financial literacy: imperative to india’s economic...

Journal of Emerging Issues in Economics, Finance and Banking (JEIEFB)

An Online International Research Journal (ISSN: 2306-367X)

2017 Vol: 6 Issue: 1

2102 www.globalbizresearch.org

Financial Literacy: Imperative to India’s Economic Makeover

Ananjan Singh Rawat,

Delhi School of Economics,

University of Delhi, India.

E-mail: [email protected]

Bani Gambhir,

Delhi School of Economics,

University of Delhi, India.

E-mail: [email protected]

___________________________________________________________________________

Abstract

In the words of the famous American economist Alan Greenspan, financial illiteracy is the

number one problem of ‘today’s generation and economy.’ The objective of this paper is to

bring forth the deficiencies in the Indian economy with respect to financial literacy, its policy

design, implementation and infrastructural caveats. This is due to the fact that financial

know-how is not only indispensable microscopically for an individual but also for the entire

economy since it plays a significant role in ensuring growth. We thereby, through this paper

aim at illuminating its purport to modern living.

For the purpose of studying the Indian behaviour towards pecuniary matters, we have devised

a scale which serves as a yardstick for measuring the level of financial literacy. We have also

tried to project the correlation between financial literacy and economic indicators. We

conducted a survey to analyse the same and found that some of the results were not in tune

with our expectations.

Finally, we attempt at suggesting potential solutions which can be implemented to ameliorate

the current bleak state of affairs across all sections of the society in India. There is

tremendous room for improvement in making people financially capable and subsequently

empowering them. Steps in this direction will aid the increase in the size of the economic

cake, ensure its equitable distribution and also link markets to facilitate cross-country

investments. Conscious efforts need to be made to catalyse sustained and desired ‘economic

makeover’ of the country.

___________________________________________________________________________

Key Words: Financial concepts, financial planning, retirement, savings, investment,

economic well being, financial decision making, financial products and services, standard of

living, foreign markets, financial instruments, financial security





1. Introduction

The 2008 Financial Crisis, which started off in the United States and then later spread to

the rest of the world, highlights the prevalent ignorance and inability to take the right

financial decisions among the common people and the consequences of such callowness. The

magnitude of this catastrophic upheaval is indicative of the attention that the subject of

financial literacy demands.

The term financial literacy entails adequate know-how of financial concepts, and optimum

management and utilisation of financial products and services. In other words, it talks about

the day-to-day financial decisions of an individual, necessary for what economists refer to as

‘maximizing utility’.

Financial Illiteracy is a topic which is much discussed at various international economic

forums such as the G-20 summit, IMF and World Bank conferences. It has also been a major

point of contention in the recent OECD meets. These organisations have been strongly urging

all countries to conduct potent surveys and realise the essentiality of financial literacy in

driving economic indices to move in favour of the benefit of the international communion.

The primary reason why this is essential is because it helps in assuring financial well-

being and stability of an individual (and those dependent on him/her) in the present and in the

future. High literacy rates have always been recognised as an important stepping-stone to set

an economy on its growth trajectory. Moreover, today, with increasing complexity of

financial markets and the variety of products offered, financial education has become

fundamental to enable uninhibited progress. It is therefore the need of the hour to encourage

and promote it pan India.

An individual is financially secure if he has sufficient to sustain himself and his family

during unforeseen circumstances such as loss of employment, high medical expenses and

even retirement when his source of income is ebbed. The judicious planning of finances

prevents individuals from falling into precarious situations such as debt traps. This is

particularly important for a country such as India where majority of the population is ‘hand to

mouth’ and is thus unable to save. They need to be equipped to plan their finances efficiently,

minimize mismanagement, taught the importance of saving and investment and encouraged to

make conscious efforts to do the same.

An increase in savings would facilitate effective utilisation of untapped business

opportunities by increasing economic activity through credit creation which would further

positively impact the GDP. Though not exclusive, GDP is an important measure of the

standard of living prevalent in a country. Emphasis should be laid on increasing the per capita

GDP and simultaneously ensuring equity by uplifting the downtrodden and alleviating

poverty.





Next, the pertinent macroeconomic events across the world, their impact on an economy

and microscopically an individual can be understood if he/she is well versed with the key

financial concepts. Consequently, an individual can adjust to changing conditions by applying

his knowledge to practical use.

It requires a multi-faceted approach and sustained action over time to bring about gradual

improvement and thereby transform India to achieve financial autonomy.

