K C Chakrabarty: Exploring the challenge of financial education across
emerging economies
Keynote address by Dr K C Chakrabarty, Deputy Governor of the Reserve Bank of India, at
the Visa-FT Financial Literacy Forum Series, Mumbai, 5 June 2012.
* * *
Assistance provided by Smt. Sushma Vij and Ms Geeta Nair in preparation of this address is gratefully
acknowledged
Mr. James Crabtree, Chief Mumbai Correspondent, Financial Times, Mr. Uttam Nayak,
Group Country Manager, South Asia, Visa Inc, Mr. Thomas Davenport, Director, South Asia,
IFC, Ms. Nirupama Soundararajan, Additional Director, FICCI, Ms. Jayshree Vyas, Managing
Director, SEWA Bank, distinguished guests, members of the press, ladies and gentlemen. It
is my pleasure to be present here today to address this august gathering to deliberate on the
challenge of financial education across emerging economies. Financial Literacy, together
with Financial Inclusion and Consumer Protection form a triad which has a vital bearing on
the stability of the financial system. Financial literacy is one of the major challenges facing
countries across the globe, irrespective of their level of economic development and has been
receiving significant attention from policy makers worldwide. I would, therefore, like to
congratulate Financial Times and Visa for taking initiative by organizing this financial literacy
forum and bringing together thinkers, policy makers and market practitioners to deliberate on
how to enhance the effectiveness of our financial literacy efforts.
When we talk about financial literacy, we are usually referring to a set of skills that allow
people to manage their money wisely along with some understanding of essential financial
concepts, not least an appreciation of the trade-off between risk and return. Financial
Literacy is not just about markets and investing, but also savings, budgeting, financial
planning, basics of banking and most importantly, about being "Financially Smart". To
understand financial planning, a person should be financially literate and be able to
understand the importance of preparing household budgets, cash-flow management and
asset allocation to meet financial goals. Hence, the foundation of financial literacy needs to
be laid by inculcating financial prudence through education at the school level.
Is financial literacy required only in emerging and developing economies?
I would say that financial literacy is essential for both developed nations and emerging
economies. However, we need to bear in mind that the focus of financial literacy initiatives
would vary depending on the economic profile of the target population. For developed
countries, the access to financial products/ services is fairly widespread and hence,
consumers/ market participants are required to be educated more about the characteristics
of the financial products/services, including their risks and returns. However, for emerging
market economies, ensuring adequate access to financial products and services is more
important with the financial literacy initiatives focusing on creating demand for these
products/services. In India, the access to products itself is lacking. Therefore, ensuring
widespread access to financial products/ services and greater knowledge about the basic
financial products/ services, including their risk/ return profiles, is essential for expanding the
outreach and inclusiveness of the financial system. Thus, our financial literacy efforts are
closely interlinked with our financial inclusion strategy.
Why is financial literacy necessary?
Financial Literacy is considered an important adjunct for promoting financial inclusion,
consumer protection and ultimately, financial stability. Financial Inclusion and Financial
Literacy need to go hand in hand to enable the common man to understand the needs and
benefits of the products and services offered by the formal financial institutions. We have
defined financial inclusion as ensuring access to appropriate financial products and services
needed by all sections of the society in general and vulnerable groups, such as weaker
sections and low income groups in particular, at an affordable cost, in a fair and transparent
manner by regulated mainstream institutional players. So, from the financial literacy
perspective, it essentially involves two elements, one of access and the other of literacy.
Who are the target groups and what messages to deliver?
I shall argue here that everyone in the economy needs to be financially literate viz., users
and providers of financial products/ services. In the Indian context, the users can be broadly
categorized as the financially excluded resource-poor, the lower and middle income groups
and high net worth individuals.
For the resource-poor population, financial literacy would invariably involve addressing deep
entrenched behavioural and psychological factors that are major barriers to participating in
the financial system. For the purpose, our financial literacy efforts are primarily directed
towards dissemination of simple messages of financial prudence (vernacular language)
through large awareness campaigns across the country combined with vigorous roll out of
financial inclusion plans by banks, insurance and pension funds, and others. However, it is
important to note that being literate is not a necessary prerequisite for attaining financial
literacy as the basic financial messages can be conveyed through various alternate means
without relying on written inputs. Some of the basic messages we seek to deliver are:
•
Why save?
