatest challenge in India, not the least because of its geographical spread and diversity in languages. Just as banks have started offering credit counselling services, some authority has to take the responsibility of offering financial counselling. This cannot be left to the banks or other financial institutions, because there could be a conflict of interest.
Besides, financial counselling would involve, among other things, providing at one place, information about products and their charges across all banks, mutual funds, insurance companies, and so on. A centralised/impartial authority has to take charge of this task to assure uniformity in delivery and credibility of content.
May be, this is something that the proposed Financial Stability and Development Council can think about. After all, lack of financial education is said to be at the bottom of the recent global crisis and financial instability.
Financial literacy is one of the most critical pillars of financial inclusion without which financial inclusion cannot be successful. No amount of technology or innovative schemes can overcome ignorance of people of basic finance. Without the basic knowledge of finance even if people were made to open bank accounts they will not use them to save or they will not take loans even if it is provided at low interest rates. They will continue to keep money on their possession or to borrow from the money lender. they will continue to be affected by shocks in the absence of savings and will continue to remain in poverty and fall victim to the cycle of debt that most rural families fall victim to. The initiatives currently being undertaken by the RBI and GOI though they need to catch more steam and be more comprehensive are a great start - one that needs to be built upon to achieve greater gains.
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