2. Literature Review

One of the first researchers to highlight the absence of financial knowledge was Bernheim

(1995, 1998)

Annamaria Lusardi followed and is today the pioneer in the study of this issue. In her

survey in the United States in 1999, she found out that as many as one-third of the

respondents had not thought about retirement at all following which there was no retirement

planning. The findings for almost a decade later showed no significant improvements with

close to 30 percent of respondents not having considered saving for retirement. (Lusardi and

Mitchell, 2007a; Lusardi and Beeler, 2007). The major reason individuals refrained from

retirement planning is because they weren’t financially literate.

Agarwal, Driscoll, Gabaix, and Laibson (2007) show that financial mistakes are most

prevalent among the young and elderly, groups that also display alarmingly low levels of

financial knowledge.

Financial ignorance carries significant costs. Stango and Zinman (2007) show that those

who are not able to correctly calculate interest rates out of a stream of payments end up

borrowing more and accumulating lower amounts of wealth which is a consequence of

inadequate financial knowledge. Consumers who fail to understand the concept of interest

compounding spend more on transaction fees, run up bigger debts, and incur higher interest

rates on loans (Lusardi and Tufano, 2015; Lusardi and de Bassa Scheresberg, 2013). It is

increasingly apparent that financial mistakes can impact individual welfare as well as create

negative externalities that affect all economic participants.

Van Rooij, Lusardi, and Alessie (2007) find that financially sophisticated households are

more likely to participate in the stock market.

The Standard & Poor’s Ratings Services Global Financial Literacy Survey (S&P Global

FinLit Survey) provides information on financial literacy levels across a wide array of

countries. The survey complements the efforts of various organisations which help in data

collection, etc by delivering the first and most comprehensive global gauge of financial

literacy to date. Worldwide, only 1-in-3 adults are financially literate. Not only is financial

illiteracy widespread, but there are big variations among countries and groups. For example,

women, the poor, and lower educated respondents are more likely to suffer from gaps in





financial knowledge. This is true not only in developing economies but also in countries with

well-developed financial markets. Adults who use formal financial services like bank

accounts and credit cards generally have higher financial knowledge, regardless of their

income. Even poor people who have a bank account are more likely to be financially literate

than poor people who do not have a bank account, and rich adults who use credit also

generally have better financial skills than rich adults who do not. This suggests the

relationship between financial knowledge and financial services may work in two directions:

While higher financial literacy might lead to broader financial inclusion, operating an account

or using credit may also deepen consumers’ financial skills.

Examination of the studies mentioned above and a few others reveal a few hurdles/barriers

to developing a standardized approach to measure financial literacy. Due to the prevalent

heterogeneity across countries on account of various factors (specially between developed and

developing countries), using a universal measure to adjudge the financial literacy levels is

erroneous. The difference with respect to different financial set ups, population and

occupation structure, literacy levels, age patterns, etc need to be factored in to be able to

arrive at accurate results on the financial literacy levels of a country.

A second barrier to developing a standardized approach to financial literacy is the use of

measures that are not comprehensive. Only one-quarter of the studies included all of the

personal finance components in their measure.

Finally, an overwhelming majority of the studies reviewed did not include a guide for

measurement interpretation. This lack of clarity is a barrier to a common or general

understanding of the financial literacy construct.

3. Current Scenario

To gauge the relevance of financial literacy and the pressing need to encourage it, it is of

foremost importance to look at the ongoing state of affairs. For India as a whole, the literacy

levels stood at 74.04per cent in the year 2015. Kerala led the contest with 90per cent while

Bihar stumbled with only 63per cent.

The literacy rate in urban areas is stagnant at 86per cent while the absence of adequate

educational infrastructural and other facilities keeps that in rural areas substantially lower at

71per cent. Also, the above figures reflect the literacy rates in tandem with the substandard

definition of literacy. This motivates us to believe that the corresponding financial literacy

rates would be even lower.

The unbanked India is majorly rural and poor. Out of roughly 600,000 villages, only

33,495 have rural bank branches. It is unrealistic to expect a low-income earner to spend even

a small share of his earnings on travel to get to a bank. Moreover, the financial services

required by the rural populace differ from the ones used by urban dwellers.





With the aforementioned staggering figures of literacy rates it’s very natural to expect

even lower financial cognizance. For an economy as large as the one that is placed at the fifth

position in terms of GDP size and third in terms of purchasing power parity, the financial

literacy rates reflect a dismal picture. Close to 76per cent Indian adults do not clearly

understand basic financial concepts, found in a global survey conducted by Standard & Poor’s

Financial Services LLC. The S&P’s Ratings Services Global Financial Literacy Survey found

that this number is lower than the worldwide average of financial literacy, but it is roughly in

line with other BRICS (Brazil, Russia, India, China and South Africa) and South Asian

nations.

