‘Financial literacy is the first step toward financial inclusion’

Most people are not aware of the right questions to ask when they are offered a slew of investment products and therefore fall prey to get-rich-quick schemes and fly-by-night operators, said RBI deputy governor  Usha Thorat, in a Moneylife event.

For the Reserve Bank of India, the country’s apex bank, preservation of the value of money is sacred, its deputy governor Usha Thorat said. She was speaking at the launch of the Moneylife Foundation and the prize distribution ceremony of Moneylife Essay Contest on “Taking Financial Markets to the Masses” in Mumbai on Saturday.

“If the value of money erodes rapidly, there will be no incentives to save; if households, businesses and countries get into unsustainable debt, there will only be bankruptcy.  Having enlightened citizens who can understand inflation, monetary policy and how these esoteric concepts affect their lives, is important to us. Financial literacy achieves this objective,’’ Ms Thorat said before giving away prizes to the winners of the Big Ideas Essay Contest organised by Moneylife in association with Reliance Mutual Fund.  Students from 26 management schools from Mumbai and Pune participated in the contest.

Ms Thorat said the RBI has multiple goals for its various initiatives to promote financial literacy. The foremost goal, she said, was financial inclusion—which is to ensure that all persons are offered the facility of a bank account and other services leading from having such an account, including savings, loans, mortgages, insurance and remittances as also access to capital market. “One of the key reasons for the current low level of financial inclusion was lack of awareness of the advantages of banking amongst many people. Hence, we felt financial literacy is an essential part of financial inclusion,” Ms Thorat said.

Second, if the nation is to have well-informed citizens who can take responsible decisions for their own finances and that of their families, it is important that the population is financially literate, she said. Financial literacy enables a person to understand the importance of savings, the opportunities available for finding finance for various purposes such as education, setting up of small businesses, etc. It makes a self-employed woman capable of assessing whether she will be able to repay the loan she is proposing to take from a self-help group (SHG) or a bank, from the cash she generates from her livelihood and other sources. It helps a student understand the power of compound interest to a borrower and a saver. “The time value of money is something not easily grasped, but when it is grasped, it can change the way one makes decisions. It makes young couples, having easy access to credit, and wanting a good life style, assess whether they would be getting into a debt trap. It makes a jawan wanting to remit funds understand alternative ways he can send money to his family. It makes an earning woman understand the implications of finance and control over it. Hence financial literacy is critical for making people take informed decisions on personal finance. Financial literacy is empowering,” Ms Thorat said.

Financial literacy is also important for consumer protection, she said. Consumers need to be empowered to ensure that they are fairly treated and get the services they are entitled to as per the codes of conduct and regulations. In the field of banking services, financial literacy involves effectively communicating to the customer her rights and responsibilities vis a vis her banker and how to get her grievances redressed.

“It is common knowledge that while as a country we save 35% of our GDP, our net financial savings constitute only about 11% of GDP,” Ms Thorat said. “Within financial assets, 58%-59% is in the form of bank deposits; 30% is in the form of contractual savings including insurance, provident and pension funds; and only 2.6% is invested in mutual funds and equity. Higher growth requires more of savings to be diverted to the real sector, for infrastructure, for small and micro enterprises, for industry, for trade and so on. This means that financial savings as a share of GDP has to grow. This implies the effective and efficient delivery of financial products suited to the various households across the length and breadth of the country.” {break}

Financial literacy will also ensure that people take care of their needs in old age, Ms Thorat said. “Some recent surveys show that a higher rate of household savings at the macro level can be explained in terms of increasing concerns about social security, high cost of education, health and meeting other social commitments. Saving for old age is not found to be a dominant factor. At the same time, an overwhelming 96% of households feel that they cannot survive for more than one year on their current savings in case they lose their major source of household income; yet 54% of households feel that they are financially secure. Financially-at-risk urban Indians appear to be even more optimistic than their rural counterparts. This clearly indicates that Indians do not take a long-term view of their financial security.  There is, therefore, a pressing need for financial literacy for better understanding of financial risks.”

