Home / Money / Personal Finance /  Lack of awareness is the key challenge on the road to financial inclusion

Saving money is a useful habit that most of us still have. But many I know miss an important question: are the savings enough? We generally accumulate in bank accounts. The bank savings rate, however, is often significantly lower than price rise (inflation). As a result, unaware savers end up with a savings kitty that is unable to match future expenses. There is one other separate category of issues many savers overlook. The possibility of bodily harm to themselves or to the family’s savers-in-chief. There are some who do buy insurance, but they buy it more as an investment and not as a protective cover. Not many I know use two time-tested and cost-effective choices: term life and medical insurance.

No matter how much one earns, lack of understanding of simple financial realities results in an inability to use money when it is required the most. This lack of understanding has a devastating effect on those who are near the poverty line (those who earn 100-300 per day). I rediscovered these and other basic truths as my CFA Society India colleagues and I cycled through the hinterlands of north western and central India. We cycled for 14 days and spent time in 50-plus locations between Mumbai and Delhi. Our main purpose was to reach out to all the sections of the society to promote financial literacy. As we went through towns and villages, we noticed that almost everyone we met was low on financial literacy. Large city dwellers thought they knew. But many of the urban people we met, especially the well-off ones, seemed to be in the twilight zone of half-knowledge. For instance, most of those we met had invested in “some mutual fund" without knowing why or what they were really earning. And almost everyone in the well-off category had “invested" in an insurance scheme bought at a very high cost.

My colleagues and I hosted educational seminars in the places we visited. We also interviewed people from more than 30 walks of life. Lack of financial awareness, we found, is widespread. It affects the poor the most. They are vulnerable to sudden increases in spending. Loss of life or an unexpected large medical expense push the economically weak into a poverty trap. Most of the economically weak we met were unaware of affordable government schemes, expressly rolled out for them. The other major source of misery we saw was usurious interest people paid on loans they took to deal with financial emergencies. Some families we met may remain virtually jailed in poverty—forever. For instance, Kaloji, a watchman belonging to the Bhil community, has a 1 lakh loan. Kaloji has been paying an interest of 50% per annum. With his current salary, I doubt if Kaloji would be able to repay his loan in this lifetime. Worse, Kaloji referred to his loan giver as “mata" or mother. Udaji, a rag picker, wasn’t even able to fathom the cost of capital he was paying to earn just 200 a day. Udaji has been taking daily loans of 1,000 at 5% interest per day. Another daily wager had taken a 40,000 loan for a medical emergency at an interest of 10% per month.

Three simple and inexpensive, yet grossly unused, government schemes could have lessened the pain for the people we met: the Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY), the Pradhan Mantri Suraksha Bima Yojana (PMSBY) and Ayushman Bharat Yojana. PMJJBY and PMSBY come at a yearly cost of 342 (less than 1 daily). These schemes provide a life cover of 2 lakh and an accident cover of 2 lakh. Ayushman Bharat is completely free for the economically weaker societal sections and provides a medical cover of 5 lakh a year.

Not everyone we interviewed was financially unaware. For instance, Ganguji, from a village near Godhra (Gujarat), is a mechanic. He is differently abled and uses sign language to communicate. Ganguji has a bright two-three-year-old daughter. Despite multiple constraints, Ganguji is well insured and has saved in Sukanya Samriddhi Yojana, a government scheme meant for girl children.

Lack of simple awareness has a magnifying effect. It can push people into deep debt traps. The economically weak, in particular, can avoid many of these traps by accessing the right government schemes. Ganguji was hungry enough to find out, and ended up with the right answers. We could all learn from him. It would help to check and recheck our financial choices by accessing multiple sources, such as government websites, well-regarded personal finance columns and professional registered advisers. Separately, policy makers may wish to use the learnings from our successful national drives (such as polio eradication) for recruiting people into the right schemes.

Shreenivas Kunte, CFA, CIPM, is director, content and advocacy, CFA Institute

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