Why financial literacy is more critical now

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 is the ability to use skills and knowledge to take effective and informed money management decisions. 

Need of the hour

As per a global survey by Standard & Poor’s Financial Services LLC (S&P), only 25% 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% of the world’s population and nearly 76% of its adult population does not understand even the basic financial concepts.

The survey confirms that financial literacy in India has consistently been poor as 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. The need of the hour is for a drastic overhaul of approach to savings and investments by Indian households.

India way behind 

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. 

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 and insurance players for noticeable changes in the perceptions that an average Indian has about financial management. 

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% of Indians have bank accounts, against 63% in China.

The launch of digital wallets, universal payments interface, and new age commercial and payment banks have paved new ways for a less-cash economy. There is a huge scope with only 2% of Indians using mobiles for payments, against 11% in Nigeria. The push to increase usage of mobiles for payments is significant.

The way forward

Financial literacy and financial stability are two key aspects of an efficient economy. 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. All stakeholders, including consumers, must work in conjunction for financial literacy through a combination of innovative strategies.

The writer is Executive Vice-Chairman and Managing Director, Max Life Insurance. The views expressed in this article are his own