However there have been fair attempts by the Indian government at spreading awareness

about financial instruments and their rational application. The following table illustrates the

main objectives of the programmes undertaken.

Scheme Sanctioning

Ministry

Date of

launch

Focus Brief

Atal Pension

Yojana

Ministry of

Finance

May 9,

2015

Pension Social Sector Scheme pertaining to

Pension Sector

National

Pension Scheme

January 1,

2004

Pension Contribution based pension system

Pradhan Mantri

Jeevan Jyoti

Bima Yojana

Ministry of

Finance

May 9,

2015

Insurance Life insurance of Rs. 2 lakh with a

premium of Rs. 330 per year

Pradhan Mantri

Jan Dhan

Yojana

August 28,

2014

National Mission for Financial Inclusion

to ensure access to financial services,

namely Banking Savings & Deposit

Accounts, Remittance, Credit,

Insurance, Pension in an affordable

manner

Rashtriya

Swasthya Bima

Yojana

Ministry of

Health and

Family

Welfare

April 1,

2008

Insurance Health insurance to poor (BPL),

Domestic workers, MGNERGA

workers, Rikshawpullers, Building and

other construction workers, and many

other categories as may be identified by

the respective states

Swavalamban Ministry of

Finance

September

26, 2010

Pension Pension scheme to the workers in

unorganised sector. Any citizen who is

not part of any statutory pension scheme

of the Government and contributes

between Rs. 1000 and Rs. 12000/- per

annum, could join the scheme. The

Central Government shall contribute Rs.

1000 per annum to such subscribers.

[Source: https://en.wikipedia.org/wiki/List_of_government_schemes_in_India]





“Currently, NPS (Rs 100,163 crore) and Atal Pension Yojana (Rs 112 crore) together have

more than one crore subscribers with total assets under management (AUM) of Rs 1,00,275

crore,” the Finance Ministry said in a statement. [1]

However there has been a major slowdown in the subscription of these schemes because of

resurfacing of the popular mind-set of avoiding to invest in them. This is because the Indian

people fail to realise their importance due to their myopic temperament. This is where the role

of spreading financial literacy is crucial.

The Indian crusade for financial planning has stressed significantly on the macroscopic

factors of financial inclusion that boost private investment and neglect the rudimentary

requirement of providing financial literacy at the bottom of the social strata that form a

massive chunk of the unorganised sector contributing 50.6per cent to the GDP.

Financial Inclusion is making basic banking services available to the general public,

primarily the disadvantaged segments of the society in the most cost effective way possible.

Such services are of no good if people aren’t aware of their existence.

The World Bank reports that two billion people in the world don’t use formal financial

services. The reasons behind this solemn situation for over 70per cent of the people are all

related to pitfalls in the banking infrastructure. It is indeed disheartening to comprehend that

the largest number of unbanked people in the world are in India. Off late, Pradhan Mantri Jan

Dhan Yojana was initiated to encourage opening of no frill or zero balance accounts as an

integral step to achieve financial inclusion.

Mere opening of accounts doesn’t suffice financial inclusion. It is almost impossible to

vouch for successful inclusion without literacy.

The products need to be tailored to be uncomplicated and affordable to allow banking

services to be in sync with the demands of the people thereby allowing their advantages to

trickle down to the grass root levels.

The PMJDY, which has been flagged as a gigantic success, is actually a huge economic

failure. Superficially, it seems like a revolutionary scheme for a nation whose 40per cent

population is unbanked. It swiftly completed its target of opening 75.16 million bank accounts

within 3 months of its launch, well ahead of its stated deadline of January 26, 2015. The

Finance Ministry is boasting the project’s remarkable achievement but, its own data reveals

that 75 per cent of the accounts or 56.64 million, have no money.

Majority of these accounts opened as a stimulus to the rumour, which promised that the black

money that the government retrieves would be credited to these accounts. This sort of

rationale is clearly a repercussion of lack of knowledge about the economic system among the

Indians.





The Government of India and various other institutions have undertaken the following

initiatives to expedite the process:

3.1 ‘PROJECT FINANCIAL LITERACY’

The Reserve Bank of India launched ‘PROJECT FINANCIAL LITERACY’ with an

objective to disseminate information regarding the central bank and general banking concepts

to various target groups, such as, school and college going children, women, rural and urban

poor, defense personnel and senior citizens. It would be propagated to the concerned audience

with the help, among others, of banks, local government machinery, NGOs, schools, and

colleges through presentations, pamphlets, brochures, films, as also through the Reserve

Bank's website.

3.2 Credit Counseling Centres

Credit counselling is a process of offering education to consumers about how to avoid

incurring debts that can’t be repaid. Credit counselling often involves negotiating with

creditors to establish a Debt Management Plan (DMP) for a consumer. A DMP may help the

debtor repay his/her debt by working out a repayment plan with the creditor.

