Duvvuri Subbarao: Financial education - worthy and worthwhile
Comments by Dr Duvvuri Subbarao, Governor of the Reserve Bank of India, at the Reserve
Bank of India-Organisation for Economic Co-operation and Development (RBI-OECD)
International Workshop on Financial Literacy, Bengaluru, 22 March 2010.
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Mr. Pranab Mukherjee, Hon'ble Finance Minister of India, Ambassador Richard Boucher,
Deputy Secretary General, OECD, Dr. K.C. Chakrabarty, Deputy Governor, Reserve Bank of
India, Mr. V.K. Sharma, Executive Director, Reserve Bank of India, Distinguished Guests and
my colleagues from the Reserve Bank
1. First of all, I want to say that the Reserve Bank of India attaches immense value to
this workshop on "Financial Literacy". The year 2009/10 marks the Platinum Jubilee of the
Reserve Bank. Over the last one year, we have celebrated this milestone in diverse ways. By
far the most enduring part of the celebrations has been the outreach programme which
involved the top management of the Bank including the Governor and the Deputy Governors
fanning out across the country, visiting typically off-main road, away from urban influence,
unbanked villages. The outreach programme was driven by two objectives. The first was to
understand the needs and aspirations of emerging India living in the villages, mainly as a
reality check on the Bank's programmes and policies. The second objective was to demystify
the Reserve Bank and explain to people at large what it does, why what it does is important,
and how it makes a difference to peoples' every day lives.
Outreach programme
2. I am happy to claim, with a deep sense of fulfillment of course, that between all of us
in the top management of the Reserve Bank, we have visited at least one village in every
state and most union territories. Given that India has over 600,000 villages, our coverage
was, by all accounts, miniscule. Even so, it has been an enormously rewarding experience
for us as individuals and for the RBI as an institution. We learnt more this way than what we
could have by reading hundreds of reports and attending scores of meetings and
conferences. And what is more, it was a lot more fun than sitting in air-conditioned offices in
skyscrapers. If I were to single out one important lesson from these visits, it is about the
growing aspirations and the rising awareness of rural people. We were all struck by how
much rural women knew about saving and investment and struck even more by how eager
they were to learn more about saving and investment.
3. It is axiomatic that when income levels rise, the time horizons of households
become longer. From thinking about the next agriculture season, they start thinking about the
next five years, and then about their children's future and their own old age. These are
healthy concerns on which we must capitalize. This realization sensitized all of us in the
Reserve Bank that we will be failing in our mandate if we do not address the challenge and
the opportunity of financial literacy head on. That is the reason why learning from this
workshop on furthering financial literacy is important and valuable to us in the Reserve Bank.
Partnering with OECD
4. It is our privilege and good fortune to have the OECD as a co-sponsor for this
workshop. The OECD has been an intellectual leader in the field of financial literacy. It has
been involved in supporting research and evaluation in financial literacy and has been
proactive in spreading awareness about the importance of financial education. The OECD is
by far the most valuable repository of knowledge on grass root experiments in financial
literacy. Learning from these international best practices can certainly help India to "leapfrog"
over several stages of the process. Partnering with OECD is therefore a huge and valuable
learning opportunity for India.
Why is financial literacy important?
5. Let me step back a bit and spend a few minutes on why financial literacy is so vital.
There is virtually no country whose economy has developed and matured without a
corresponding deepening of the financial sector. And such deepening is possible only when
individuals and households are financially literate and are able to make informed choices
about how they save, borrow and invest. Indeed, it is possible to argue that the sub prime
problem would not have grown to the explosive proportions that it did if people had been
financially more "literate".
6. Beyond the individual level - and this is equally important - greater financial literacy
can aid a better allocation of resources and thereby raise the longer-term growth potential of
the economy. India clocked average growth of around nine percent in the period 2004-08
before the global financial crisis interrupted the growth trajectory. One of the key drivers of
this growth has been the increased savings rate in the economy, which reached a high of
36 percent of GDP in 2007/08, the year before the crisis.
7. The increase in savings itself has been a consequence of the changing
demographics and the welcome trend of rise in household savings. However, nearly half our
population still lacks access to banking and other financial services. If we can redress that
and provide this "left behind" population access to the entire gamut of banking services, we
could raise household and overall domestic savings even further, and that will fulfill one of
the necessary conditions to achieve the double-digit growth that we aspire to.
