Financial Literacy
Financial Literacy
Chapters
Synopsis
Introduction
Objectives
Scope
Research methodology
Need for Financial literacy
Importance of financial literacy
Determinants of Financial literacy in an individual
Scenario in India
Study on financial literacy by experts
Investment options
Financial education
Initiatives taken in India
Financial inclusion
How to develop financial literacy
Primary data
Findings
Recommendations
Conclusion
Bibliography
SYNOPSIS
The financial system plays an important role in the growth and
development of a nation. The financial system plays an important role in
the growth and development of a nation. The basic function involve is to
transfer fund from surplus generating unit to deficient generating unit.
Since economic reforms, India has one of the highest saving rates
in the world but allocation of these savings is a cause for concern.
Creating financial literacy plays an important role in information,
knowledge, skills to evaluate options and enables consumers to
understand the implications of alternative financial decisions. Though
financial literacy increased in India but negative symptoms which are
observed are underinsurance, debt
trap, insufficient retirement fund, low return on investment and the cause
of all these is one and the same is financial Literacy.
This research with the help of questionnaire outlines the necessity and
importance of financial literacy for the growth and inclusion.
Introduction
Financial literacy refers to the set of skills and knowledge that allows
an individual to make informed and effective decisions through their
understanding of finances. Improving financial education and literacy
standards underpins is a major component in all our work and projects.
Financial literacy means understanding financial products, concepts
and risks, and through information, instructions and/or objective
advise, develop the skills and confidence to become more aware of
financial risks and opportunities, to make informed choices, to know
where to go for help, and to take other effective actions to improve
their financial well being.
Thus financial literacy is the ability to know, monitor and effectively
use financial resources to enhance the well being and economic
security of oneself, ones family and business, and also for improving
the understanding of the financial service providers. In our case, our
focus of financial literacy will be SHG members and their families and
all other organizations who are involved with them.
The concept of Financial Literacy, is essentially spreading the
knowledge of good money management practices. It
encompasses all monetary transactions that a person enters into such
as earning, spending, saving, borrowing and investing. These
transactions cannot be avoided and they are all integral parts of a
persons life, and hence the introduction of financial literacy will help
people, especially women to manage these transactions to their
advantage. With financial literacy, poor will have opportunity to learn
skills related to:
a) setting economic goals,
b) making a financial plan,
c) managing cash flow,
d) keeping financial records,
e) minimizing debt,
f) planning for the future,
g) socially responsible actions without jeopardising the environment
or natural resources
OBJECTIVES
To understand the meaning of Financial Literacy
To identify factors that determine Financial Literacy
To understand knowledge of Financial Literacy among people
To understand ways to develop Financial Literacy in an Individual
SCOPE
The scope for studying financial literacy awareness is huge as the study
may differ as per the demographics of the sample size.
This project focuses on Financial literacy awareness among
undergraduate students in Mulund College of Commerce as they will be
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Research Methodology
A suffice research was undertaken to meet the objectives of this study
with the collection of both secondary and primary data.
The primary data was collected through a questionnaire designed for a
sample of 100 students in Mulund College Of Commerce.
The secondary data has been collected from various references from
books,magazines,journals and the internet.
Limitations
Since the scope is vast, study was restricted to Awareness among
undergraduate students and thus observations will be limited.
Following studies, they may move out of the parents house and begin
to live on their own (or with friends/ housemates) and earn their own
living. They then get married, form a couple and start their own
family. By this stage, the parents are old, with reduced income levels
because of lower physical capacity to work. They seek support from
their children who have just been endowed with new responsibilities
of a family, with children of their own to raise. The cycle continues
with these children getting educated, moving out to find a job and then
eventually raising their own families, while assisting their parents.
Figure 1. Life cycle of an individual/ household
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Scenario in India
While we have become marginally better at saving and planning for the
unexpected and retirement, basic money management still remains a
weak point, shows a recent survey. In terms of overall financial literacy,
India is at the bottom among 16 countries in the Asia-pacific region with
59 index points, according to the annual MasterCards index for financial
literacy. Only Japan fared worse with 57 points.
The index is based on a survey conducted between April 2013 and May
2013 with 7,756 respondents aged 18-64 years.
The survey polled consumers on three aspectsbasic money
management (50% weight), financial planning (30% weight) and
investment (20% weight)to arrive at the overall financial literacy index.
On individual parameters, India scored 50 index points in basic money
management, which was lowest among 16 countries. With respect to
financial planning, which involves savings and planning for the
unexpected and retirement, India showed improvement from the last
round of survey and scored 76 index points and for investments it scored
58, one index point lower compared with last year.