3.2.1 Scheme for Financial Literacy and Counselling Centres (FLCC)

In order to make credit counselling more effective and popular, a scheme for setting up of

FLCCs has been suggested. The wide objectives of the FLCCs will be to provide free

financial education and credit counselling.

A few banks have already opened up credit counselling centres in the country. For

example: ‘ABHAY’ counselling centre (an initiative of Bank of India); Disha Trust (an

initiative of ICICI Bank Ltd.) and Grameen Paramarsh Kendras (an initiative of Bank of

Baroda) in the state of Maharashtra.

Credit counselling services have become popular both in the rural and urban areas.

However, there is a pivotal point that cannot be neglected which is that a majority of Indian

population still lives in the rural areas. Thus, there should be a segmented approach to these

programmes rather than a broad based perspective.

3.3 Other Initiatives

Securities Exchange Board of India (SEBI) has started financial education on a nationwide

basis. The SEBI Certified Resource Persons organise workshops for the target audience on

aspects such as savings, investment, financial planning, banking, insurance, retirement

planning etc. SEBI has a dedicated website for investor education wherein study materials are

available for dissemination.

Insurance Regulatory and Development Authority (IRDA) conducts awareness drives

highlighting the importance of insurance through programmes broadcasted on television and

radio and simple messages about the rights and duties of policyholders are communicated.





The Pension Fund Regulatory and Development Authority (PFRDA), India’s youngest

regulator has been engaged in spreading social security messages to the public. It has been

associated with non-government organisations in India providing the pension schemes to the

underprivileged.

4. Importance of Financial Literacy

The issue of financial literacy has acquired great significance not only in the developing

countries with otherwise low literacy rates but across the world in the recent times. This is

because the negative impacts of improper financial planning mushroom beyond economic

well being to other domains of life and even hamper a decent quality of life. The ramifications

of poor financial decision-making at the household level are not just confined to one

generation but the consequences are borne by the children and grandchildren as well. The

mismanagement of financial resources can drag an individual into spiraling debts, which at

times lead to bankruptcies and foreclosures. Insufficient savings and the inability to see future

requirements manifest as lack of preparedness for retirement and other contingencies. This is

because illiteracy results in distorted and inefficient decisions.

Evidently, a person’s wealth doesn’t prove his/her literacy. It’s plausible for a very rich

person to squander away all his money due to poor decisions and for modest income earners

to be able to accumulate wealth by being consciously aware and putting their knowledge to

practical use.

No doubt, the complexity of financial markets has constantly been on the rise in the last

decade. This has led to informational asymmetry, thereby exacerbating the problem of

uninformed and ill equipped decisions by the common man.

Education about financial products and services ensures multifarious benefits to the

consumers. The major of them being where to save and where to invest by teaching them

about the concepts such as maximisation of returns, diversification of risk, safety of

investment and the like.

Propagation of financial literacy will safely ensure people saving in the banks rather than

keeping the money at home in cash or kind as done traditionally. By borrowing from banks

and not from moneylenders, concentration of economic power will not be restricted within a

few hands and the subsequent exploitation will be prevented. Financial inclusion can play a

pivotal role in reducing poverty, ensuring literacy and consequently resulting in inclusive

growth and empowerment if done in the right way. But what is important is it to realise that

there can be no inclusion really without literacy.

Savings are advantageous both at the household level and at the level of an economy.

Franco Modigliani in his life cycle hypothesis explains how rational and farsighted

individuals aim at maximising lifetime expected utility subject to an inter-temporal budget





constraint. They save in periods of high income for time periods of low or no income. A

person should aim at increasing the amount of wealth amassed by the time of retirement and

also diverting this to different saving avenues. This will guarantee him returns and help him

enjoy a better standard of living. This makes the individual financially secure and

simultaneously greases the wheels of the economy by encouraging investment.

At the macro level, the importance of awareness of financial instruments can’t be

undermined either. The key driver to economic growth is savings. That is because savings in

turn facilitate investment and capital flows in the economy. Consequently, higher investment

encourages more of large-scale production and lowers the costs substantially by enabling

economies of scale to be reaped. Lower prices of domestically produced goods would make

them attractive in foreign markets and subsequently boost exports. This also aids employment

generation. Its dualistic advantage would be a decrease in the current account deficit leading

to a favourable balance of payments and a surge in the GDP of the economy.

For a corporation, it is of utmost importance that its employees are able to manage their

finances properly. Economic and societal uncertainties mean volatility in their incomes,

which can have an adverse impact on the financial stability. This not only empowers them

but also makes them confident consequently enhancing their productivity at work.