However, she added, it is a fact that most people are financially illiterate or are not aware of the right questions to ask when they are offered a slew of investment products and therefore fall prey to get-rich-quick schemes and fly-by-night operators. Even educated and professional people are lured by investment schemes that seem to offer attractive features and do not read the ‘fine print’.

While focus on financial literacy could lead to empowered and responsible consumers, it cannot by itself ensure consumer protection, Ms Thorat said. “There has to be ‘responsible’ selling of products, especially to vulnerable sections of society including, among others, senior citizens and low-income groups. In particular, banks selling insurance, capital market and pension products have to be sensitive to the fact that the essence of financial services is trust. A bank accepts deposits on trust and assures a return. A bank customer relationship is fiduciary and not based on transaction—it is a long-standing relationship and there is every need for banks to act with responsibility.”

Ms Thorat also spoke about the various initiatives of the RBI in the area of financial literacy.

1. The first is the main communication vehicle of the RBI, viz., its website. The RBI’s website has a separate section that gives information on RBI regulations that are relevant to the common person. This is a multi-lingual section available in 12 Indian languages, besides English, and was launched in June 2007.
2. A financial education site was launched by the RBI on 14 November 2007. Mainly aimed at teaching the basics of banking, finance and central banking to children in different age groups, the site will also eventually have information useful to other target groups. The site has films on security features of currency notes of different denominations and also a games section. The games have been specially designed to familiarise school children with India’s currency notes and their security features. This site is also available in 12 major Indian languages, apart from English. Comic books explaining the complexities of banking, finance and central banking in a simple and interesting way to school children have also been placed on the website.
3. The regional offices of the RBI regularly conduct essay competitions for students on topics related to finance and banking. They participate through stalls in exhibitions/fairs at the State and district capitals to spread awareness about currency notes, forex facilities, guidance on non-banking financial companies, the Banking Ombudsman Scheme, etc.
4. The Financial Literacy and Credit Counselling Centres (FLCCs) is a unique scheme initiated by the RBI to provide free financial literacy and credit counselling in each district. To begin with, banks have been asked to take initiative for setting up FLCCs in the district headquarters.  The FLCCs are required to maintain an arms-length relationship with banks and may be set up as trusts/societies singly or jointly with other banks.  So far, 154 FLCCs in 129 districts have been set up in the country.
5. In 2008, the RBI Young Scholars Awards programme was initiated for students studying in undergraduate classes, through a countrywide competitive test conducted in all the scheduled languages in several centres all over the country. This programme attracted 20,000 applications in 2008 and 30,000 applications in 2009. Its main objective is to generate interest in and awareness about the Indian banking sector and the RBI. Under this scheme, about 250 scholars were attached to the regional offices of the RBI for pursuing assigned projects for a period of two to three months. These young scholars are being paid a monthly stipend of Rs7,500 and given accommodation and other facilities. They are also awarded certificates by the RBI on successful completion of their projects.
6. As a part of its platinum Jubilee celebrations, the RBI is conducting a series of outreach programmes in remote villages where there are no banks. So far, 120 outreach programmes have been conducted by the RBI’s regional officers (ROs). The central bank is also planning an event in Karnataka in March 2010 to bring financial literacy into the state’s school curriculum. It will also hold an international conference on financial literacy in Bengaluru, in collaboration with the Organization for Economic Cooperation and Development (OECD).  {break}

Apart from these initiatives, Ms Thorat said the RBI’s Banking Ombudsman Scheme and the setting up of the BCSBI have been very important in the area of customer service and grievance redressal. There are 15 banking ombudsman across the country, located mostly in state capitals. They provide free assistance to any service-related grievance of bank customers. The BCSBI is an independent and autonomous watchdog set up by banks to monitor and ensure that the Banking Codes and Standards are assiduously followed by banks while delivering services to customers.

Ms Thorat concluded by saying that financial literacy is important not only to help individuals become financially responsible and take charge of their financial security, but it should also be an integral part of delivery of financial services. “In this endeavour, programs such as this (the Moneylife essay contest) encourage young citizens to apply their minds to how financial penetration can be increased and how financial products can be taken to the masses, keeping in view the need for responsibility, transparency and sensitivity by those who supply the services and those who consume them.”  

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