D Subbarao : Why is Financial Literacy Important?

In a recently held RBI-OECD International Workshop on Financial Literacy in Bengaluru on March 22, 2010, Dr. D Subbarao, the RBI Governor, highlighted the imperative of Financial Inclusion and Financial Literacy for an economically empowered India :

5. Let me step back a bit and spend a few minutes on why financial literacy is so vital. There is virtually no country whose economy has developed and matured without a corresponding deepening of the financial sector. And such deepening is possible only when individuals and households are financially literate and are able to make informed choices about how they save, borrow and invest. Indeed, it is possible to argue that the sub prime problem would not have grown to the explosive proportions that it did if people had been financially more ‘literate’.
6. Beyond the individual level - and this is equally important - greater financial literacy can aid a better allocation of resources and thereby raise the longer-term growth potential of the economy. India clocked average growth of around nine percent in the period 2004-08 before the global financial crisis interrupted the growth trajectory. One of the key drivers of this growth has been the increased savings rate in the economy, which reached a high of 36 percent of GDP in 2007/08, the year before the crisis.
7. The increase in savings itself has been a consequence of the changing demographics and the welcome trend of rise in household savings. However, nearly half our population still lacks access to banking and other financial services. If we can redress that and provide this ‘left behind’ population access to the entire gamut of banking services, we could raise household and overall domestic savings even further, and that will fulfill one of the necessary conditions to achieve the double-digit growth that we aspire to.
8. To make that happen, we need to deepen the penetration and expand the coverage of financial services to all sections of society and to all regions of the country in a meaningful way, particularly to those at the bottom of the economic pyramid. Lack of financial awareness and literacy is one of the main reasons behind lack of access to financial products or failure to use them even when they are available. An NCAER and Max New York Life study shows that in India, around 60 percent of laborers surveyed indicated that they store cash at home, while borrowing from moneylenders at high interest rates - a pattern which increases their financial vulnerability.
9. Financial literacy and awareness are thus integral to ensuring financial inclusion. This is not just about imparting financial knowledge and information; it is also about changing behaviour. For the ultimate goal is to empower people to take actions that are in their own self-interest. When consumers know of the financial products available, when they are able to evaluate the merits and demerits of each product, are able to negotiate what they want, they will feel empowered in a very meaningful way. They will know enough to demand accountability and seek redressal of grievances.  This, in turn, will enhance the integrity and quality of financial markets. One big lesson we have learnt in our outreach programmes is that financial literacy is not just a public good; it is a merit good. What this means is that by deepening financial literacy, not just individuals and households, even the society at large stands to benefit.

Read the complete text of his speech here.

Vijay Mahajan on Universal Financial Inclusion : How It Can be Done

He writes in the Inclusion magazine:

In terms of bank branch density, India scores fairly well and this is primarily due to the branch expansion policy that was pursued soon after nationalisation in the 1970s. Thus, while we seem to have cracked the “last mile” problem, the poor have still to see the “first smile” from the service providers. More branches have not translated into better access for the poor. They still find it difficult to fulfill the “know your customer” (KYC) requirements to open accounts and contending with surly staff in branches. How can this be changed?
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The interesting thing is that India’s banking system (except for big city-based high-end users) in 2009 is a lot like the Indian telephone system was in 1989, before the STD-PCO revolution. To be sure, there are thousands of ATMs from where even small account holders can draw cash, but even these are mainly present in bigger cities in any reasonable density. To truly take the system to the next level of access, three things are a must – enabling every adult to open a bank account, establishing a dense and nationwide network of transaction points, spanning not just the “last mile” but the “final furlong”, and lastly, an inter-bank exchange or switch, to ensure that all transactions are recorded in real-time. Taken together, this will be the Nationwide Electronic Financial Inclusion System (NEFIS) that we recommended in the report of the Raghuram Rajan Committee on Financial Sector Reforms.
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Interestingly, India is on the threshold of these possibilities. The first, opening of bank accounts, can be greatly enabled by the proposed unique ID (UID) number that will be given to every Indian. This will eliminate the need for further KYC requirements. The second is supported by the recent recommendation of the RBI committee on the business correspondent (BC) model, which says that kirana shops and STD-PCOs (yes!!) can become BCs for banks. The third, an inter-bank switch already exists both for large transactions - RTGS for above Rs 100,000 and NEFT for transactions below Rs 100,000, but rarely below Rs 1,000. Thus, all key parts of NEFIS are falling into place.
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The technologically challenged need not worry if this is possible and how much will it cost. It is already being done in several pilots, such as by the pioneer company in this field, A Little World or ALW, and the whole kit costs less than Rs 10,000 per mobile BC!
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After satisfying itself that such technologies are reliable and tamper-proof, the RBI should permit the use of m-money more widely (that is beyond bank account to bank account transfers), as has been done in European e-money regulations. This will reduce the use of currency for small transactions, just as has happened for larger transactions in the last decade. This will significantly reduce transaction costs of cash pay-in, pay-out and handling currency notes/coins. A day should come when an NREGS worker receives her wages on her mobile phone and uses it to pay her kirana shop and school fees, without using currency. All this, while the balance in her account earns interest!

 Read the full article here.