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Why India needs to work on financial literacy NOW!

By Rajesh Sud
Last updated on: November 04, 2017 08:08 IST
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Lack of basic financial understanding leads to unproductive investment decisions. The need of the hour is for a drastic overhaul of approach to savings and investments by Indian households, says Rajesh Sud

I wouldn't have been writing this piece, if the calendar on my desk showed a date from a decade and a half back. The topic itself would have sounded alien to most.

Financial literacy is now one of the top priorities for most nations. It is more critical for developing nations like India, where the majority find financial literacy beyond comprehension.

What is financial literacy?

Financial literacy, according to its literal definition, is the ability to use skills and knowledge to take effective and informed money management decisions.

For a country like India, it plays a bigger role, as it is considered an important adjunct for promotion of financial inclusion and ultimately financial stability.

Need of the hour

As per a global survey by Standard & Poor's Financial Services LLC (S&P) only 25 per cent of adults or less are financially literate in South Asian countries. For an average Indian, financial literacy is yet to become a priority.

India is home to 17.5 per cent of the world's population and nearly 76 per cent of its adult population does not understand even the basic financial concepts.

The survey confirms that financial literacy in India has consistently been poor compared to the rest of the world. It can be detrimental to India's ambition of becoming an economic super power in the coming years.

Financial illiteracy puts a burden on the nation in the form of higher cost of financial security and lesser prosperity. Most people resort to investing more in physical assets and short term instruments which clearly conflicts with the greater need for long-term investments, both for households to meet their life stage goals and for meeting the country's capital requirements for infrastructure.

In addition, there are certain erroneous beliefs associated with financial literacy: the most common being the myth that one who is ‘literate' or 'rich' is 'financially literate' too.

Lack of basic financial understanding leads to unproductive investment decisions. The need of the hour is for a drastic overhaul of approach to savings and investments by Indian households.

Way too late as compared to the West

India is way behind developed nations in financial literacy efforts. In the US, financial literacy promotion was started way back in 1908 by the American Credit Union Movement.

In 1957, financial education was made compulsory by the state of Nevada, and other states followed. Australia provides financial literacy education through customised programmes, while Asian countries such as Indonesia and Singapore have successful precedents in financial literacy drives.

Catch them young

It is a myth that financial literacy is more important for adults. We can achieve the desired results from financial literacy only when we start educating our children.

Like many other provocative topics, money is something that kids hear about outside homes as well, which exposes them to absorption of wrong perceptions about money management many a time resulting in formation of bad money habits from the foundation stage itself.

Need for joint efforts

Financial regulators in India -- RBI, SEBI, IRDAI, and PFRDA -- have created a joint charter called ‘National Strategy for Financial Education' detailing initiatives taken individually by them and other market players like banks, stock exchanges, broking houses, mutual funds, insurers etc.

What is required is a joint effort by all the Banking, Financial Services & Insurance players for noticeable changes in the perceptions that an average Indian has about financial management.

It's time to bring individual efforts under one framework to ensure better outcomes.

Going digital

Empirical evidence points to the fact that digital efforts like video clips, short films and interactive quizzes on financial education have had a far greater impact than the traditional medium.

Digital fluency is expected to increase with the government's initiatives such as Digital India.

The recent mammoth exercise of demonetisation should help bring many more people to the organised sector and thereby opening up possibilities for financial inclusion and literacy.

Currently, only 35 per cent of Indian have bank accounts, against 63 per cent in China.

The launch of digital wallets, universal payments interface (UPI), and new age commercial and payment banks have paved new ways for a less cash economy. There is a huge scope with only 2 per cent of Indians using mobiles for payments, against 11 per cent in Nigeria.

The push to increase usage of mobiles for payments is significant, as India is already the world's second biggest smartphone market with over 220 million smartphone users.

Mobile internet users in India total 350 million, and expected to grow 50 million every year till 2020. These numbers create enormous possibilities from going digital and create new opportunities to engage and share financial knowledge with consumers.

The way forward

Financial literacy and financial stability are two key aspects of an efficient economy. Financial literacy enhances individuals' ability to ensure economic security for their families.

In India, there is a need to reach out to lower income groups and economically weaker sections on one hand and on the other to the millennials who are hyper-connected and require tailor-made financial products but have limited awareness of the possible financial solutions.

The millennials are economically more active compared to their predecessors but are also more fragile in dealing with personal finances. The bottom-line, therefore, is that ‘me-too' approach to financial literacy will not work in India.

All stakeholders including consumers must work in conjunction for financial literacy through a combination of innovative strategies.

The author is Executive Vice Chairman & Managing Director, Max Life Insurance

Photograph: Nattanan23/pixabay

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Rajesh Sud