K C Chakrabarty: The what, why, who and how of financial literacy
Address by Dr K C Chakrabarty, Deputy Governor of the Reserve Bank of India, at the
stakeholders' workshop on "Financial literacy", organized jointly by the UNDP, NABARD and
MicroSave, Mumbai, 4 February 2013.
* * *
The assistance provided by Smt. Jaya Mohanty and Smt. Pallavi Chavan in preparation of this address is
gratefully acknowledged.
Dr. Prakash Bakshi, Chairman, NABARD; Ms. Caitlin Wiesen, Country Director, UNDP India;
Mr. Manoj K. Sharma, Director, MicroSave; delegates at the Workshop, ladies and
gentlemen. As you all know, financial literacy has emerged as a focus area for policy makers
not just in India, but all across the globe, particularly in the aftermath of the global financial
crisis. Success in dissemination of financial literacy has been identified as key to meeting the
critical objectives of financial inclusion and consequently, financial stability. The workshop is
extremely topical as it brings together key stakeholders and brainstorms on steps needed to
provide impetus to the financial literacy mission going forward. I congratulate the organizers
for today's initiative and hope that some meaningful and credible strategies emerge from the
deliberations.
The United Nations Development Programme (UNDP) has had a significant impact on the
social emancipation of people across the globe, ever since its inception in 1966. Over the
years, it has focused on Poverty Reduction, Democratic Governance, Crisis Prevention and
Recovery; and Environment and Sustainable Development. It is heartening to note that
UNDP has partnered with the Government machinery and civil society in India, with a
particular focus on seven of the less developed states, to work towards improvement in the
quality of lives of the poorest of the poor. Achieving inclusive growth has been one of the
predominant objectives of UNDP's programmes in India and across the world. NABARD, as
you all know, was set up with a mandate of facilitating credit flow for promotion and
development of agriculture, rural industries and services. It has evolved to occupy a pivotal
position in the financial inclusion efforts, particularly in the rural hinterland of the country.
Similarly, MicroSave has also made important contributions in the field of financial inclusion
by successfully partnering with diverse stakeholders such as financial institutions, investors,
donors, corporate and regulators for providing, what its corporate tagline claims, "Market-led
solutions for financial services". I am happy to note that the three organizations have come
together to host today's seminar and hope that the partnership yields fruitful results for our
financial inclusion/ financial literacy initiatives.
I am happy to note that at the behest of UNDP and NABARD, MicroSave has conducted a
Financial Literacy Assessment Survey to assess the current status of financial literacy in the
UN focused states and to gather relevant inputs from other similar programs operating
nationally/ internationally. It is, indeed, very important not only to work hard, but also to have
periodic appraisals of the performance, as it helps one to refocus, reorient and undertake
mid-course correction, which is so very vital to the achievement of the ultimate objective. I
am sure the insight gained from this exercise would provide valuable guidance to UNDP and
help them in further streamlining the existing programs and taking it further, both - in terms
of its penetration across the targeted states and the impact it has on the financial behavior of
the beneficiaries.
In my address today, I shall answer four basic questions about financial literacy:
• What is implied by the concept of financial literacy?
Why is financial literacy necessary?
•
• Who all need to be made financially literate and in what aspects?
• And finally, how to spread financial literacy?
What is implied by the concept of Financial Literacy?
Let me begin by answering the first question. Financial literacy is not a new term to all of us
present here. While we have heard a number of definitions of financial literacy, I would use
the one given by OECD, which defines it as "a combination of financial awareness,
knowledge, skills, attitude and behaviours necessary to make sound financial decisions and
ultimately achieve individual financial wellbeing." Financial literacy is expected to impart the
wherewithal to make ordinary individuals into informed and questioning users of financial
services. It is not just about markets and investing, but also about saving, budgeting,
financial planning, basics of banking and most importantly, about being "Financially Smart".
