Introduction

Financial Literacy is defined as a combination of financial awareness, knowledge, skills, attitude and behaviour necessary to make sound financial decisions and ultimately achieve individual financial well-being. Financial Education, on the other hand is defined as the process by which financial consumers/investors improve their understanding of financial products, concepts and risks 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”.

As can be seen, the term Financial Education and Financial Literacy are not the same, these are related concepts. People achieve Financial Literacy through the process of Financial Education. The achievement of Financial Literacy empowers the users to make sound financial decisions which result in financial well-being of the individual.

Need for Financial Awareness Campaign 

India is home to 17.5% of the world’s population and according to a survey conducted by Standard & Poor’s, over 76% of Indian adults lack basic financial literacy and they don’t understand the most basic and key financial concepts.

According to a survey on Global Financial Literacy in 2012 conducted by VISA, only 35% of Indians were financially literate and India was among the least financially literate countries. It demonstrated that “India is lagging behind the global standard and it secured the 23rd slot in the overall ranking.”

Another survey of “Financial Literacy among Students, Young Employees and the Retired in India” conducted by IIM-A supported by CITI Foundation reveals that “high financial literacy is not widespread among Indians where only less than a quarter population have adequate knowledge on financial matters. There is lack of understanding among Indians about the basic principles of money and household finance, such as compound interest, the impact of inflation on rates of return and prices, and the role of diversification in investments.”

Percentage of Financial Literacy in Developed and Emerging Economies:

According to the report conducted by the Global Financial Literacy Excellence Center, only 24% of the Indian adult population is financially literate. In comparison to other major emerging economies, the financial literacy rate of India is the lowest. This is due to inter-state disparities, lack of formal training and awareness. While other emerging economies have better financial literacy rates, there’s still scope for more improvement.

 The Survey conducted in 2019 revealed that 27.18 % of the respondents have achieved minimum target score/minimum threshold score in each of the components of financial literacy prescribed by OECD-INFE [i.e. a minimum of 3 in Financial Attitude (out of 5), 6 in Financial Behavior (out of 9) and 6 in Financial Knowledge (out of 9)] as compared to 20% in 2013.

 Some of the major findings of the Survey are illustrated in the charts below:

Chart 1

Source: https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=1156#CH3

Chart 2

Source: https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=1156#CH3

Chart 3

Source: https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=1156#CH3

Chart 4

Source: https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=1156#CH3

Chart 5

Source: https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=1156#CH3

Chart 6

Source: https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=1156#CH3

Chart 7

Source: https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=1156#CH3

Chart 8

Source: https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=1156#CH3

Based on the above illustrative Charts, the following thrust areas have been arrived at for improving financial education efforts:

  1. Though there has been an improvement over the period, further efforts are needed to improve financial literacy among women
  2. East, Central and North Zone need more attention
  3. Rural India needs focused attention
  4. The group with lower education needs greater financial education initiatives
  5. The group of age ‘50 and above’ needs more financial education

 As there have been several developments in the financial inclusion landscape and the economy, in general, the Strategic Objectives have been revised to reflect the changes in the vast economic landscape and provide renewed impetus to promote financial education in the vast expanse of the diverse country.

The Strategic Objectives are as under:

  1. Inculcate financial literacy concepts among the various sections of the population through financial education to make it an important life skill
  2. Encourage active savings behaviour
  3. Encourage participation in financial markets to meet financial goals and objectives
  4. Develop credit discipline and encourage availing credit from formal financial institutions as per requirement
  5. Improve usage of digital financial services in a safe and secure manner
  6. Manage risk at various life stages through relevant and suitable insurance cover
  7. Plan for old age and retirement through coverage of suitable pension products
  8. Knowledge about rights, duties and avenues for grievance redressal
  9. Improve research and evaluation methods to assess progress in financial education

Financial Education will reap rich benefits to the country and can be attributed to following reasons:

 a) Inclusive Growth, Financial Inclusion & Financial Education: Financial education plays a vital role in making demand side response to the initiatives of the supply side interventions. Financial inclusion is one of the top most policy priorities of the Government of India. One of the most visible aspects of governance has been the agenda of social inclusion of which financial inclusion is an integral part. ‘Financial literacy, and education, plays a crucial role in financial inclusion, inclusive growth and sustainable prosperity’.

 b) Knowledge and skill: Increasing range and complexity of products has made it very difficult for an ordinary person to take an informed decision. Financial literacy develops confidence, knowledge and skills to manage from speech delivered by Hon’ble Union Finance Minister, Shri Pranab Mukherjee during RBI‐ OECD Workshop on Delivering Financial Literacy in March 2010 3 financial products and services enabling them to have more control of their present and future circumstances

 c) Freedom from exploitation: Financial literacy will help in protecting society and individuals against exploitative financial schemes and exorbitant interest rates charged by moneylenders. 

d) Avoidance of over indebtedness: Financial education will help to avoid over-indebtedness, improve quality of services and make wise financial decisions. 

e) Promoting entrepreneurship: Small entrepreneurs who would be educated and already have a business sense will benefit through awareness about new financial products and help them to understand the dynamics of market mechanism and improve their business dealings.

 f) Positive Spillover effects: Financial education can lead to multiplier effects in the economy. A well educated household would resort to regular savings, which in turn would lead to investment in right channels and income generation. The financial well being of individuals will in turn increase the welfare of the society.

 g) Shifting of Pension Responsibility from State / Corporations to Individuals: A financially educated person would be in a better position to assess his/her own requirements and make savings in appropriate schemes. It reduces strain on social programs and pension plans, and fosters an economy that is more resilient.

 h) Behavioral Change: The proliferation of financial products has led to its indiscriminate usage without realizing its financial implications by the user.’ In fact, the recent global financial crisis has raised the question 4 whether individuals’ lack of financial knowledge led them to take out adjustable rate mortgages or incur credit card debt they could not afford.‘ Financial Education can become an agent of behavioral change.

 i) Deeper participation in Financial Markets: In India, we need to convert savers into investors. More participation of domestic retail investors in securities market will give dividends by Increasing depth of securities market, reducing dependence on foreign investors and domestic savers reaping benefits of Corporate Growth and reducing strain on Government Treasury for investment in National Infrastructure. 

Conclusion

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 millennial who are hyper-connected and require tailor-made financial products but have limited awareness of the possible financial solutions.

The millennial 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.

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