Updated: Aug 25
Abstract: The article studies the state of financial literacy and education across the world and specifically in India; observing a dismal situation, with the challenge that people do not realize that they are financially illiterate. It is observed that this issue is present even in developed countries such as the US. Additionally, within India, we see a stark disparity between the rates for male-female and urban-rural individuals. In conclusion, we provide suggestions for improvement in the same, especially for India.
Key Words: financial literacy, financial education
Author Name: K. R. Bharat
In mid-2020, the Reserve Bank of India launched the National Strategy for Financial Education (NSFE) 2020-25 after a comprehensive review of the first one, NSFE 2013-18. With India having one of the largest young populations in the world, increasing financial products such as Mutual Funds, Liquid Funds, SIPs, PPF's, improvements in financial literacy are of the utmost importance. President of the Institute of Chartered Accountants of India, Mr. Atul Kumar Gupta has stated the need for encouraging financial literacy, saying that; “India is home to around 17% of the population and the literacy rate here is around 74%. While out of the total population, only 24% is financially literate. This reveals the pressing need to educate the masses about finance and savings" 1
Surprisingly, the scenario is not only pertinent for a developing economy like India but also for developed nations such as the USA. The 2018 National Financial Capability Study showed that only 34% of the respondents were able to answer four or more questions out of five, concerning financial literacy.2 Moreover, this rate has been falling over the years, that too for all age groups, which has only exacerbated the problem; with the lowest rates for the 18-34 age group.
MEANING AND IMPORTANCE
The Organization for Economic Co-operation & Development (OECD) defines Financial Literacy as a combination of financial awareness, knowledge, skills, attitude and behaviour necessary to make sound financial decisions and ultimately achieve individual financial well-being.3 Financial Education, on the other hand, is defined as the process by which financial consumers/investors improve their understanding of financial products, concepts and risks and through information, instruction and/or objective advice, develop the skills and confidence to become more aware of financial risks and opportunities, to make informed choices, to know where to go for help and to take other effective actions to improve their financial well-being.4
Often a misconception the terms ‘financial education’ and ‘financial literacy’ do not have the same meaning; however, they are related concepts. People achieve Financial Literacy through the medium of financial education. Financial literacy empowers individuals to make appropriate financial decisions, which results in their financial well-being.
Apart from benefits at an individual level, financial literacy and education provide benefits to the economy. In 2012, post the Global Financial Crisis, Ben Bernanke, the then Chairman of Fed, mentions in one of his speeches "Financial education supports not only individual well-being, but also the economic health of our nation. As the recent financial crisis illustrates, consumers who can make informed decisions about financial products and services not only serve their own best interests but, collectively, they also help promote broader economic stability." 5 Even OECD in a 2006 policy brief mentions how financial literacy holds importance in both emerging and developed markets.6 For emerging and developing economies such as India, financially literate individuals can help ensure that the financial sector makes an effective contribution to real economic growth and poverty reduction by optimal allocation of their financial resources while safeguarding their own interests. Nevertheless, financial literacy is also crucial for more developed economies, to ensure consumers save enough to provide an adequate income for retirement while also avoiding high levels of debt that might result in bankruptcy and foreclosures.
RATES OF FINANCIAL LITERACY
In 2013, the National Centre for Financial Education (NCFE) was set up with support from all the financial sector regulators i.e., Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), Insurance Regulatory and Development Authority of India (IRDAI) and Pension Fund Regulatory and Development Authority (PFRDA), for implementation of the National Strategy for Financial Education (NSFE)7. It conducted All India Financial Inclusion and Financial Literacy surveys in 2013 and 2019 adhering to the OECD methodology, which looks at financial attitude, financial behaviour and financial knowledge. The survey conducted in 2019 revealed that 27.18% of the respondents have achieved minimum target score/minimum threshold score in each of the components of financial literacy prescribed by OECD-International Network on Financial Education as compared to 20% in 2013.
