financial literacy: challenges for indian economy

8/10/2019 Financial Literacy: Challenges for Indian Economy

http://slidepdf.com/reader/full/financial-literacy-challenges-for-indian-economy 1/14

Financial Literacy: Challenges for IndianEconomy

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, China’s 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 - 3476



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 FinancialConcepts 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 InternationalBenchmarking, 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.




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 PensionScheme (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




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 IncreasedComplexity of Financial Products and Services, Financial Decisions Are

Mostly Annoying to Many of Today’s 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 Individual’s Financial Needs

(Or Objectives) And Abilities (Resources) To Acquire These Financial




Assets And Liabilities. The Combination of Financial Need Priorities

and Resource Availability at Different Stages of Household’s 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 TheLimitation 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.




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




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, ThereAre 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 FinancialInitiatives 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




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 BeAble 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.

References

1. Anthes, W.L. (2004) „Frozen In The Headlights: The Dynamics Of Women And Money‟,

Journal Of Financial Planning, Vol.13, No. 9, Pp. 130-142

2. Bagwell, D.C. (2000). Work And Personal Financial Outcomes Of Credit Counseling

Clients. Phd Thesis. Virginia Polytechnic Institute And State University, Blacksburg.

3. Beal, D.J. & Delpachtra, S.B. (2003) „Financial Literacy Among Australian University

Students‟, Economic Papers, Vol.22, No. 1, Pp. 65-78.4. Chakrabarty Committee Report, Reserve Bank Of India

5. Cole, S.,Thomas S., And Zia B. (2009) „Financial Literacy, Financial Decisions, And The

Demand For Financial Services: Evidence From India And Indonesia.” Harvard Business

School Working Paper 09-117.

6. Commonwealth Bank Foundation (CBF), (2004a), Australians And Financial Literacy,

Commonwealth Bank Foundation: Sydney.




7. Commonwealth Bank Foundation (CBF), 2004b, Improving Financial Literacy In

Australia: Benefits For The Individual And The Nation, Research Report, Commonwealth

Bank Foundation: Sydney.

8. Drentea, P. & Lavrakas, P.J. (2000). Over The Limit: The Association Among Health

Status, Race And Debt. Social Science & Medicine, 50, 517-529.

9. Garman, E. T., Leech, I. E. & Grable, J. E. (1996). The Negative Impact Of Employee

Poor Financial Behaviors On Employers. Financial Counseling And Planning, 8(2), 157-

167.

10. Mandell, L. (2009, January).The Impact of Financial Education in High School and

College on Financial Literacy and Subsequent Financial Decision Making. Presented At

The American Economic Association Meetings San Francisco, CA.

11. Hendrix, W.H., Spencer, B.A. & Hogarth, J. M. (2002) „Financial Literacy and Familyand Consumer Sciences‟, Journal Of Family And Consumer Sciences, Vol. 94, No. 1,

Pp.14-28.

12. Hendrix, W.J., Steel, R.P. & Shultz, S.A. (1987). Job Stress And Life Stress: Their Causes

And Consequences. Journal Of Social Behavior And Personality, 2(3), 291-302.

13. Hilgert, M. A., Hogarth, J. M., & Beverly, S. G. (2003) „Household Financial

Management: The Connection Between Knowledge And Behavior‟, Federal Reserve

Bulletin, Vol. 89, No. 7, Pp. 309-322.

14. Lusardi, A., & Tufano, P. (2009) „Debt Literacy, Financial Experiences, And

Overindebtedness‟, NBER Working Paper, No. 14808.

15. Noctor M., Stoney S., & Stradling S. (1992) Financial Literacy: A Discussion Of

Concepts And Competences Of Financial Literacy And Opportunities For Its IntroductionInto Young Peoples‟ Learning: National Foundation For Educational Research

Commissioned By Natwest.

16. OECD (2005) Improving Financial Literacy: Analysis Of Issues And Policies,

Organization For Economic Co-Operation And Development, Paris: OECD Publications.

17. Roy Morgan Research. (2003a). ANZ Survey Of Adult Financial Literacy In Australia:

Final Report, Melbourne: ANZ Bank, Australia.

18. Shukla, R. (2009) How India Earns, Spends And Saves, National Council Of Applied

Economic Research (NCAER) & Max New York Life Insurance Company Ltd.

19. Ullah, P. (1990). The Association Between Income, Financial Strain And Psychological

Well-Being Among Unemployed Youths. Journal Of Occupational Psychology, 63, 317-

330.

The Author

Dr. Anjali Sane is Assistant Professor MIT School of Management College, Pune

E-Mail: [email protected],[email protected] • Received on: 25, Apr.2014




Reproduced with permission of the copyright owner. Further reproduction prohibited without

permission.

financial literacy: challenges for indian economy

Documents