Financial literacy is a complex concept, and it is important to understand its full import. In
fact, as a society, we are yet to fully recognise the need and potential of financial literacy. As
I would explain subsequently, financial illiteracy permeates across all levels of society and
economic strata. The nature of illiteracy and its manifestations may vary, but it gets reflected
in the everyday financial choices that many of us make. The lack of basic knowledge about
financial products and services and their risk-return framework is one common instance of
financial illiteracy that is widely observed. The greed for higher returns eventually culminates
into a crisis involving larger number of retail investors. This basic lesson holds true not just
for an individual investing his hard earned savings in financial products, but also for a bank or
financial institution that manages public funds and channels them, either as investments or
loans. Thus, appreciation of various aspects of financial literacy and how it impacts our lives
holds the key to prudent financial planning and welfare maximisation, both- at the individual
level and for the society as a whole.
Why is Financial Literacy necessary?
I, now, come to the second question: Why is financial literacy necessary? Together with
Financial Inclusion and Consumer Protection, Financial Literacy forms a triad, which is
necessary for ensuring financial stability. Not only do the three have a bearing on financial
stability, they also have a strong interplay among each other, with each having a vital impact
on the other. Thus, financial literacy has significant relevance for financial inclusion and
consumer protection. Without financial literacy, we cannot expect to make major headway in
either financial inclusion or consumer protection.
Financial inclusion, essentially, involves two elements, one of access and the other of
awareness. It is a global issue, and the relative emphasis on the two elements varies from
country to country. For developed countries with widespread financial infrastructure, the
access to financial products/services is not a matter of concern. It is more of a financial
literacy issue in that market players/consumers are required to be educated about the
characteristics of the available financial products/services, including their risks and returns. In
developing countries like India, however, the access to products itself is lacking. Therefore,
here, both the elements, i.e. access and awareness need to be emphasized, with improving
access assuming greater priority.
Financial Stability, as a policy objective, refers to the avoidance of financial crises as also to
the ability of the financial system to limit, contain, and deal with the emergence of imbalances
before they pose a threat to the economic processes.1 The recent global financial crisis is a
glaring example of how lack of financial literacy can impact financial stability. The genesis of
the crisis was in the sale of inappropriate mortgage products to sub-prime borrowers, who
did not understand the product characteristics. The crisis was also fanned by the creation of
sophisticated financial products by seemingly expert market participants, without
understanding the underlying risks involved. Ben Bernanke, Chairman, Board of Governors
of the Federal Reserve System, remarked "In light of the problems that have arisen in the
subprime mortgage market, we are reminded of how critically important it is for individuals to
become financially literate at an early age so that they are better prepared to make decisions
and navigate an increasingly complex financial marketplace".2
As already noted, financial literacy involves imparting knowledge about the risk and return of
financial products to the users and providers of these products. It is this knowledge that helps
in containing risks and maintaining stability in the financial system. I would like to argue that
with knowledge, financial market players are expected to control their avarice for higher
returns, keeping in view their inherent risk taking abilities.
Financial literacy is an essential pre-requisite for ensuring consumer protection. The low
levels of transparency and the consequent inability of consumers in identifying and
understanding the fine-print from a large volume of information leads to an information
asymmetry between the financial intermediary and the consumer. In this context, financial
education can greatly help the consumers to narrow this information divide. Besides,
knowledge about the existence of an effective grievance redress mechanism is essential for
gaining the confidence of the unbanked population and overcoming apprehensions they may
have about joining, what would appear to be a complex and unfriendly financial marketplace.
For the population group that would have newly entered into the formal financial system
through our financial inclusion initiatives, awareness about the consumer protection
mechanism is critical as any unsavory experience could result in them being permanently
lost to the financial system.
Who needs to be financially literate and in what respect?
This brings me to the third question of who needs to be financially literate. I shall argue here
that everyone associated with the financial system needs to be financially literate. This
includes all users of financial services, be it the financially excluded resource-poor, the lower
and middle income groups or the high net worth individuals; the providers of services; and
even the policy makers and the regulators.