5. Methodology

Theories and past researches depict a hiatus in financial literacy. We’ve seen that

education of financial instruments is indispensable, both at the microscopic and macroscopic

levels. Absence of adequate know how is detrimental to the health of the economy.

With this study, we aim at understanding the extent and patterns of financial literacy. Through

the trends, we also wish to identify the critical target areas, which need attention and prompt

action.

We began our study by formulating a questionnaire. In consonance with our intent of

including people from all sections of the society, we prepared both an online and a physical

form for our survey.

For the purpose of our study, we collected a cross-sectional dataset, which was sampled,

from the population of North Delhi. We take a simple random sample with confidence level

99% with a 10% margin of error. Further, we assume that it follows normal distribution

This survey is designed to address the questions about the relevance of financial literacy

by tracking basic economic and demographic indicators such as age, gender, literacy level,

occupation, monthly income and number of dependents (in a family).The regression equation

is as follows:

fin_lit = α0 + β1(mon_income) + β2(no_dep) + δ1(gender1) + δ2(age1) + δ3(occp1) + δ4(lit_lev1) + ε

where;





fin_lit is financial literacy, the dependent variable(regressor) in our model. mon_income is the

monthly income of the respondents’ household. no_dep depicts the number of non earning

members in a famil. gender1 is used for the gender of the individuals. age1 for their

respective ages. occp1 shows the occupation of the surveyees, lit_lev1 reflects the education

levels of the respondents and ε is the random error term which takes into account

unobservable factors The βi’s are the coefficients of the quantitative terms in the regression

while the δi’s show the impact of the qualitative variables on the regressor.

The model used posits the aforementioned factors as the key determinants of financial

literacy in India. We tried our best to include different occupational categories in our

heterogeneous random sample so as to prevent the results and consequent inferences from

being skewed.

The first part of the questionnaire takes in mandatory entries. These encompass the various

economic factors, which form the independent variables in our model, and we regress

financial literacy on them. We’ve fitted a multinomial regression model to circumvent the

factor that the data set takes discrete values because of the way we have devised our scale to

measure the level of financial literacy that we describe later below. Another reason for using

this type of regression is the large number of categories in our categorical variables because

of the way we have structured our model. Conditioned on the above factors, we use the

multinomial regression model to derive results for our data.

Inspired by our definition of financial literacy, the core rationale guiding the questions

included in the survey is that application of knowledge is as important as knowledge itself.

All the questions have two parts each, the first part tests the awareness of the individuals and

the second checks if the knowledge they have acquired is actually applied in decisions of

diurnal living to maximise benefits.

We list the questions below in the order, same as the questionnaire.

S.No Question Answer options Weights Remarks

Q1a) How do you like saving your

money?

1) Cash

2) Depositing in

a bank

3) I don't save

4) Other

0.5

1

0

0.5

Savings in banks is the most

optimal as a return can be

earned and thus money grows

Q1b) Which type of bank account

do you have?

1) Savings

account

2) Current

account

3) Fixed Deposits

4) Recurring

Deposits

5) I don't have a

bank account

0.5

0.25

1

0.75

0

A Fixed Deposit earns the

highest rate of return and is

thus weighted highest. For a

person with more than one

account, the one with the

higher weight is considered





Q2a) Which following financial

instruments are you aware

of?

1) Mutual Funds

2) Gold

3) Shares

4) Debentures

5) Real Estate

6) Derivatives

7) None

Weights are assigned based on

the individual’s knowledge.

Four or more instruments=1

Two or three=0.5

One or zero=0

Q2b) Which out of the following is

your most preferred

investment option?

1) Mutual Funds

2) Gold

3) Shares

4) Debentures

5) Real Estate

6) Derivatives

1

0.5

0.5

0.5

0.5

0.75

Mutual funds are a perfect

blend of risk minimisation and

return maximisation. Thus,

they are weighted 1 followed

by derivatives;

0.75.All others are given a

weight of 0.5

Q3a) What are the basic KYC

requirement norms to open a

bank account?

1) ID & Address

Proof

2) Address Proof

only

3) ID Proof only

4) Either

1

0

0

0

Both ID and Address proof are

required. Thus there is only

one right answer. All others

get 0

Q3b) Which of the following do

you think is a safer

investment option?

1) Rs. 10000 in

fixed deposit

2) Rs. 10000 in

shares

3) Rs. 10000 in

cash

4) All of the

above

1

0

0

0

Fixed deposit is the safest bet

since a return is assured.