Financial Literacy Rates: Rural and Urban - India
Source: NSFE - 2020-25
Though there have been improvements in rural and urban areas (Fig. 1), the growth in financial literacy rates has been sluggish. In addition to that, there still exists a comparable divide between the two, which leads to the need for additional focused attention in rural India. Such a divide could be explained by a persisting lack of awareness in rural areas regarding schemes and programs related to financial literacy. It could also represent a lack of coverage by the existing proponents of financial education, i.e., the financial sector regulators.
A similar divide exists when one looks at the rates gender-wise (Fig. 2). The financial literacy rates for males have been significantly higher than that of females and the gap between the two has widened rather than getting reduced. This displays the need to direct attention towards improving financial literacy among women. This can be possibly due to lower education levels of women, smaller work tenures and low labour force participation by women. This would be exacerbated in the case of a married couple where it may be the case that one spouse is better in managing finances due to which the other doesn't spend their time and effort for the same.
Financial Literacy Rates: Gender-wise - India
Source: NSFE - 2020-25
While looking at the international scenario, we look at the Standard & Poor's Ratings Services Global Financial Literacy Survey, which was conducted in 2014 and provides information concerning financial literacy across 140 countries.8 It is one of the most comprehensive surveys undertaken in this field and equips policymakers with an expansive dataset that can be utilized to improve the poor conditions of financial literacy in the world.
It provides a very dismal picture of the situation with the fact that only 1 in 3 adults are financially literate. Additionally, in India, women trail men in financial literacy. Comparing India to other countries, we see that despite being one of the fastest-growing economies in the 21st century, India has the lowest financial literacy rate among the emerging economies (Fig. 3).
Financial Literacy Rates across BRICS Nations
Source: S&P Global Finlit Survey
1. Effectiveness of financial education programs
Over the years, Indian financial regulatory bodies have taken up several initiatives. A few major programs are mentioned below:
● Financial Education Training Program (FETP)10: FETP is a training program under NCFE for schoolteachers to enable them to impart basic financial education to school students. It involves modules such as introduction to banking and protection of financial future so as to begin a holistic development in individuals right from a young age.
● National Financial Literacy Assessment Test11: It is a free annual financial literacy test among classes of VI and above. It was launched by NCFE in 2013-14 and tests topics such as risk, insurance, taxation, banking, retirement planning etc.
● Booklets on Financial Education such as the Financial Awareness Messages (FAME)12 booklet (by RBI) and Financial Education Booklet13 by SEBI: The FAME Booklet provides basic financial literacy information for the general public; with messages such as opening bank accounts, borrowing, credit scores etc. The Financial Education Booklet by SEBI provides information for investors to improve allocation of personal finance.
● Pension Sanchay by PFRDA14: Pension Sanchay is a website by PFRDA that aims at spreading awareness on topics related to financial planning, money, and retirement.
Also, in a keynote address in 2012, Dr K. C. Chakrabarty, former Deputy Governor, Reserve Bank of India, mentions the importance of inculcating financial literacy among schoolchildren; "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."15. Later in 2013, NSFE was initiated with the intent to formalize financial education at the school level.
However, as of 2019, only about 150 schools in India are Money Smart Schools under the Money Smart School Programme (MSSP). Similarly, a joint program was formed by CBSE-NSE to provide financial education in schools. However, only 87 out of 17093 schools affiliated with CBSE offer these courses.16
Despite several such robust initiatives, the outcomes have been quite weak. This shows the lack of effectiveness of policies in achieving the desired results and no concerted efforts to integrate financial education into the school curriculum. An apparent suggestion would be to focus on improving the reach and effectiveness of the present programs rather than to continue creating additional similar programs simply under a different label.
