The number of people scammed is endless, while that of people who have successfully recovered their money is negligible. Even well-educated people are naïve enough to believe that easy redress is available and tend to lash out on hearing that none of the financial regulators will help them quickly
As I write this column, a mainstream newspaper reports that a doctor lost Rs5 lakh in an advance fee job scam. A while ago, the Maharashtra chief minister’s personal secretary lost Rs60,000 (since recovered) to a vishing (telephonic phishing) scam. A senior editor called from Delhi to say his uncle was gypped of Rs10 lakh in an insurance scam. An IAS officer requested us to help a senior manager in a top Tata group company who was conned into ‘investing’ in 38 insurance policies. A regular Moneylife subscriber came to ask us what can be done to stop people investing in a ‘gold’ ponzi run by a woman, who displays in her office, photographs of receiving awards from the Bharatiya Janata Party and Congress prime ministers. He is worried about two women ignoring his warnings and wanting to mortgage their property to invest in the scheme offering a 36% return.
Our list of stories about people scammed is endless, while that of people who have successfully recovered their money from scamsters is negligible. In most cases, they are well-educated people—in influential positions—who are shockingly ill-informed and trusting with their money. They are also naïve enough to believe that easy redress is available and tend to lash out on hearing that none of the financial regulators will help them quickly. Last week, Standard & Poor’s Rating Services announced the results of a Global Financial Literacy Survey which shows that Indians’ understanding about money is below the global average. It says that 76% of Indian adults do not understand key financial concepts including risk diversification, inflation and compound interest. When it comes to women, only 20% are financially literate. Interestingly, the difference in the level of financial literacy between the richest (26%) and poorest (20%) is only six percentage points. The S&P release says, the “weak financial skills raise questions as to whether they’re getting the most out of their money.” This, probably, explains why Indians buy gold as a savings instrument without understanding its speculative nature and absence of any yield; they are easily duped by anyone who assures a high return on deposits without studying the business or its ability to earn enough to generate such returns.
Speaking at public event in June 2015, deputy governor of the Reserve Bank of India (RBI), SS Mundra, spoke about the ‘possible trinity’ of financial inclusion, financial literacy and consumer protection. He evocatively defined five kinds of financial illiterates: The wise illiterates (the educated lot with resources who fall for ponzis, exotic derivatives, etc, with ‘unnerving regularity’); greed-driven illiterates (who understand risk and are educated but greed overpowers reason and they fall for various scams); information-deprived illiterates (educated but won’t seek information on financial products); illiterate illiterates (over 300 million truly illiterate people in India) and kindergarten illiterates (young students who need to be targeted by financial literacy efforts).
We now know that these five categories account for an astonishing 73% of Indian adult males and 80% of women. Isn’t it then RBI’s duty, as a banking regulator, to make a bigger push to punish those who take advantage of this widespread financial illiteracy, mainly the banks under its regulation? Unfortunately, RBI is dragging its feet on this issue. It is well over a year since RBI released its consumer charter, but it remains a meaningless list of pious statements, since the banking regulator has failed to prescribe any consequences for failure to treat consumers fairly, or indulging in organised and deliberate mis-selling of financial products to bank customers. Having identified a huge problem, it is the duty of the government and its regulators to ensure that people get the best possible protection and redress.