•
Why save regularly and consistently?
•
Why save with banks?
•
Why borrow within limits?
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Why borrow from banks?
•
Why borrow for income generating purposes?
•
Why repay loans
•
Why repay loans in time?
•
Why do you need insurance?
•
Why you will need regular stream of income post working life -pension?
•
Why you should keep money aside regularly and consistently during your earning
life for pension in old age?
•
What is interest? How moneylenders charge very high interest rates?
•
What is the difference between money and credit.
One of the primary challenges for improving the effectiveness of financial literacy efforts is to
ensure the standardization of the basic messages being conveyed to people. This will help in
ensuring consistency in the messages reaching the target audience from various sources
and making it more focused and purposeful. I hope that this forum deliberates on this issue
and comes up with some useful ideas on the same.
For the lower and middle income groups that are participating in financial markets as either
savers or borrowers or both, i.e. the financially included, financial literacy is about enhancing
their knowledge about the market and about the range of products/ services available for
meeting various financial goals. For instance, how many people invest in equities? They lack
knowledge about how the equity market functions, which gives relatively high returns over a
longer time horizon as compared with other kinds of investments. For high net worth
individuals, the education is useful to fetch greater returns from their investments in the
market and to avail credit at relatively cheaper rates. But whether saving or investing, the
basic lesson that a higher return implies higher risks cannot be lost sight of. People need to
be educated to balance their investments in terms of liquidity and risks and that they should
not put all eggs in the same basket.
While financial literacy for the users of financial services/products is of paramount
importance, literacy is also a must for financial service providers. Banks, financial institutions
and other market players too need to be literate about their risk and return framework. Every
bank, in order to expand its customer base, needs to understand the requirements of its
customers, the market, credit and operational risks involved and returns to be achieved.
They need to understand that for their business to survive, their customers must survive and
for that, they need to understand the appropriateness of the products themselves to be able
to explain it to their customers.
Besides, the providers of financial services have a vested interest in the spread of financial
inclusion and financial literacy, as it will help them in expanding their business operations to
newer segments of the population. Globally, it is observed that commerce for the poor is
more viable than commerce for the rich. Financial Inclusion needs to be pursued in a
commercially viable manner, which is possible only if the entire suite of products including
credit products, remittance services and deposit products are offered to customers. The
commercial viability of financial inclusion efforts is essential for ensuring long term
sustainability and scaling up of this business. The failure of financial intermediaries to ensure
effective implementation of financial inclusion efforts as a viable business model indicates
the lack of basic financial literacy on the part of these financial intermediaries.
Institutional framework in India
One critical advantage that India has in its Financial Literacy and Financial Inclusion efforts is
the strong institutional framework in place for guiding its implementation. We have the
Financial Stability & Development Council (FSDC) headed by the Union Finance Minister
which, inter alia, has been mandated to look after Financial Inclusion and Literacy efforts.
With heads of all financial sector regulatory authorities being part of the FSDC, it seeks to
ensure inter-regulatory co-operation for attaining the stated goals. FSDC has constituted a
Sub-Committee to focus solely on Financial Inclusion and Literacy. In our multi agency
approach, Reserve Bank has taken a lead role in spreading financial inclusion and financial
literacy, both in terms of creating an enabling policy environment and providing institutional
support.
One of the important tasks that the FSDC Sub-committee has taken up is to formulate the
National Financial Literacy Strategy document with the following objectives.
(i) Create awareness and educate consumers on access to financial services,
availability of various types of products and their features.
(ii) Change attitudes to translate knowledge into behaviour.
(iii) Make consumers understand their rights and responsibilities as clients of financial
services.
Financial literacy - Ideally start early in schools
It is well recognized that to be effective, financial literacy initiatives should ideally commence
at school level although, even at a later stage adult education would provide substantial
benefits. Financial education at the school level would involve teaching the basics concepts
for laying a strong foundation. The groundwork for this sort of conceptual understanding is
best laid in a formal educational setting. The reason why it is important to teach financial
education in schools is also due to its multiplier effect on the society as they would be in the
best position to act as ambassadors for the spread of financial education in their surrounding
environment. In India, therefore, we are engaging with the curriculum setting bodies like
National Council of Educational Research and Training (NCERT), Education Boards like
Central Board for Secondary Education (CBSE), Central and State Governments to try and
embed such concepts in the school curriculum.
