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India’s flagship financial inclusion programme, Pradhan Mantri Jan Dhan Yojana (PMJDY), has been able make universal access to a bank account a near reality, but the level of usage of accounts remains quite low.
India has now 180 billion accounts. But 48 per cent of the bank accounts have seen no transactions in the last one year, according to the World Bank’s Global Findex database. We must remember that the right measure of financial inclusion is not access, but regular usage.
For making successful use of financial services, people need to be literate enough to understand the basics of managing money. This skill is known as financial literacy.
In simple terms, it refers to a set of skills that allow people to manage their money wisely along with some understanding of essential financial concepts, not least an appreciation of the trade-off between risk and return.
Financial literacy is essential for enabling people to make right financial choices. In view of the lack of proper awareness, people buy insurance policies without adequate planning and give up midway because they don’t have money to pay the premium. Aggressive pushing of products by insurance providers without adequately assessing the consistency in income streams of the buyers for servicing their policies can mean more harm to the poor.
The OECD has a working definition of financial literacy. It considers it “a combination of awareness, knowledge, skill, attitude and behaviour necessary to make sound financial decisions and ultimately achieve individual financial well being”.
Building on OECD’s global paradigm, India’s National Strategy for Financial Education (NSFE) aims to “spread awareness about basic financial products in order to link new users to the formal financial sector, to educate existing users of financial products and services to make informed choices and to ensure consumer protection for all the users”.
Functional proficiency in core money skills and their subtle nuances are crucial if they are to successfully manage their future money needs. Financial literacy is expected to impart the means to transform ordinary individuals into informed and questioning users of financial services.
People who have a strong grasp of financial principles are able to better to understand and negotiate the financial landscape and avoid financial pitfalls. Conversely, people with a lower degree of financial literacy struggle to understand money matters and the potential impact on their financial well-being. Consumers who cannot comprehend basic financial concepts, such as interest compounding and financial risk diversification, often end up paying higher transaction fees, pile up unmanageable debts and end up paying higher interest on loans.
A basic financial education comprises an understanding of financial planning, debt management investing, mechanics of interest rates and investment diversification so that people become aware of the devastating results of taking on too much debt or purchasing wrong insurance policies. People must be trained in smart spending — prioritising needs over wants, using credit card wisely, avoiding waste, funding expenses from savings and not loans, understanding terms of EMI (equated monthly instalments) before buying on EMI.
Three main features of financial capability can be summarised. First, the concept of financial capability seeks to capture the idea that individuals need skills and knowledge as well as the ability to put these into practice through their attitudes and self-efficacy.
Second, the dynamicity of the concept emphasising that financial decisions need to best fit different circumstances of life is crucial; thus, financial capability may mean different financial practices for different people and even for the same people at various stages of their life.
Third, the concept brings the external environment into the picture, allowing for a consideration of those external features which may or may not regulate the exercise of financial capability by individuals.
India has always been a fertile ground for swindles that have bilked mostly low-income households of millions of rupees. The financially illiterate are usually easy pickings. The investors have been periodically lulled into dubious schemes by nefarious characters. The poor have now become wary of investing money even in credible organisations.
Financial education and awareness are the most powerful antidotes against risky investment traps. People need to understand that the price of financial illiteracy is very high.
The writer is Member of NITI Aayog’s National Committee on Financial Literacy and Inclusion for Women