K C Chakrabarty: Financial literacy and consumer protection
Remarks by Dr K C Chakrabarty, Deputy Governor of the Reserve Bank of India, in a panel
discussion on "Financial literacy and consumer protection", Washington DC, 22 April 2012.
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Globally, the triad of Financial Inclusion, Financial Literacy and Consumer Protection has
been recognized as intertwining threads in pursuit of Financial Stability. For any kind of
stability, whether financial, economic, political or social, inclusive growth is an essential
prerequisite. Inclusive growth, in turn, is largely driven by financial inclusion and an inclusive
financial system.
Financial inclusion and literacy
Financial Inclusion and financial literacy are complementary to each other. For emerging
market economies, ensuring adequate access to financial products and services is more
important at this stage but financial literacy creates demand for these products/services. In
advanced economies, the access is not that important an issue. Thus, it is a global problem
with global dimensions.
India's strong financial inclusion / literacy architecture
The institutional structure for India's Financial Inclusion/ Literacy programme is unique as it
has an apex body in the Financial Stability and Development Council (FSDC), headed by the
Finance Minister of Government of India, mandated, inter alia, to focus on attaining financial
inclusion/ literacy goals. 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.
Our approach to financial inclusion
(a) Structured, planned approach
We have a structured and planned approach to financial inclusion wherein all banks have
prepared Board approved Financial Inclusion Plans (FIPs) with a three year horizon
extending up to 2013. The initial goal of providing access to banking services to all villages
with population more than 2000 by March 2012 has been successfully met and we are on our
way to ensure the same for all villages in a time bound manner. The focus is also on the
volume of transactions in new accounts opened as a part of the financial inclusion drive.
(b) Bank led model
In India, we have adopted a bank-led model for financial inclusion which seeks to leverage
on technology. The FI initiatives would have to be ICT based and would ride on new delivery
models that would need to be developed by the market participants to best suit their
requirements.
Our experience shows that the goal of financial inclusion is better served through
mainstream banking institutions as only they have the ability to offer the suite of products
required to bring in effective/meaningful financial inclusion.
Other players such as mobile companies have been allowed to partner with banks in offering
services collaboratively.
(c) Minimum bouquet of products and services
To meet the criterion of availability of banking services, a minimum of four basic products
must be offered to customers:
 a check-in account with emergency credit facility
 payment services and remittance facility
 a pure savings product such as a recurring deposit
 facility of entrepreneurial credit to deserving people
(d) Technology driven - but technology platform neutral
The task of Financial Inclusion is gigantic and cannot be done without actively leveraging
technology and without involvement of society as a whole. The Financial Inclusion strategies
and delivery models being developed by banks are primarily technology driven. However, we
have consciously ensured that the models adopted by banks are technology neutral, which
facilitates easy up-scaling and customization, as per individual requirements.
(e) Combination of branch and BC structure to deliver financial inclusion
A combination of Brick and Mortar structure with Click and Mouse technology will be helpful
in extending financial inclusion especially in geographically dispersed areas. Banks need to
make effective use of technology to provide banking services in remote areas through the
Business Correspondent (BC) model. The BC model allows banks to provide doorstep
delivery of services, especially cash transactions. To ensure increased banking penetration,
and control over operations of BC, more Brick and Mortar branches are needed. In
April 2011, banks have been mandated to allocate at least 25 per cent of all new branches to
unbanked rural areas. Banks have also been mandated to open intermediary brick and
mortar structure between the base branch & customer locations, which will lead to efficiency
in cash management, documentation, redressal of customer grievances and close
supervision of BC operations.
Where do non-mainstream institutions fit in?
As the penetration of mainstream institutions in limited, other players, which can reach the
excluded segments of the society, are needed. These institutions will contribute to financial
deepening and furthering the inclusion agenda by acting as a link between the hitherto
unbanked population and the mainstream institutional players. They will also help in filling the
void till the formal financial sector develops adequate reach and penetration to directly
service these segments.