Shares may, at times earn a

higher return but they are an

unsafe option

Q4a) What does it mean when you

say that the owner of a

contract has the right but not

the obligation to sell a

specified amount of security

at a specified price and time?

1) Call Option

2) Put Option

3) Long

4) Short

0

1

0

0

Put option is the only right

answer to this and thus gets

the weight 1. All others get 0

Q4b) Have you subscribed to any

type of insurance policy?

1) Yes

2) No

1

0

We urge every individual to

get an insurance policy to

ensure financial security. Thus

the weight 1 is given to those

who have a policy

Q5a) What does Basel III

requirement of banks talk

about?

1) Bringing down

inflation

2) Capital

adequacy

3) Increasing

employment

opportunities

4) All of the

above

0

1

0

0

Basel III talk about capital

adequacy requirements and

that alone gets the weight 1

Q5b) What according to you

should be the immediate step

required to combat inflation

in the Indian economy?

1) Increasing the

repo rate

2) Re-looking at

National

0

1

Food is the major cause of

inflation in an agrarian country

like India. Thus the Food

policy needs to be revamped.





Food Policy

3) Increasing the

size of the GDP

4) Increasing the

rate of

unemployment

0

0

Thus, option 2 gets the weight

1 while all others get 0

The weights are subsequently added and the scores are given out of 10. For our analysis,

the interpretation of the scores is as follows:

Score Range Inference

0 to < 5 The financial literacy level of the individual is assumed to be basic and rudimentary.

5 to < 8 The individual has intermediate knowledge of financial instruments

8 to 10 A score in this range depicts advanced financial knowledge.

6. Results and Discussion

Our findings on financial literacy led us to the following trends:

Considerable impact of number of dependents on financial literacy

[Scatter plot 1: fin_lit= Financial literacy score; no_dep= no of dependents (in a family)]

There is a negative correlation of financial literacy with the number of dependents of the

family among the people who possess basic levels of financial awareness. Since most of them

lie in the unorganised space, more mouths to feed mean an obligation to work extra time

because of the direct proportionality between income and the number of hours worked.

Hence, they aren’t able to spare time for any kind of financial planning.

Inconsistency in the commonsensical view about income levels

As opposed to a seemingly apparent outlook of a strong positive interrelation between the

financial literacy scores and the income earned by an individual, our model investigates and

asserts that income levels have rather negligent effect on financial proficiency.

Positively correlated with schooling





Most importantly, financial illiteracy is most acute for those with lower than a high school

degree.

Lopsided gender ratio for the lesser aware

A whopping contrast in the financial literacy scores of the males when pegged against

their female counterparts. This reassures the fact that majority of the women are still

contained within their traditional Indian belief of home making and are left stranded with

little or no education. Patriarchy is still prevalent in many parts of the country as a

consequence of which women fail to voice as decision makers in the financial planning of the

family.

[Scatter plot 2: fin_lit= Financial literacy score; gender1=gender (male=1, female=0)]

More women in the advanced range

Our study reveals a positive dependence when talking about advanced financial literacy

and the purportedly inferior sex. This observation is contrary to the aforementioned. This

shows that women perform better than men if given an opportunity to study, participate in

decision-making.

Financial exigency among the average scorers and the number of dependents

There is a striking trend, which indicates that among the ones having intermediate levels of

financial knowledge there is an unexpected positive relationship of the number of dependents

with the financial literacy scores, where it’s largely negative for the other two categories.

This may be attributed to the fact that with an increase in the number of children per

family, families, which have a stable income and fair literacy standards, there is an

involuntary nudge to explore more investment options to provide for and secure the kids or

the elderly.

Poor financial management among business professionals

Business individuals fall at the bottom of the totem pole in the intermediate range. The

callous attempts at vital investment avenues lead to poor budgeting decisions and





mismanagement of finances. This results in the failure of new ventures. Embezzlement at

different hierarchical levels of management has been an outcome of the technical nature of

accounting and finance which entrepreneurs often find intimidating and avoid dwelling deep

into.

Private corporate employees know it all

[Scatter plot 1: fin_lit= Financial literacy score;occp1= occupation (1=Student, 2=Business

professional, 3=Government, 4=Private, Unorganised)]

Across all the three financial literacy domains, corporate toilers performed the best. A

randomly selected worker at a private firm is expected to fare well in their attempt to devise a

financial contingency plan.

Vague age patterns

In the intermediate category, there has been a pattern that the financial education tends to

accumulate through time as a person ages. However, in the other categories, there hasn’t been

any characteristic relationship.

Roughly 16 out of 100 people in India don’t save at all. Most of these people are either

students or are in the unorganised sector such as rickshaw pullers, street vendors, etc. who

earn a meager sum of money on a daily wage basis which is not even sufficient to sustain

their basic nutritional requirements. Students on the other hand have reckless spending habits.