The report states that for Indians, the lack of ability to keep up with
bills, set money aside for big item purchases and to pay off credit cards
fully could be due to a lack of surplus cash, resulting from the fact that
income levels are not high enough to cover expenses. According to
Desmond Choong, an external analyst who works with MasterCard on
indices and surveys, this can be attributed to inflation. The Consumer
Price Index-based inflation has been around 9-10% for the last two years.
Interestingly, the younger lot seems to be slightly more financially
proficient. The financial literacy scores for Indians aged 30 and above
was 59 compared with 61 for those under 30 years of age. This was an
exception to all the other Asia-Pacific countries where the older cohort
had clearly better financial literacy scores than the younger cohort except
for Indonesia where it was almost a tie between the two segments.
However, given the small sample size and locations chosen for the
survey, it may not be a true reflection of the things on ground. The
sample is not too big and India is a large country with diverse lifestyle
approaches. So I am not sure how far will this be true for pan-India, says
Ranjeet S. Mudholkar, vice-chairman and chief executive officer,
Financial Planning Standards Board India.
The survey was conducted with respondents at the urban level, so the
results are particularly for urban Indians but may to a lesser extent
reflect the situation as well for rural India, says Choong.
Mudholkar, however, says that the survey can give a good idea from a
country on country perspective. For instance, Hong Kong and Singapore
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INVESTMENT OPTIONS
While some plans accrue short term profits some are long term deposits.
The first step towards investing in Indian market is to evaluate individual
requirements for cash, competence to undertake involved risks and the
amount of returns that the investor is expecting. Below are Top 10
Investment Options in India which assure safe and satisfactory returns
1. Investments in Bank Fixed Deposits (FD)
Fixed Deposit or FD is accrues 9.25% of annual returns for non-senior
citizen, depending on the bank's tenure and guidelines, which makes it's
widely sought after and safe investment alternative. The minimum tenure
of FD is 15 days and maximum tenure is 5 years and above. Senior
citizens are entitled for exclusive rate of interest on Fixed Deposits,
current rate of return is average 10% annual.
2. Investments in Insurance policies
Insurance features among the best investment alternative as it offers
services to indemnify your life, assets and money besides providing
satisfactory and risk free profits. Indian Insurance Market offers various
investment options with reasonably priced premium. Some of the popular
Insurance policies in India are Home Insurance policies, Life Insurance
policies, Health Insurance policies and Car Insurance policies.
Some top Insurance firm in India under whom you can buy insurance
scheme are LIC, SBI Life, ICICI Prudential, Bajaj Allianz, Birla Sunlife,
HDFC Standard Life, Reliance Life, Max NewYork Life, Metlife, Tata
AIG, Kotak Mahindra Life, ING Life Insurance, etc.
3 Investments in National Saving Certificate (NSC)
National Saving Certificate (NSC) is subsidized and supported by
government of India as is a secure investment technique with a lock in
tenure of 6 years. There is no utmost limit in this investment option while
the highest amount is estimated as ` 100. The investor is entitled for the
calculated interest of 8% which is forfeited two times in a year. National
Saving Certificate falls under Section 80C of IT Act and the profit
accrued by the investor stands valid for tax deduction up to ` 1, 00,000.
4. Investments in Public Provident Fund (PPF)
Like NSC, Public Provident Fund (PPF) is also supported by the Indian
government. An investment of minimum ` 500 and maximum INR.
100,000 is required to be deposited in a fiscal year. The prospective
investor can create it PPF account in a GPO or head post office or in any
sub-divisions of the nationalized bank.
PPF also falls under Section 80C of IT Act so investors could gain
income tax deduction of up to ` 1, 00,000. The rate of interest of PPF is
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9. Investments in Equity
Private equity is a type of asset consisting of equity securities in private
companies that are not publicly traded on stock exchange.
A private equity investment will generally be made by a private equity
firm, a venture capital firm or an angel investor.
Private Equity is expanding at a fast pace. India acquired US $13.5 billion
in 2008 under equity shares and featured among the top 7 nations in the
world. In 2010, the total equity investment is predicted to increase upto
USD 20 billion. Indian equities promise satisfactory returns and have
more than 365 equity investments firms functioning under it.
