Why India needs to work on financial literacy now more than ever
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I wouldn’t have been writing this piece if the calendar on my desk showed a date from a decade-and-a-half back. The topic of financial literacy itself would have sounded alien, though it is now one of the top priorities for most nations. It is even more critical for developing nations like India, where the majority find financial literacy beyond their comprehension.
According to its literal definition, financial literacy is the ability to use skills and knowledge to take effective and informed money-management decisions. For a country like India, this plays a bigger role as it is considered an important adjunct to promotion of financial inclusion and ultimately financial stability.
As per a global survey by Standard & Poor’s Financial Services LLC (S&P) less than 25% 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% of the world’s population but nearly 76% of its adult population does not understand even the basic financial concepts.
The survey confirms that financial literacy in India has consistently been poor compared to the rest of the world. Financial illiteracy puts a burden on the nation in the form of higher cost of financial security and lesser prosperity. An example of this is the fact that most people resort to investing more in physical assets and short-term instruments, which conflicts with the greater need for long-term investments, both for households to meet their life stage goals and for meeting the country’s capital requirements for infrastructure.
In India, there are also certain erroneous beliefs associated with financial literacy, the most common being the myth that one who is ‘literate’ or ‘rich’ is also ‘financially literate’. Lack of basic financial understanding leads to unproductive investment decisions.
Another myth is that financial literacy is more important for adults. We can achieve the desired results from financial literacy only when we start educating our children. Like many other provocative topics, money is something that kids hear about outside homes as well, which exposes them to wrong perceptions.
Financial regulators in India—Reserve Bank of India (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’, detailing initiatives taken by them and also other market participants like banks, stock exchanges, broking houses, mutual funds and insurers. What is required is a joint effort by all the banking, financial services and insurance companies as well to be able to achieve noticeable changes in the perceptions that an average Indian has about financial management. It’s time to bring individual efforts under one framework to ensure better outcomes.
In this regard, it is important to note that empirical evidence points to the fact that digital efforts like video clips, short films and interactive quizzes on financial education have had a far greater impact than the traditional medium. Digital fluency is expected to increase with government initiatives such as Digital India.
The recent mammoth exercise of demonetization should help bring many more people into the organized sector, thereby opening up possibilities for financial inclusion and literacy. While only 53% of Indians had bank accounts against 79% in China till 2014 (as per World Bank Gallup Global Findex Survey 2014), the gap has narrowed significantly after the launch of Pradhan Mantri Jan Dhan Yojana, which has led to over 280 million new accounts being added to the financial system (as of 5 April 2017, according to government data).
The launch of digital wallets, Universal Payments Interface (UPI) and new-age commercial and payments banks have paved new ways for a less-cash economy. According to RBI, the total number of digital transactions has grown from over 419 million in November 2015 to 692 million in March 2017. But there is still huge scope. Nigeria, for example, is almost one-fourth of India's economy, but reported over 910 million digital transactions in 2016 alone.
The push to increase usage of mobiles for payments is significant, as India is already the world’s second biggest smartphone market with over 220 million smartphone users. Mobile internet users in India total 350 million, and are expected to grow 50 million every year till 2020. These numbers create enormous possibilities to go digital and create new opportunities to engage and share financial knowledge with consumers.
Financial literacy and financial stability are two key aspects of an efficient economy. Financial literacy enhances individuals’ ability to ensure economic security for their families. In India, on one hand, there is a need to reach out to lower income groups and economically weaker sections, and on the other, to millennials who are hyper-connected and require tailor-made financial products but have limited awareness of the possible financial solutions.
The millennials are economically more active compared to their predecessors but are also more fragile in dealing with personal finances. The bottom-line, therefore, is that a ‘me-too’ approach to financial literacy will not work in India. All stakeholders including consumers must work in conjunction for financial literacy through a combination of innovative strategies.
Rajesh Sud is executive vice-chairman and managing director, Max Life Insurance