15.12 per cent of the sample don’t even know the basic formalities required for opening a

bank account. 20.27 per cent of the respondents weren’t aware of the risk factor associated

with different investment options. Almost three fourths of the participants have absolutely no

idea about advanced economic and financial concepts. This mammoth figure throws light on

the austere predicament. Insurance serves as a parachute for bailing out of contingencies.

17.97 per cent of the interviewees haven’t subscribed to any kind of insurance policy.





7. Conclusions and Recommendations

“An investment in knowledge pays the best interest,” Benjamin Franklin very accurately

brings out the idea of paramountcy of education. This in fact needs to be our very first step

towards the ultimate goal of eradicating financial illiteracy so that the ‘interest’ on our

investment can be as high as possible. Literacy has always been a major concern especially in

developing countries like India. Unequivocally, financial literacy can’t transpire without the

ability to read and write among people.

7.1 School and College Level

First and foremost, emphasis needs to be laid on making good quality education available

to the people of the country.

There is a dire need of introducing education of financial instruments to school

curriculums so as to endow the children with prerequisite skills to be financially stable in their

future. Initiatives at this level should include conducting biweekly sessions on financial

literacy in both urban and rural schools for better retention.

It is of utmost importance to train the teachers who will be responsible for leading these

workshops and sessions in the schools. Training programmes for them need be organised

prior to the actual sessions to ensure sophisticated conduct. Monetary compensation can be

used to motivate more participants to take up such roles.

Students can be encouraged to publish monthly school journals on the same to expand

their knowledge horizons. Inter school competitions on financial literacy can also be

conducted to ensure healthy learning.

Mandatory courses should be included in college curriculums as well, irrespective of their

major stream. These would require focusing on advanced concepts and practices to foster

increasing financial independence as these individuals prepare themselves to enter the real

practical world. Formation of allied society groups should be proposed which could conduct

discussions about the current financial issues. Conferences hosting dignitaries from the

financial field who have immense capacity to inspire the youth can also be organised.

7.2 Rural Areas

The Panchayat is the political system in the pastoral parts of the country. To begin with,

initiatives need to be taken by these supreme authority and ultimate decision-making bodies

to providing thrust to spreading financial knowledge at the vestigial level. They can either

themselves conduct sessions (by first themselves acquiring the necessary training), else can

help organise such sessions by trained professionals, whatever is more suitable keeping in

mind the feasibility and sustainability. This is to warrant trickle down of availability of

information right till the grass root level so as to empower people and make them financially

capable.





The presentations need to be such that they teach all the required concepts through

relatable real life stories. For instance, a story around a financially literate farmer can be

created. Both positive and negative impacts arising out of his decisions should be highlighted

showing how he was better off in terms of living standards, productivity at work, etc. Such

efforts would help an individual to resonate with the concepts. Moreover, a two-way

interactive session is always more fruitful than just a monologue or an address. Efforts should

be made to promote the same.

Various forms of entertainment and recreational media can be used to promote financial

literacy. Puppet shows are one example that can prove to be effective in ensuring learning.

Informative movies or documentaries can be made focusing on the importance of elementary

financial tools and their application. The movie ‘One Idiot’ was a well-appreciated initiative

taken by the Infrastructure Development Finance Co. Ltd. in this regard.

More of similar initiatives need to be emboldened. Financial Literacy Roadshows such as

the one organised by VISA can be initiated in India as well. These are engrossing and at the

same time cogent in achieving the desired objective. One very popular medium in India,

which can be used more frequently for this purpose, is ‘Nukkad Nataks’(street plays).

One of the major factors ensuring success of these programmes is the participation rate. To

encourage higher attendance, it is important to provide incentives to people .The level of

poverty in India is so acute that people can’t even afford three meals a day and often go to bed

with an empty stomach. Some don’t have permanent employment and sit idle for a substantial

part of the year. Schemes focusing on free provision of nutritious food or providing training

to enhance the skill set which can help in procuring employment can be taken up to foster

participation.

Also, since India is majorly an agrarian economy, most of the rural dwellers earn their

livelihood from agriculture and erratic allied activities. Incentives, which assist in improving

productivity, can play a great role in pulling audiences to these sessions.

The type of products introduced to the villagers are also of extended concern. These

should be in line with their requirements. To begin with, unnecessary complex products may

be of no good. Plain vanilla products, which are simple, easy to understand and guaranteed by

the government to have no underlying hidden clauses can be, tailor made to suit the demand

and requirements of the villagers.