In sum, two basic issues need to be understood while implementing financial inclusion:
 Financial Inclusion programmes should be implemented on commercial lines and
not on a charity basis. It is important that banking with the poor is perceived and
pursued as a sustainable and viable business model.
 While poor need not be subsidized, it is important to ensure that they are not
exploited. The need is to ensure that poor people who deserve credit are provided
access to timely and adequate credit in a non-exploitative manner.
Financial literacy
As a complement to Financial Inclusion, Financial Literacy aims to build peoples capability to
use the financial products and services. As the first stage of literacy is to create demand, all
institutions involved in delivery of financial products and services are contributing to our
financial literacy agenda. This entails devising appropriate products and services, pricing
them reasonably, understanding the risk, communicating it to customers and protecting the
customers.
Multi-agency Central Bank led approach
The Central 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,
the Reserve Bank of India is actively contributing towards the goal of universal financial
inclusion in the country. FSDC has constituted a Sub-Committee to focus solely on Financial
Inclusion and Literacy.
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. Realizing this, in India, we have engaged 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, in the FSDC
sub-Committee on FI and FL.
A large number of other players are involved. All other financial sector regulators, banks,
insurance companies, pension funds, NABARD, corporates, industry associations, NGOs
and other members of the civil society are actively engaged in this process. Thus, our basic
approach could be described as a central bank led multi-agency approach.
National financial literacy strategy
One of the important tasks that the FSDC Sub-committee is undertaking is to formulate our
National Financial Literacy Strategy document. It is being finalized with the following
objectives:
 Create awareness and educate consumers on access to financial services,
availability of various types of products and their features.
 Change attitudes to translate knowledge into behaviour.
 Make consumers understand their rights and responsibilities as clients of financial
services.
Who should be imparted financial literacy?
Contrary to popular perception, financial literacy has to be imparted to everyone in the
economy viz. users and providers. In the Indian context, the users are broadly the financially
excluded resource-poor, the lower and middle income groups and high net worth individuals.
Equally important, banks, financial institutions and other market players too need to be
literate about their risks and returns framework. Last, but not the least, policy makers
including the financial sector regulators must have financial literacy to comprehend and
gauge the requirement of the population and financial institutions to drive the agenda. But,
naturally, the message to be conveyed, the method of communication, the language of
communication, the complexity of subjects etc. would have to be tailored to suit the target
audience. Illustratively, what are the basic/simple messages that we are trying to get across.
What are the basic messages that we are trying to convey?
Some of the questions that we seek to address through our FL initiatives are:
 Why open a bank account?
 Why should one save?
Why save regularly and consistently?
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 What is the difference between money and credit?
 Why borrow responsibly?
 Why borrow for income generating purposes?
 Why repay loans in time? Repayment ethics.
 Why do you need insurance?
 What are the benefits of being part of payment and settlement system
 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?
Risk return framework
The basic underlying message that is to be conveyed through financial literacy initiatives is
that where returns are more, risk will invariably be higher. One should not take the risk one
does not understand.
Consumer protection - in whose interest?
To protect consumers is in the interest of service providers also. They need to appreciate
that for their business to survive, their customers must survive and for that they need to
understand the appropriateness of the products themselves. We are encouraging simple
plain vanilla products where pricing and other parameters are easy to comprehend and are
not too complex. However, as markets mature and more complex products become
available, the need for financial literacy would become even more paramount.
Pricing of product and services to protect the customer
The most important area for consumer protection is pricing of products and services.
Regulation has to ensure that pricing is transparent, non-discriminatory and non-exploiting.
Also, it should be ensured that pricing is affordable too. For the most vulnerable sections of
society who do not have much idea about pricing, regulation should ensure formulation of
standardized products and services by all market players. For other category of customers,
market forces should determine the price.