Channels of financial literacy
Taking into consideration different cultures and market development needs, we are adopting
a multi-channel approach to cover different financial and education levels in various age
groups. We have a link on Financial Education on the RBI website for the common man,
containing material in 13 Indian languages, which includes comic books on money and
banking for children, puzzles, competitions, etc. Top Executives of Reserve Bank of India
undertake outreach visits to remote villages on a continuous basis to spread the message of
financial awareness and literacy. A Young Scholars Scheme has been instituted wherein,
around 150 graduate students are selected each year from across the country, who are
provided summer internship in various offices of the Reserve Bank and are expected to
submit small project reports relevant to the Bank's functioning. Moreover, these young
scholars are required to visit some schools in their region and explain their project to school
students, so as to create greater awareness among the school students regarding the
functioning of the Reserve Bank. Besides, town hall meetings, participation in information /
literacy programmes organized by Press, enacting plays and skits, arranging stalls in local
fairs/ exhibitions, etc. are some other initiatives towards this objective.
Who all are partnering in this initiative?
Everybody has to be involved in the financial literacy efforts. In India, a large number of
stakeholders including the central and state governments, financial regulators and players,
civil society, educationists and others are involved in spreading financial literacy. As we have
adopted a bank led model for financial inclusion, banks are actively contributing to our
financial literacy initiatives by setting up Financial Literacy and Credit Counselling Centres
with focus on educating people on availability of various deposit, credit and remittance
products offered by banks, so as to create demand for the same, with the aim of attaining
Financial Inclusion. As on March 31, 2012, there are 429 FLCCs functioning throughout the
country. Use of mobile Financial Literacy vans by banks in the North Eastern States, Weekly
Radio programmes on financial literacy in some States by banks and similar programmes in
Tribal districts by NABARD, awareness programmes on various Government Sponsored self
employment schemes involving bank loans and subsidy by Government agencies like
KVIC,DICs, SC/ST corporations, Mass media campaigns, tie ups with educational institutes,
financial awareness workshops/ help lines, books, pamphlets and publications on financial
literacy by NGOs, financial market players, etc. National and State level rural livelihood
missions have large number of field functionaries for proper handholding support to a large
number of Self Help Groups. A number of other websites/portals of banks/ /State Level
Bankers Committees are disseminating information on banking services. Conduct of
Financial Literacy programmes by Rural Self Employment Training Institutes, conduct of
training programmes for Farmers Clubs, NGOs & SHG members by NABARD are also useful
initiatives in this regard. State Governments and local level administrations have an
important role to play in financial literacy campaigns as they are closer to the ground and will
be in a position to better implement the initiatives taken.
Consumer protection through literacy
For all users of financial services, an important component of financial literacy is the
provision of a grievance redressal mechanism, which they can access in cases of complaints
and frauds by/against financial service providers. The availability of an effective grievance
redressal mechanism is essential as its absence could lead to loss of confidence in the
financial system, prompting people to move away from it. This would be a serious setback to
our financial inclusion initiatives. For cost-effective, quick grievance redressal related to
banking sector, the Reserve Bank has instituted Banking Ombudsmen in each of our
Regional Offices. Other regulators have also setup ombudsman in their areas. However,
banks/financial institutions should realize that improved customer awareness/ service and
effective grievance redressal at their level alone can substantially reduce the number of
complaints going to Ombudsmen.
In addition to the obvious benefits of financial literacy at the individual level, it has major
macro-economic benefits as well. If we can bring the excluded population into the purview of
banking services, we could raise household and overall domestic savings further, and can,
thus, fulfill one of the necessary conditions for achieving double-digit growth.
Conclusion
While a number of measures have and are being taken, given the enormity of the task of
financial literacy, a lot of ground still needs to be covered. Here, I would like to emphasize
the need for a partnership of all the stakeholders in a collaborative manner. The preparation
of National Strategy on Financial Education is a step in this direction. However, like the
proverbial "horse and carriage", efforts to improve financial capacity and to raise financial
literacy best go together; it makes for an easier and more successful journey.
I wish the deliberations all success. Thank you.