High Financial Illiteracy

Sucheta Dalal 23 December 2015

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.

Comments

User

MG Warrier

1 decade ago

An interesting analysis. GOI, state governments, regulators in the financial sector, financial institutions including banks have an important role to play in improving financial literacy. The recent developments in the Indian financial sector have aggravated the situation.
Technology and social media are also doing havoc by attracting people who do not have the skills or awareness about the ‘apps’ they are forced to use by aggressive marketing techniques, to get into traps. Recently I came across a ‘website’ in the name of RBI Governor Raghuram Rajan, with RBI emblem as profile picture. When approached by RBI, the service provider reportedly said, unless something ‘harmful’ is posted, they cannot ‘block’ the page. I do not know, what is meant by ‘harmful’. When technology was not so developed, I remember a TV Channel was sued for a damage of some crores of rupees, by an individual for flashing his photograph in place of the person to whom the channel was talking about!
In this case, RBI will have to revisit the types of business each category of institutions it regulates should be doing. Perhaps, banks have gone much ahead of traditional banking business and are selling more non-bank products in their premises than they were doing during the last decade. GOI should consider providing legislative support by providing for dealing with scamsters fast and blocking their bank accounts quickly when scams are reported.

Ramesh Bajaj

1 decade ago

A regulator is very much needed.

Meenal Mamdani

1 decade ago

Very true. It is amazing how often people fall for schemes that seem too good to be true; they are too good to be true.

In USA, Senator Elizabeth Warren established a watch dog exclusively to look after the interests of consumers, the Consumer Financial Protection Bureau(CFPB). It has the authority to write policies with consumer interest in mind which are then ratified by the Congress. It was not easy to establish CFPB as many with vested interests tried to prevent formation of CFPB.

It is possible that even if such a focused regulator is created in India, it may still not be enough. We have so many excellent laws on books but they lack implementation.

However a regulator similar to CFPB in India will not be able to shrug off its responsibilities as those would be its exclusive area of work. At present the regulators have multiple responsibilities and can easily pass the buck from one to another.

A regulator like CFPB in India is worth consideration.

Ganesh Kamat

1 decade ago

GST SIMPLIFIED....

Tax Reform Simplified,
Only 1% Tax on Receipt to get
more Taxpayers, Tax collections & more VOTES too.

1) For Big Tax collections,
take 1% Tax from 20 Taxpayers,
than 20% Tax from one Taxpayer.

2) Simple Tax of 1% on Receipt /Transaction /Interest /Sale
/Gift /Loan /Benefit /Salary /Dividends /Rent /Custom.....
any & all inward cash, Cheque etc.

3) Average say on Rs. 30 L Receipt,
Pay Rs. 0.3 Lac Tax per year.
If Taxpayers = 60 Cr.
Tax collection will be 18 L- Cr.

4) Simple Tax means more Taxpayers, more collection & No refund Problem.

5) At present, we have say @ 3 Cr Taxpayers,
with Collection of say @ 3.5L-Cr,

6) So with 1% Tax, the Taxpayers will work to improve Business / Goods Services/
R.& D./ Social work.So more Employment, make in India, less Farmer Suicide &
Peace of mind to the people.

7) Bank Account number is your mobile number.

8) Tax payment by your mobile number @ RBI a/c,
In bank transaction, the Bank will deposit your 1% Tax by your mobile number @ RBI a/c directly.

9) For cash Transaction pay similar to Post paid Mobile charges,
to your mobile number @ RBI a/c.
Most will pay if the Tax is 1% & simple to pay.

10) Your Bank Account Number should be mobile number & connected to PAN/ AADHAAR /Passport/ Election Card etc.
For Simplicity.

11) Tax collection will be distributed to State & Local bodies, say 10% each, from the place of collection.

12) Also add 1% more (L.P.F.)
Less Privilege Fund,
similar to PPF for,
social / self benefit,
to give Power to the people for Social Cause / in your bad days.