2. Low Participation of Non-Regulators
In a keynote address, Shaktikanta Das (Governor, Reserve Bank of India) talks about the fact that in a country as large as India, financial education cannot remain the responsibility of financial sector regulators.17 This has been a hindrance in improving the reach of such programs with the bulk of them being the responsibility of financial sector regulators. This aspect has been highlighted in NSFE 2020-25 that recommends a multi-level stakeholder approach. Such a multi-level stakeholder approach can be in the form of various stakeholders such as Government Bodies, Financial Regulation Authorities, Private Financial Sector, Higher Education Institutes, Civil Societies, Non-Governmental Organizations etc., with each having a specified role to play.
Additionally, as mentioned earlier, a probable reason for the urban-rural divide in rates of financial literacy could be due to lack of coverage by the financial sector regulators. This could be overcome by inclusion of the private sector, which has helped alleviate the same issue in provision of banking services and health coverage. Thus, supplementary measures should be taken to involve the private sector in such programs.
3. Communication of Survey Results
A major challenge, however, in the improvement of financial literacy is that individuals believe that they are far more financially literate than is really the case.6 For instance, in a study of basic financial literacy, a representative of U.S. managers scored an average of only 38% and a majority were unable to distinguish similar terms concerning finance. 9
Given that several surveys and studies occur both on the national and international front, the aforementioned challenge can be corrected by effectively communicating the test results back to the participants and the public.
4. Role of Youth
When we observe the rates of financial literacy in India age-wise (data for the year 2019), we observe that the maximum proportion of the financially literate population is in the age group of 18-29 years (Fig. 4). India having a high youth population would imply a large proportion of the financially literate population. So, programs such as inculcating financial education in institutions of higher education can have an additional impact on the youth assisting their family members in making informed decisions. It is also important to note that this result is opposite to that in the US where we saw that financial literacy rates are falling for all age groups and the rates are lowest for the 18-34 age group.
Financial Literacy across age groups in India
Source: NSFE - 2020-25
The Indian Government has formed several schemes in India for the purpose of financial inclusion such as Jeevan Suraksha Bandhan Yojana, Pradhan Mantri Vaya Vandana Yojana and Pradhan Mantri Mudra Yojana. However, unless people have the necessary financial skills, these programs can lead to mismanagement of funds, defaults, and insolvency. This is especially true for women, the poor, and the less educated—all of whom suffer from low financial literacy and are frequently the target of government programs to expand financial inclusion.
In order to correct this, the government and financial regulatory bodies have initiated several programs[B1] . Despite this, financial literacy rates continue to remain low. We study surveys and programs by governmental as well as international organizations, which show the poor state of financial literacy rates across the world. When looking specifically at India, we observe a stark difference in the rates between males and females, which provides another instance of gender bias. While looking at the data for rural and urban regions in India, we notice higher rates for individuals residing in urban areas, which might indicate a lack of coverage of the programs initiated by RBI and other institutes. This is further solidified by the fact that the rates for individuals in urban areas are higher even after a gap of 6 years. An additional problem as mentioned by OECD is that of individuals incorrectly believing that they are financially literate when upon conducting surveys the opposite is observed. The results show a dire need to take certain steps to improve the situation. Actions such as inculcating programs for financial literacy in schools and the involvement of non-regulatory organizations can help tackle this situation.
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10. Financial Education Training Programme. National Centre for Financial Education. https://www.ncfe.org.in/program/fetp
11. National Financial Literacy Assessment Test. National Centre for Financial Education. https://www.ncfe.org.in/nflat
12. Financial Literacy Material - FAME Booklet. Reserve Bank of India. https://www.rbi.org.in/FinancialEducation/fame.aspx
13. Financial Education Booklet. Securities and Exchange Board of India.
14. Pension Sanchay. Pension Fund Regulatory and Development Authority. http://www.pensionsanchay.org.in/
15. Chakrabarty KC. (2012, June 5) Exploring the challenge of financial education across emerging economies. Presented at the Visa – FT Financial Literacy Forum Series. https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=693
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