For the resource-poor population, which operates at the margin, vulnerability can be acute
due to constant financial pressures. Household cash management can be daunting under
difficult circumstances, with few resources to fall back upon. Financial literacy efforts, in case
of such population groups, essentially, involves educating them about the benefits of being
part of the formal financial system and managing short term volatility in incomes and meeting
unexpected emergencies without getting trapped in unnecessary debt. To cite one example,
a study by NCAER and Max New York Life has shown that in India, around 60 per cent of
labourers surveyed stored cash at home, while borrowing from moneylenders at high interest
rates; a pattern of saving money that is bound to aggravate financial vulnerability of these
labourers.3 The process of educating these excluded sections would involve addressing deep
entrenched behavioural and psychological factors that are major barriers to participating in
the financial system.
For the middle and lower-middle income groups that are participating in financial markets as
either savers or borrowers or both, i.e. the financially included, financial literacy efforts should
aim at enhancing their knowledge about the market and new products/services. For instance,
there is a large section of our population that has a bank account but refrains from
participating in the capital market on account of lack of knowledge. Financial literacy, in such
cases, would focus on creating awareness about the way the capital market functions and
also about the fact that the equity market provides relatively higher returns as compared to
other investments, over a longer time horizon.
Similarly for high net worth individuals, better knowledge about the financial markets, new
and innovative products and instruments is important as it helps them in making better use of
the available avenues in the financial markets. This knowledge is also useful for fetching
greater returns from their investments in the market and to avail credit at relatively cheaper
rates. However, whether saving or investing, the basic lesson that "higher return implies
higher risks" should not be lost sight of.
While the need for financial literacy for the users of financial products/ services is a well
accepted fact, I would like to emphasize that even banks, financial institutions and other
market players need to be financially literate and be fully aware of the risk and return
framework. Financial literacy for the providers of financial services would involve
understanding the risks involved in their businesses and in the products that they offer to
their customers. As market players, they need to understand risks inherent in complex
financial products and choose wisely while committing funds. For service providers, financial
literacy also involves understanding the needs of existing and potential customers and
creating products and services suited to those needs.
Finally, I would argue that financial literacy is also relevant for opinion makers and policy
makers. Literacy is a must to gauge the needs of the population and financial institutions; to
understand the risks inherent in products and markets; and to create a policy environment
conducive to attainment of the national goals. Only such an approach would ensure that
physical and financial resources are put to their optimum use to generate higher economic
growth, while minimizing the financial stability risks.
Some basic concepts are not fully appreciated even by seemingly literate groups, resulting in
assumption of excessive risks. One example that I often quote about the widespread
financial illiteracy is the theory being floated around by the so called "financial advisers"
about investment in gold being a "hedge against inflation" and a "safe asset". The steep rise
in gold prices over the past few years only indicates that the risk involved in investment in
gold has heightened, a fact which is not recognized by people.
How to spread Financial Literacy
Let me now turn to my final question about how to promote financial literacy and who should
spearhead the process. As I have already argued, financial literacy is required for each
player in the economy, albeit in different degrees, forms and modules.
World over, countries have targeted programmes for schoolchildren, teachers, research
institutions, among others. Further, they have also launched mass media
campaigns/websites providing simplified information, often in vernacular mediums, which can
be used by the public to learn about the monetary and banking system. A global problem
requires a global approach. Realizing this, the Organisation for Economic Cooperation and
Development (OECD) created the International Network on Financial Education (INFE) in
2008 to promote and facilitate international co-operation between policy makers and other
stakeholders on financial education issues worldwide. Currently, more than 200 institutions
from 90 countries have joined the OECD/INFE.
In view of the sheer magnitude of the task at hand, it is beneficial to have a strong
institutional architecture guiding and coordinating the efforts of various stakeholders towards
spreading financial literacy. In India, we have that advantage through the Financial Stability
and Development Council (FSDC), which is chaired by the Union Finance Minister with
heads of all financial sector regulatory authorities as members. FSDC is mandated,
inter alia
to focus on spread of financial inclusion and financial literacy. The Reserve Bank, besides its
role as a member of the FSDC, has also taken numerous initiatives for spreading financial
inclusion and financial literacy, both in terms of creating an enabling policy environment and
providing institutional support.