Steps taken by RBI in promoting financial literacy
One of the objectives of the Financial Inclusion/Literacy agenda is to ensure that the sections
of the society that are hitherto undeserving of credit facilities are made credit worthy.
Initiatives such as setting up Rural Development and Self-Employment Training Institutes
(RUDSETIs) and Financial Literacy and Credit Counselling Centres (FLCCs) by different
banks are aimed at ensuring this.
Some of the other steps taken by RBI to promote financial literacy are as under:
 Outreach visits by Top Executives of Reserve Bank of India to remote villages on a
continuous basis - to spread the message of financial awareness and literacy.
 RBI website - A link on Financial Education in the RBI website for the common man,
containing material in 13 Indian languages which includes comic books on money
and banking for children, essay competition etc.
 Awareness - by distributing pamphlets, comic books, enacting plays and skits,
arranging stalls in local fairs, exhibitions, participation in information / literacy
programmes organized by Press
 Inclusion of Financial Education material in school curriculum by various State
Governments
 Use of mobile Financial Literacy vans by banks in the North Eastern States
 Weekly Radio programmes on FL in some States by banks & similar programmes in
Tribal districts by NABARD
 Awareness programmes on various Government Sponsored self employment
schemes involving bank loans & 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 FL by NGOs, Financial
market players etc.
 National & State level rural livelihood missions have large number of field
functionaries for proper handholding support to large number of Self Help Groups
 Large number of other websites/portals of banks/ /State Level Bankers Committees
disseminating information on banking services
 Conduct of training programmes for farmers club, NGOs & SHG members by
NABARD
Banking ombudsman - quick and cheap forum of grievance redressal
In India, we do have a law for Consumer Protection though not specifically for the financial
sector consumers. In regard to bank customers, we have the Banking Codes & Standards
Board of India (BCSBI) which is the standards setting body for banking services. The
self-regulatory organization of the banking industry viz., Indian Banks Association has
evolved a fair practices code to be adopted by its members.
To ensure that consumers are protected even in case of plain vanilla products, the Reserve
Bank of India has instituted the Banking Ombudsman, an alternate dispute resolution
mechanism. We are examining the possibility of enacting a comprehensive financial sector
consumer protection legislation.
What has been achieved so far?
The progress in some of the key parameters from March 2010 to March 2012 are as follows:
 Banking connectivity to more than 1, 47,534 villages has been achieved by
March 2012 from 54,258 in 2010.
 All villages with population of more than 2000 persons have been connected with
Banks. Total number of such villages given bank connectivity is around 74,000.
 Number of barefoot bankers increased to nearly 97,000 from 33,000.
 More than 50 million basic banking accounts have been opened to take the total
number of such accounts to more than 100 million.
 About 7 million people/families have been credit linked.
 Nearly 22 million families have been given the benefit of electronic benefits transfer.
Though these figures in isolation seem very impressive, yet, if one considers the gargantuan
nature of the task ahead to provide access to 1.2 billion people in the country and to reach
600 thousand villages, it's a long way forward. It requires concerted efforts at all levels
involving all stakeholders.
Gaining from international experiences
Financial Inclusion as a concept is still evolving. The delivery models are still being perfected
by the market participants. While excellent work is being done in some pockets, in many
other areas the progress is not satisfactory and there is a need to broad base the
achievements. International conferences such as this help in sharing cross-country
experiences and in fine tuning our strategies based on learnings of our peers across
jurisdictions and adopting international best practices.
Conclusion
The task of achieving universal financial inclusion is a global one and has huge dimensions.
The issue of financial stability and that of financial inclusion, literacy and consumer protection
are intertwined. While each jurisdiction will perhaps evolve their own different delivery
models, we need to learn from each other and implement what is suitable in our context.
Some progress has been achieved but a lot needs to be done. I am sure that with the active
involvement of all stakeholders we would be able to take financial inclusion from principles to
action.
Thank you.