Financial Literacy and Inclusion in India: Demand and Supply

Written by Sanchit Kumar

During the launch of Pradhan Mantri Jan Dhan Yojana (PMJDY) in 2014, India’s Prime Minister Narendra Modi declared, “If we want to eradicate poverty, we need to get rid of financial untouchability.” Fast forward two years, and Modi’s PMJDY scheme to foster inclusive development appears to be eliminating financial ‘untouchability’ as over 75 million bank accounts have been opened. Yet, a study by the Organization for Economic Cooperation and Development (OECD) in 2016 suggests that the Indian population has not been ready for this widespread initiative.

Demand and Supply

Although over 75 million accounts have been opened, many of them are empty and 70 percent of them are used once a month. These underused bank accounts indicate a lack of interest and trust in financial services. An OECD survey corroborates this explanation as low levels of awareness in major financial products and services have been noted, “including crop and livestock insurance (27% and 24%, respectively) and pension products, such as the Employees Provident Fund (38%), National Pension Scheme (36%) and Family and/or Employee Pension Schemes (30%).” While the government has targeted the supply-side to scale financial inclusion, demand-side barriers such as financial literacy must be equally addressed to complement the increased access to financial products.

Financial Literacy

The National Strategy for Financial Education has been developed to improve efforts in schools and towards community outreach workers. The Reserve Bank of India has undertaken “Project Financial Literacy” and instructed banks to open Financial Literacy Centres to instill and diffuse general financial concepts to target groups like university students. Yet, these steps still need to be further bolstered. The 2014 Financial Literacy and Inclusion Survey by the National Centre for Financial Education suggests that the critical challenges facing a financial education agenda are the urban-rural and gender gaps. “Urban residents showed higher levels of knowledge than rural residents (differing by 7.4 percentage points on average) and men showed higher levels than women (differing by 7.0 percentage points on average).”

In rural areas, microcredit has been used for “home purchases, weddings, health, funerals, and school fees.” This indicates that borrowing is used for consumption and not for investment. For any policy objective, it will be important to understand that access to credit is not as relevant as the use of credit. For women, their husbands enhance ownership of household assets by departing from wage based work to self-employment as men use the loans – given to their wives – to start their own businesses. Laws that safeguard women’s control over loan based assets and that allow collateralisation of loans with cash flow, property or equipment must be introduced. Furthermore, discriminatory policies, in which men sign documents for women in banks, are still in place and should be removed.

Trust appears to be the biggest issue. Banks have promised financial returns to garner small deposits, creating up a trust deficit. Entities like the National Stock Exchange (NSE) and structured financial intermediaries are pivotal to creating trust through awareness. The NSE academy has helped women form self-groups across states like Andhra Pradesh, Tamil Nadu, and Rajasthan. By identifying a middle layer of trainers to disseminate information to these women, the NSE has instilled the basics of managing money more efficiently. Yet, to implement a large population-wide initiative in India, state governments will need to play their part by using their existing broadcasting infrastructure to increase the reach to local schools and rural areas. Ultimately, any initiative will take time.

Regional coordination at the state level will be necessary to reduce rural and gender based inequalities and incentivize these target groups to trust financial services. In the long term, traditional power structures and norms will collapse as job creation and female entrepreneurship are promoted.