The Covid-19 pandemic and subsequent lockdown have taught us all that financial literacy and financial security is of prime importance to survive time periods when there is no steady flow of income. Manik Bahl, intern with Wishes and Blessings, gives a closer insight into the current situation and suggests ways on how financial literacy can be improved.
Financial Literacy is the ability to understand basic financial concepts and the possession of knowledge and skills required to make informed and effective financial planning decisions using the available financial resources. It is about knowing how to generate, spend, invest, and save money; the ability to manage your finances well by making the optimum use of the available financial products and resources to give you maximum benefit. It is one of the most important factors to be considered for any economy.
Financial Literacy and India
According to the World Bank, the rural population as of 2018 in India was at 66%(1), which is consistently declining. This means that more and more individuals are migrating to urban areas for their livelihood. However, this is accompanied by various problems that these individuals face in terms of sending money back to their families in the villages.
This issue was identified by the government of India, which then launched the Pradhan Mantri Jan Dhan Yojana (PMJDY), on 28th August, 2014, to increase the purview of people under the formal banking channel, leading to 80% of Indians having a bank account, up from 53% in 2014, as per the World Bank’s 2017 Global Findex Database(2). More than 355 million accounts in India’s state and private sector banks were opened under the PMJDY scheme in 5 years. However, according to the World Bank’s data, half of India’s bank accounts are inactive, double the average rate found in developing economies. The data is not surprising as per Rajat Kathuria, director of the Indian Council for Research on International Economic Relations (ICRIER). According to him, accounts are opened by “people with nothing to put in them”, which means banks do not find it profitable to service these customers and focus on making them operational.
The issue is that most people do not understand how the use of the formal banking channel will make their everyday life better. Most accounts were opened under the misconception that opening an account will give them Rs. 5,000/- for free, whereas this was an overdraft facility which could be availed if required and carried interest. Also, there are several examples of where people opened their accounts but still do not know how to operate or use their account and thus keep their savings at home.
According to All India Rural Financial Survey 2016-17 (3) 52% of respondents preferred to keep their savings at home. As per the survey, only 11% of the respondents had ‘good’ financial literacy, defined as a combination of sound financial knowledge, positive financial attitude, and behaviour. The fact is that people remain unaware of the benefits they could reap from the Jan Dhan accounts. The government did incentivise people to open accounts, however, has done little to increase usage or provide them with enough information.
The World Bank says only 7%(2) people in India borrowed from an established, licensed financial institution in 2017, a rate that has changed little in 5 years despite the explosion of formally ‘banked’ individuals. Banks also screen the individual before lending and only lend small amounts of money initially and increase the loan size over time, rather than taking a chance on a low-income borrower.
Although 88% of Indian households own a mobile phone, according to People Research on India’s Consumer Economy, a non-profit group, India lags behind countries like Kenya, where 73% of the population use mobile payment services, compared with just 2% in India.
Access to credit is one of the stated goals of the Jan Dhan Yojana. Yet, of the 48%(3) respondents who needed a loan in the NABARD study, around 76% sought it from non-institutional sources because of “easy availability”. Of these, 25.3% said loans could be availed for all kinds of purposes from such sources, 34.9% said it helped avoid excessive collateral requirements, and 47.9% said they did not want to deal with a lengthy application process.
Also, the bank representatives seldom share information about facilities such as overdraft and loan available to the account holders due to a conflict of interest. They themselves are somewhat related to the informal money lenders and hence do not wish to promote the formal banking channel(4). The overdraft facility has been availed by no more than 1% of account holders – that is 3.17 million of 340 million accounts as of January 2019 – according to data submitted by the government to the Rajya Sabha. Part of the explanation lies in the required active usage. Those who need the overdraft facility are unlikely to save and have regular transactions.
One of the biggest misconception people have is that they will not be allowed to open an account since they do not have the prerequisite KYC documents, however, if a person does not have KYC documents, then a small account with certain limitations can still be opened under the PMJDY. Individuals can convert their small account to BSBD (Basic Savings Bank Deposit) account by submitting the KYC documents. Thus, it is critical to spread financial literacy and create awareness among the masses to avail the benefits provided to them.
Solutions
I believe we should focus on spreading financial awareness in the country to help alleviate the problems faced by the underprivileged and misinformed consumers. According to a survey conducted by People Research on India’s Consumer Economy (PRICE), 88% of households in India have a mobile phone as of December 2016(5) and thus we can leverage this source for spreading awareness. This could be achieved by creating visual content in local languages, showing info commercials, and running financial literacy campaigns on popular applications used by the mobile users.
We could also create partnerships between the bank representatives and various NGOs to enable them to spread awareness in their respective districts. Only once people are financially aware and literate will they understand the importance of using the formal channels of banking and its benefits. Lastly, easy access to Bank branches / ATMs and simplified credit disbursement procedures should be focused on.
Resources
1.https://data.worldbank.org/indicator/SP.RUR.TOTL.ZS
2. https://globalfindex.worldbank.org/node
3. https://www.nabard.org/auth/writereaddata/tender/1608180417NABARD-Repo-16_Web_P.pdf
5. http://www.ice360.in/en/projects/homepageservey/88-of-households-in-india-have-a-mobile-phone
About the author
Manik loves to spend time with his family, listening inquisitively to the stories his grandparents share. He has always been passionate about helping society and thus gave up his Investment Banking career to pursue his passion. Having majored in finance, he wishes to increase financial literacy and awareness in the country.