Under the aegis of the FSDC, the draft National Strategy for Financial Education (NSFE) for
India has been prepared. The Strategy envisages ways of creating awareness and educating
consumers on access to financial services; availability of various types of products and their
features; changing attitudes to translate knowledge into responsible financial behaviour; and
making consumers of financial services understand their rights and obligations. The Strategy
calls for active involvement of individuals, financial sector regulators, educational institutions,
NGOs, financial sector entities, multilateral international players and the Government at both
Centre and State.
The Strategy envisages a time frame of five years for its massive financial education
campaign. It envisages that financial education will be delivered to different target groups
through trained users. Basic financial education is aimed to be included in school curricula up
to senior secondary level. This is based upon the premise that the most effective way is to
weave financial education into the normal content of curriculum. Accordingly, we are
engaging with the curriculum setting bodies like the National Council of Educational
Research and Training (NCERT), Education Boards like the Central Board for Secondary
Education (CBSE), Central and State Governments to try and embed such concepts in the
school curriculum.
Simultaneously, the Strategy aims at establishing initial contact with 500 million adults,
educating them on key savings, protection and investment related products so that they are
empowered to take prudent financial decisions. It also seeks to create awareness about
consumer protection and grievances redressal machinery available in the country. All the
above measures would be undertaken through various stakeholders including NGOs, civil
society and by using all available channels of mass communication. As a first step towards
increasing financial education, the NSFE envisages conducting a National Survey on
Financial Education to provide a holistic assessment of the need for financial education in the
country.
Since the challenge in India is to link large number of financially excluded people to the
formal financial system, the focus of our strategy at the base level is to create awareness of
basic financial products. Some of the steps that have been taken by the Reserve Bank and
other stakeholders to promote financial literacy in India are as under:
• by Top Executives of Reserve Bank of India to remote villages: The
Outreach visits
objective of these visits is to understand the ground level position, spread
awareness about benefits of being connected to the formal financial system and
disseminate information about the functioning of RBI.
• - A link on Financial Education in the RBI website, containing material
RBI website
in English, Hindi and 11 vernacular languages, which includes comic books on
money and banking for children, films, messages on financial planning, games on
financial education and link for accessing the Banking Ombudsman Scheme.
• - distributing pamphlets, comic books, enacting plays and skits,
Awareness
arranging stalls in local fairs, exhibitions, participation in information / literacy
programmes organized by Press. Books on financial planning for students and new
professionals have also been released.
• (FLCs) have been opened by various banks with focus
Financial Literacy Centres
on the spread of Financial Literacy, to create awareness about financial products
and provision of counseling facilities for customers of banks. There were 575 FLCs
in the country as on September 30, 2012.
• Conducting Town Hall events across the country, including in Tier II and smaller
cities, bringing together commercial banks and other stakeholders.
• Newsibition on Mint Road Milestones has become the focal point for financial
literacy activities with all activities relating to financial literacy coalescing at a
common forum at each centre
• Setting up of a monetary museum by RBI to create awareness about money and
banking among general public and spread knowledge about the history of money.
• Use of mobile Financial Literacy vans by banks in the North Eastern States
• Awareness programmes on various Government Sponsored self employment
schemes involving bank loans and subsidy by Government agencies like KVIC,
DICs and SC/ST corporations.
• Mass media campaign 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 large number of Self Help Groups.
• Large number of websites/portals of banks/ State Level Bankers Committees
disseminating information on banking services
• Conduct of Financial Literacy programmes by
Rural Self Employment Training
Institutes
In line with the "catch them young" strategy for our financial education initiatives, the Reserve
Bank launched the RBIQ, an all India inter school quiz competition, in 2012. The quiz seeks
to be an effective platform for disseminating financial education by creating awareness and
sensitization about the history and role of the Reserve Bank, about banking and finance,
economics, current affairs, etc., besides seeking to build a "connect" between the Reserve
Bank and the young student community enrolled in schools across the country.
