As we near the goal of universal financial access, there is a need to bridge the inequality gap. Ensuring financial literacy and subsequent inclusion can unleash the untapped potential at the bottom of the pyramid, leading to a less-cash economy
The World Bank Group has put forward an ambitious global goal to reach Universal Financial Access (UFA) by 2020, as financial literacy and financial inclusion has now become the topmost priority for policymakers, regulators and development agencies, globally. The UFA goal is that by 2020, adults who currently aren’t a part of the formal financial system, must have access to a bank account to transact money, which becomes the basic building block to manage their financial lives.
The Prime Minister’s Dhan Jan Yojana achieved a remarkable feat by bringing 80 per cent of the population into mainstream banking. But subsequently, most accounts have remained passive, with an average of three transactions a year. This because around 76 per cent of India’s adult population does not understand even basic financial concepts.
For increased economic participation, the spread of financial literacy is the primary enabler of financial inclusion — both are twin pillars in mitigation of poverty. Only by working jointly on both aspects can we herald the next revolution of prosperity and growth for India in the 21st century by enhancing scope for banking, insurance, mutual fund industry and housing for all. All four services are interlinked to financial inclusion, as also are growth propellers of the economy, which have their own multiplier effect in adding close to a percentage point to the gross domestic product (GDP). This can happen only when people are financially literate and begin to make informed investment choices.
However, financial literacy, the first prerequisite for financial inclusion, is where India lags behind as most women remain financially illiterate. As International Monetary Fund (IMF) chief Christine Lagarde said: “It’s now a proven fact, when women do better, economies do better.” There exists an ocean of untapped opportunities in India to expand the scope of financial inclusion and financial literacy for women across all demographic strata, albeit, the spread of literary cannot be confined to being gender-specific.
My passion towards this transformation stems from deep-rooted convictions based on my working life’s experience since I began my career in the late 70’s. I was the guinea pig of my experiments with money, and through sheer trial and error at an early age, I succeeded in transforming simple wages to savings, and savings to assets. Again, there was no genius to the idea but just the magic of disciplined savings and the compounding power of money. The skills of compounding money is now a science, a learning that must begin by including it in school curricula so that successive generations grow into disciplined investors and ethical borrowers.
Thereafter, financial literacy must be imparted to the millennials who comprise 34 per cent of our population, and who, research shows, are credit-oriented and spend more on lifestyle. So, they need to learn the discipline and risks of living life beyond their income. The middle aged are securely married women and are educated, yet are uninitiated in finance — just because they find its vocabulary too difficult to comprehend. Then, there are divorcees and widows, comprising 12 per cent of the population, who need to be initiated, as most are under-literate on personal finance. Let’s remember that the ultimate goal of every one of us is to own a secure asset in the form of home ownership along with building on a savings corpus, which provides dignity and insulates from future shocks.
Financial literacy is one of the most serious issues in the US, as also globally for women. Women earn 25 per cent less than men, and spend an average of 11.5 years out of the workforce. Individuals must be competent to make decisions not only about assets but also about debts. And debt is pervasive across all income strata and stands at alarmingly increased levels, even 10 years post 2008 economic crisis. This means that we failed to learn from the perils of over-leveraging. Today, credit is lavishly available and institutions that promote credit to the exclusion of savings, place the poor in deeper bondage, as credit alone cannot save the poor from poverty.
As Finance Minister Arun Jaitley expressed: “If we have growth only on the basis of 31 per cent credit off take, history will record it as growth due to indiscriminate lending.” While the incidence of indebtedness (IOI), which is a proportion of households having outstanding debt, today stands at an average of 47.4 per cent, average savings per annum per saver households was reportedly as low as Rs 17,488 according to the 2018 pan-India National Bank for Agriculture and Rural Development (NABARD) survey. With an abysmally low ability to save and rising levels of debt, how long will it take for the rural poor to climb out of poverty?
The Government consequently has a major role to play in policy formation so as to mainstream the marginalised into creating an eco-system conducive to inclusion. The objective of the financial literacy and financial inclusion committee is to attempt to spearhead a financial revolution borne of Niti Aayog’s prioritisation which is in sync with the global priority accorded to financial inclusion and financial literacy unanimously by the World Bank, the European Union, G-20, and the Organisation for Economic Co-operation and Development (OECD).
The goal is to enable shared prosperity and bring down poverty by changing investment habits of people, and also secure in knowing that gradual asset creation is within their reach too.
An example of how rapidly financial literacy can spread and lead to financial inclusion is by demistifying complicated banking jargon by dumbing down financial vocabulary, and thereafter, disseminating learning and getting the masses to get operational in much the same way educationally illiterates in rural India could take to the working of smartphones, and enjoying the WhatsApp feature. This must be done through Government-accredited programmes disseminated through tele-learning, and use of mobile phones to penetrate the spread of financial literacy.
Even the US Department of Education reports that 3.8 million American adult women possess literacy skills below a “basic” level. Also, OECD studies show that women have lower financial literacy levels than men in both developed and developing countries. Since women live longer than men and have shorter working lives in paid employment, they have lower average incomes from which they save for old age. With increasing life expectancy, there is a need to provision for increasing and inflationary cost of healthcare; women need to be sufficiently financially literate to be future-ready for any contingencies.
By being forbidden from inheritance in many patriarchal societies, though laws are changing, women own lesser property. And they havebeen excluded from decision-making on deployment of family earnings since millennia, as it has been deemed the sole prerogative of the ‘karta’ or the head of the family in India.
Deepening financial literacy and subsequent inclusion would unleash the hugely untapped potential at the bottom-of-pyramid leading to a reduction in the cash economy, as more money finds its way into the banking ecosystem. That would also inculcate the savings discipline and increase capital formation, and this in turn, would release the availability of adequate credit to foster entrepreneurial spirit of the masses, as more people are enabled through the formal financial infrastructure and freed from dependence on unscrupulous money-lenders.
Thus far it’s a slow progress, as India has climbed by just one rank to become 130 out of 189 countries in the 2018 United Nations Human Development Index (HDI). The increase in rankings is a quantum leap by 50 per cent since 1990, which reflects that the strides taken by the Government have been successful in lifting millions out of poverty — per capita gross national income increased by 266 per cent. However, there still remains a huge gap of inequality as the gains of equitable economic development are yet to percolate to the base of the pyramid.
Those disparities can only be addressed through increased outlays in education and vocational training, in prioritising financial literacy, and by increasing women’s participation in the job force, which is at an abysmal 27 per cent currently. Melinda Gates, co-Chairperson of the Gates Foundation once said: “When women have money in their hands and the authority to choose how to spend it, they grow in confidence and power by taking control of their economic future.”
(The writer, an author & columnist, is Chairperson, Committee on Financial Inclusion and Literacy for Women, Niti Aayog)