13) In short Pay Rs. 20- for every Rs. 1,000- Received.

i) Rs. 10- as tax to RBI
ii) Rs. 10- in your (L. P. F.) a/c. Could be use for social cause/ for your bad days.

14) L. P. F. (Less Privilege Fund)
of 18 L- Cr, with 60 Cr voters, will reduce dependency on the Government for the Social development.
Fund will be used for the Social cause / in your bad days.

15) Keep faith in 60 Cr voters, as they will take care of their neighbours, in need.
Also most will pay, if Tax is 1? & Simple to pay.
Only Indian can make better India.

16) Can consider more tax for Higher Receipt, say above 0.5 Cr per year, payable at the year ending.

17) All Transactions are Traceable as mobile number is once Bank a/c number & connected to PAN/ AADHAAR
/ Election card.....
So, No Corruption & Black Money Problem.

18) Babus Harassing the youth,
Traders, Voters.. who wants to work.
Babus are ruthless as they
pay "Protection Money" to......?
for Posting/ Promotion/ Permit...
Administrations Reform is a Must.
For getting Votes.

19) Farmers suicide can get reduced, by encouraging them to sell their farm products on Railways to commuter
& roads to motorists, also we need more Passenger Train, to help farmers to sell farm products, to nearby Towns.

20) Expecting Feedback on How to make India Peaceful Place by Refined, Simple Laws.
No blame game please.
Media/ Babus /Netas /Judicial Role is Eminent along with People.

For "Sare Jaha Se Achha Hindustan Hamara." forward this message.

Ramesh Bajaj

1 decade ago

I have been waiting for last 20 years for my monies from Suman Motels scam.
The police keep on saying "we will be getting orders for attaching the properties from the Courts very soon".

The last time, I enquired, I was told case is on 22nd December, 2015. They have taken down my mobile number. I am waiting for their phone call.

Ramesh Bajaj

1 decade ago

It is not only financial scam that is cause of anguish and worry.
I have been following up relentlessly with the sub-registrar's office, because a lease deed has been registered fraudulently, without my signature, with sub-registrar, old custom house. Even the share certificate attached to the lease deed does not reveal my name. (My name has been endorsed on the reverse of the share certificate 20 years ago ) Only the front side of share certificate is shown and on the reverses is a xerox copy of a tax challan.I have been running from pillar to post and all they keep on saying is go to court. Should everyone, can everyone go to court? Can everyone afford 10/ 20 years in court? Should not the Registering authorities file an FIR? It is frustrating because this way a false title will be created. Any one doing a search will see only front side of certificate.
I am 68 years old and it is very tiring and frustrating.
Everyone in the department seems to be having a cosy job, with no responsibilities and no accountability

Joscelyn DSouza

Replied to Ramesh Bajaj comment 1 decade ago

Dear Sir,

We would suggest you to visit our foundation website - foundation.moneylife.in. We have free helplines. you can raise a query under the Legal resource Centre.

Regards,
Moneylife Foundation Team

mathai

1 decade ago

i am a retired bank manager. i plan to start a blog to explain banking in simple terms .
and if possible to highlight malicious marketing campaigns which use dangerous misinformation.
the one that comes to my mind is the 'wealth generating conk shell' campaign running for months on reputed tv channels on prime time slots in kerala

Vaibhav Dhoka

1 decade ago

You have rightly said that GREED is the source for scam or cheating.But every nation has Regulators,Investigators and Judiciary to take action on wrongdoers.But in India all three have miserably failed in their duties.In case of regulators one does not know whether they go by rules or just acknowledge grievance and sleep with NO ACTION.More horrifying is police complaint(Investigators)they look with suspicion at complainant and avoid to take FIR.Only those in high and commanding position get their money back.It is Tip of Iceberg.If at all these two agencies act,our judiciary is biggest hurdle with its ever delayed justice.In short the SCAMSTERS are always in WIN WIN position.I am big looser from SEBI's and police inaction.