As part of its efforts to gain from international perspectives on financial literacy initiatives, the
Reserve Bank, in association with the World Bank and the OECD, is organizing a Regional
Conference on Financial Education in New Delhi next month. The Conference is among the
various events organized globally to disseminate the knowledge and products developed
through the Financial Literacy and Education Trust Fund, managed by the World Bank and
the OECD, for strengthening the capacity for planning and implementation of financial
education programs.
One of the objectives of the NSFE is to standardize the messages that various stakeholders
seek to disseminate through their financial education initiatives. The draft NSFE document
identifies certain simple messages such as why save; why invest; why insure; why save with
banks; why borrow within limits; why repay loans in time; why borrow for income generating
purposes, what is interest and how moneylenders charge very high interest rates, etc. It is a
well recognized fact that the standardization will help in ensuring consistency in the
messages reaching the target audience from various sources and making them more
focused and powerful.
The Reserve Bank has released on its website on January 31, 2013, a comprehensive
Financial Literacy Guide, which, banks have been advised to use as a standard curriculum to
impart basic conceptual understanding of financial products and services. The financial
literacy guide consists of Guidance Note for trainers, Operational guidelines for conduct of
financial literacy camps, and financial literacy material, including posters. The guide also
contains a financial diary to be distributed to the target audience, so as to enable them to
keep a record of their income and expenses, as a first step towards financial planning.
I am glad to note that the Assessment Survey conducted by MicroSave has highlighted that
most of the UNDP programmes were liked by the targeted population and succeeded in
creating a positive change in their knowledge, skills and financial behavior. I agree with the
survey observation that there is a need for closer integration between the financial literacy
and financial inclusion initiatives, as our experience shows that the two are complementary to
each other and the absence of any one diminishes the effectiveness of the other. About the
suggestion regarding introduction of chapters on financial literacy by UNDP in school
curriculum through CBSE/ NCERT, our experience within the FSDC sub-committee, is that
financial education needs to be embedded into the existing school curriculum. Significant
work has already been done in this regard, under the aegis of the FSDC, in association with
the CBSE/ NCERT. We would be happy to receive suggestions/ inputs from the UNDP on
this.
Conclusion
While a number of measures have and are being taken across the country, given the
enormity of the task, a lot of ground still needs to be covered. Apart from the Government
and the regulatory bodies, there is a need for involving the civil society and all other
stakeholders in spreading financial literacy. We need to evolve distinct strategies targeting
the school children and the adult population. We are still evolving a formalized curriculum for
schools, which teaches the schoolchildren the basic principles of money, credit, savings and
investments and introduces them to the way our financial system operates. After all, while
one-time, targeted programmes are useful, including financial education into school
curriculum in an on-going manner would hold the key to making our future generations
financially literate. I congratulate the UNDP, NABARD and MicroSave for their contributions
to improving the quality of lives of the poor through their financial literacy initiatives. However,
the widespread existence of financial illiteracy indicates that we need to do a lot more.
I once again thank the organizers of this Workshop for providing me the opportunity to
present my thoughts on the important subject of financial literacy. Conferences such as these
are important in generating new ideas and diffusing clarity of thought and purpose among the
various stakeholders. By way of anecdotal evidence, I would like to share the feedback I
received on the positive impact that a seminar on financial inclusion, that I addressed last
December, had on the conference participants. I am informed that based on the awareness
generated during the conference about recent relaxations in KYC norms for opening new
bank accounts, there was a perceptible improvement in the willingness of banks to open
accounts of the marginalized and migrant workers in the unorganized sector, thereby
providing them access to various financial services. The message disseminated at the
seminar galvanized the organizers to conduct several camps where sizeable number of bank
accounts were opened. They plan to conduct several such camps in the coming days. I hope
today's workshop will also have a similar impact on the participants present here.
Thank you.