7.3 Urban Areas

Due to globalisation of the Indian markets, there is an increasing trend of expenditure

especially in the FMCG sector. This led to cropping up of a niche demand for such consumer

goods during the initial reform period, which is gradually taking up a substantial fraction of a

regular consumption basket in the urban setup. A majority of the consumers of these goods





comprise of young people who generally have reckless expenditure tendency and neglect

planning for occurrence of contingencies and post retirement period that can possibly be

achieved through financial literacy.

Battling indifference towards financial literacy requires a two-pronged approach. Firstly,

there needs to be a thrust in public sector banking system. There is prevalence of required

policy mechanism but it has proved to be a drag on the existing system. There is managerial

overload due to extra burden, which has turned out to be a liability on the banking sector

because of the need for the management of inactive accounts. A number of banks such as

PNB, SBI etc. have expressed their resentment towards such policies and carry them out as an

obligation to the government’s order. Thus there needs to be formation of dedicated

departments especially looking into such financial inclusion schemes.

Second, there needs to be an efficient propagation of information regarding restrictive

allocation of income on luxurious spending.

There should be setting up of kiosks dispensing information regarding management of day-to-

day finances in public areas such as shopping malls, exhibitions, etc. This will largely support

the cause of limiting non-judicious expenses.

One of the most remarkable policy implementation has been in Kerala, which has made a

notable achievement by achieving total financial inclusion. Kerala now tops the Index of

Financial Inclusion (IFI) prepared by RBI – estimated on the basis of data on banking

penetration, availability of banking services and usage of the banking system among States.

At least one member of every household of the state has a bank account. This model can be

considered for replication in other states too.

7.4 Corporate Sector

The 2008 financial upheaval bears testimony to the fact that financial literacy is important

for corporations as well. It is of utmost importance for the finance personnel to be well versed

with the various cash flow activities of the organisation and the multitude of accounting and

analytical ratios, which help in checking solvency, liquidity, profitability, etc. This assures

better decision making on where should it invest and how much, what are the most cost

effective financing techniques, risk management and diversification and other such pertinent

issues. Employees are required to be financially capable and secure. Automatic enrolment in

pension funds has proved to be a right approach in various parts of the world and should

consequently be adopted in India as well. This would aid increase workforce productivity by

making the employees better off. An increase in efficiency would translate into more and

good quality production for the firms increasing profitability. The employers can in fact

organise mandatory workshops and seminars on financial education encompassing best

financial practices for the new employees as part of their training.





The corporates, as part of their corporate social responsibility can ‘adopt villages’. This

would require them to take the complete onus right from making all individuals financially

aware and able to take right decisions and thus expedite the coverage of financial education.

7.5 Internet and Social Media

Numerous free resources on financial literacy are available online. Studies conducted in

other parts of the world highlight the potency of these programmes by indicating significant

improvement in the knowledge base of the students. There are ample virtual stock trading

platforms available on various websites such as valueresearchonline.com and

moneycontrol.com. Awareness regarding these needs to be spread.

The rapid advent of Internet in the urban populace, especially the youth can help use social

media to play a powerful tool in spreading awareness and diffusing good practices.

Further, a mobile application can be developed which provides authentic and regular updates

and notifications to the people.

A study by TIAA-CREF, a financial services company brought forth that the wealth of

people who plan properly for retirement is twice that of those who don’t. Less financially

equipped people often find themselves in helpless situations such as failure in credit

repayment, unproductive investments, higher fees for financial assistance and eventually end

up losing money.

This serves as an anecdote to validate our argument of the pressing need for financial

literacy.

The results from our survey show that the financial literacy levels amongst majority of the

sample lie in the intermediate range. Clearly, there is scope for improvement. Education is

surely the ‘most powerful weapon’ that can be used to ‘change the world.’ More efforts need

to be put into promoting good quality education and learning as educated individuals can take

appropriate and informed decisions.

Women, in general are seen to be less financially literate. This finding coincides with the

discrimination they are subject to being considered the inferior sex. Equality needs to be

brought about to uplift and allow them to valuably contribute to the GDP. According to our

study, contrary to common perception income doesn’t significantly affect the financial

knowledge. Also financial literacy scores within the intermediate range tend to improve with

an increase in the number of dependents. Thus, highlighting the frantic nature for making

ends meet. Financial recklessness among top business executives leads to frauds,

embezzlements and sometimes collapsing businesses.

While there are several policies and programmes at the national and international level, the

major lacuna is their implementation. Conscious efforts need to be made to bring about

change so that the desirable ‘economic makeover’ of the country is achieved. We hope that





the aforementioned suggestions, if implemented efficiently can ensure sustained growth and

progress of the economy.

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