By Moin Qazi
The Reserve Bank has planned a financial literacy drive in 80 blocks in nine states on a pilot basis to educate people on e-transactions, formal sector borrowings and insurance purchases. The total cost of the pilot project over a period of three years is Rs 18.40 crore.
It aims to inculcate the habit of making a household budget and recording financial transactions, encourage transactions in savings accounts, and active saving by depositing in banks through fixed deposits and recurring deposits
Banking for the unbanked
Six NGOs registered with the Depositor Education and Awareness Fund — CRISIL Foundation, Dhan Foundation, Swadhaar Fin Access, Indian School of Micro Finance for Women (ISMW), Samarpit and the PACE Foundation — have been selected to execute the pilot project in collaboration with banks.
Ideal financial societies provide safe and convenient ways of managing simple monetary affairs. This philosophy is known as financial inclusion. It includes providing affordable, safe and properly regulated financial tools to people. These tools are conveniently accessible and are given by institutions that treat the people with respect. These tools enable the people to save and borrow responsibly, allowing them to build their assets and improve their livelihoods.
Prioritising financial literacy
Financial services are like clean water and electricity. Merely opening physical accounts as flag posts of financial identity doesn’t help in catalyzing social and economic well being of people unless they are actively used by them for managing their money.
To make this possible, financial literacy has to be imparted among people, so that they understand and execute matters of personal finance, including basic numeracy and literacy, budgeting, investing, and risk diversification. Financial literacy is imperative to achieve individual financial wellbeing.
According to a global survey by Standard & Poor’s Financial Services LLC (S&P) less than 25% of adults are financially literate in South Asian countries. India is home to 17.5% of the world’s population but nearly 76% of its adult population does not understand even the basic concepts of finance.
Poor planning leads to a heavy loss
On account of lack of proper awareness and failure of institutions to properly guide them, people buy insurance policies without planning and give up midway because they don’t have money to pay the premium. Aggressive selling prevents the agents from properly assessing the consistency in income streams of the buyers for servicing their policies. The customers end up losing heavily due to harsh penalties.
Persistency measures how long customers persist with their policies. The Insurance Regulatory and Development Authority of India (IRDAI), in its Handbook on Indian Insurance Statistics 2015-16, has provided persistency figures of the life insurance industry and the numbers are abysmal. For FY2016, the life insurance industry, on average, had a persistency rate of 61% in the 13th month, which means: 1 year after the sale, only 61 out of every 100 policies were renewed.
By the 5th year of policy sale, 16 out of the 24 life insurance companies couldn’t retain even a third of the policies. This shows the huge money customers are losing on account of bad financial planning.
Financial education programmes and their impact
Financial education programmes focused on just imparting knowledge will never yield the desired results unless backed by a suitable product and its usage support. Areas in which a service provider was involved in the programmes observed a better understanding and product usage, as claimed by a recent UNDP report on financial literacy programmes in India.
Using a model that involves experiential learning and product usage has a greater chance of being successful. This can evidently be seen in one model, where a bank undertook a project to deliver financial education training to young women in rural communities. This was accomplished by a cascade training model where core trainers trained peer educators, who in turn trained community members.
Reaping the benefits of financial services
Financial services can be fully utilised if the low-income people get the products well suited to their needs along with appropriate training and education for adapting to these financial services. Attention must be paid to human and institutional issues, such as quality of access, affordability of products, familiarity and comfort in use, sustainability for the provider of these services, proper training and outreach to the most excluded populations to achieve efficiency.
However, the issue is a lot more nuanced than what we are seeing today. The consumers will come into the formal financial sector and embrace the new opportunities believing that if they change their behaviour then certain specific pains will disappear. Thus, there exist real pains to address, simply offering benefits will not suffice.