8. To make that happen, we need to deepen the penetration and expand the coverage
of financial services to all sections of society and to all regions of the country in a meaningful
way, particularly to those at the bottom of the economic pyramid. Lack of financial awareness
and literacy is one of the main reasons behind lack of access to financial products or failure
to use them even when they are available. An NCAER and Max New York Life study shows
that in India, around 60 percent of laborers surveyed indicated that they store cash at home,
while borrowing from moneylenders at high interest rates - a pattern which increases their
financial vulnerability.
9. Financial literacy and awareness are thus integral to ensuring financial inclusion.
This is not just about imparting financial knowledge and information; it is also about changing
behaviour. For the ultimate goal is to empower people to take actions that are in their own
self-interest. When consumers know of the financial products available, when they are able
to evaluate the merits and demerits of each product, are able to negotiate what they want,
they will feel empowered in a very meaningful way. They will know enough to demand
accountability and seek redressal of grievances. This, in turn, will enhance the integrity and
quality of financial markets. One big lesson we have learnt in our outreach programmes is
that financial literacy is not just a public good; it is a merit good. What this means is that by
deepening financial literacy, not just individuals and households, even the society at large
stands to benefit.
Reserve Bank's initiatives
10. In the Reserve Bank, we treat financial inclusion and financial literacy as twin pillars.
Financial literacy stimulates the demand side - making people aware of what they can and
should demand. Financial inclusion acts from the supply side - providing in the financial
market what people demand. While we have traditionally focused more on addressing
financial exclusion through many supply-side measures so as to help "connect people" with
the banking system, we have come to recognize the demand side imperative also - that
financial literacy and education should be developed hand in hand with improving access to
financial services.
11. We have taken a number of measures over the last few years to further financial
inclusion and financial literacy. We have intensified these efforts in the last one year. I do not
want to go into them as you will have opportunity to discuss, and I hope critique, these
measures in the course of this workshop. But I do want to highlight what the Reserve Bank
and commercial banks have agreed upon.
RBI's advice to banks on financial inclusion
12. Specifically, we agreed upon three things. First, the lead bank in each district has
been asked to draw a roadmap by the end of this month (March 2010) for ensuring that all
villages with a population of over 2,000 will have access to financial services through a
banking outlet, not necessarily a bank branch, by March 2012. There will be an intermediate
target to be achieved by March 2011. Banks will have to harness technology and innovate
low cost business models to accomplish this. Second, all domestic public and private sector
commercial banks have agreed to come up with their specific, Board approved Financial
Inclusion Plans (FIPs) by March 2010 to be rolled out over the next three years. These Plans
will have both qualitative indicators and quantitative milestones. Third, we have urged all
banks to include criteria regarding financial literacy and financial inclusion in the performance
evaluation of their field staff.
Research on the way forward
13. In the Reserve Bank, we attach value and priority to deepening financial literacy. We
know it is a formidable challenge but also a huge opportunity. We do not have all the
answers; I am not sure we even have all the questions. But we are eager to learn. I know this
workshop will take us closer to the answers to some existing questions, and maybe even
raise some new ones. Just to get you all started off on that, I want to raise a few ideas where
further research will get us a lot of mileage.
• First, given the significant commitment to financial education by the government and
a host of stakeholders, it is important to determine the impact and effectiveness of
such programs so as to understand what works and what does not. We are aware
that India is a diverse country that has typically allowed its development to go
forward by letting a "thousand flowers bloom" across the country. It will be useful to
do a survey and evaluation of these grass root experiments to draw up the best
practices. In particular, we need to study the link between financial literacy on the
one hand and financial inclusion and improved financial outcomes on the other so
as to understand which models have been effective.
• Second, financial literacy programs require trained instructors. To be most effective,
these instructors or counsellors must be available to clients at the time when they
are making important financial decisions. The awareness and timeliness of financial
advice, are important to make financial literacy useful and relevant. In this context, it
would be useful to study successful experiments from NGOs such as SEWA which
started a financial counseling training service for poor self-employed women,
including a training for trainers, and identify how we can mainstream those one-off
successes in a cost effective way.
• Technology has the potential to enhance the development of financial literacy, both
as a delivery channel (e.g., the Internet) and as an intrinsic part of the learning
process (e.g., instructional computer). Technology can also bridge distances for
those living in rural and remote communities. How can we best leverage
communications and technology in ways to engage and empower people in the area
of financial literacy? Recognizing that people receive, learn and digest information in
different ways, it would be useful to survey all possible avenues of communication to
determine the best way of capturing people's attention and interest. The use
technology in the training of trainers could also be explored.
Let me stop there so that you can get on with the serious business of engagement with
issues in financial literacy. Once again my thanks to OECD for partnering with the Reserve
Bank and best wishes for the success of this workshop.