As ranked by the PEI 300, the 10 largest private equity firms in the world
are:
1.TPG Capital
2.Goldman Sachs Principal Investment Area
3.The Carlyle Group
4.Kohlberg Kravis Roberts
5.The Blackstone Group
6.Apollo Global Management
7.Bain Capital
8.CVC Capital Partners
9.First Reserve Corporation
FINANCIAL EDUCATION
An increased need for financial education is felt in both developed and
developing countries. In developed countries, the increasing number of
financial products, its complexity, importance of retirement savings,
increasedgrowth of secondary market has made the imparting of financial
education imperative for all age groups, including students so that
individuals are educated about financial matters as early as possible in
their lives. In thedeveloping countries, the growing number of investors,
technically advanced financial markets, liberalisedeconomy etc.
necessitates imparting of financial education for better operation of
markets and economy and inthe interest of investor. Further imparting of
financial education is international concern due to growth ofinternational
transactions, international financial instruments like ADR, GDR, IDR
etc., mobility of individuals from one country to another etc.
Components of Financial Education
The importance of starting now!
Time value of money and compound interest.
Planning and budgeting.
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wherein througha toll free number, investors across the country can
access and seek information for redressal of their grievancesand guidance
on various issues.
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Financial Inclusion
Financial inclusion or inclusive financing is the delivery of financial
services at affordable costs to sections of disadvantaged and low-income
segments of society, in contrast to financial exclusion where those
services are not available or affordable.
Why Financial Inclusion in India is Important?
The policy makers have been focusing on financial inclusion of Indian
rural and semi-rural areas primarily for three most important pressing
needs:
1. Creating a platform for inculcating the habit to save money The
lower income category has been living under the constant shadow of
financial duress mainly because of the absence of savings. The absence of
savings makes them a vulnerable lot. Presence of banking services and
products aims to provide a critical tool to inculcate the habit to save.
Capital formation in the country is also expected to be boosted once
financial inclusion measures materialize, as people move away from
traditional modes of parking their savings in land, buildings, bullion, etc.
2. Providing formal credit avenues So far the unbanked population
has been vulnerably dependent of informal channels of credit like family,
friends and moneylenders. Availability of adequate and transparent credit
from formal banking channels shall allow the entrepreneurial spirit of the
masses to increase outputs and prosperity in the countryside. A classic
example of what easy and affordable availability of credit can do for the
poor is the micro-finance sector.
3. Plug gaps and leaks in public subsidies and welfare programmes
A considerable sum of money that is meant for the poorest of poor does
not actually reach them. While this money meanders through large system
of government bureaucracy much of it is widely believed to leak and is
unable to reach the intended parties. Government is therefore, pushing for
direct cash transfers to beneficiaries through their bank accounts rather
than subsidizing products and making cash payments. This laudable effort
is expected to reduce governments subsidy bill (as it shall save that part
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of the subsidy that is leaked) and provide relief only to the real
beneficiaries. All these efforts require an efficient and affordable banking
system that can reach out to all. Therefore, there has been a push for
financial inclusion.
What are the steps taken by RBI to support financial inclusion?
RBI set up the Khan Commission in 2004 to look into financial inclusion
and the recommendations of the commission were incorporated into the
mid-term review of the policy (200506) and urged banks to review their
existing practices to align them with the objective of financial inclusion.
RBI also exhorted the banks and stressed the need to make available a
basic banking 'no frills' account either with 'NIL' or very minimum
balances as well as charges that would make such accounts accessible to
vast sections of the population.
Of the many schemes and programmes pushed forward by RBI the
following need special mention:
A. Initiation of no-frills account These accounts provide basic
facilities of deposit and withdrawal to accountholders makes banking
affordable by cutting down on extra frills that are no use for the lower
section of the society. These accounts are expected to provide a low-cost
mode to access bank accounts. RBI also eased KYC (Know Your
customer) norms for opening of such accounts.
B. Banking service reaches homes through business correspondents
The banking systems have started to adopt the business correspondent
mechanism to facilitate banking services in those areas where banks are
unable to open brick and mortar branches for cost considerations.
Business Correspondents provide affordability and easy accessibility to
this unbanked population. Armed with suitable technology, the business
correspondents help in taking the banks to the doorsteps of rural
households.
C. EBT Electronic Benefits Transfer To plug the leakages that are
present in transfer of payments through the various levels of bureaucracy,
government has begun the procedure of transferring payment directly to
accounts of the beneficiaries. This human-less transfer of payment is
expected to provide better benefits and relief to the beneficiaries while
reducing governments cost of transfer and monitoring. Once the benefits
starts to accrue to the masses, those who remain unbanked shall start
looking to enter the formal financial sector.
What more is to be done for financial inclusion?
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PRIMARY DATA
The study has been conducted among undergraduate students in Mulund
College of Commerce with a view to understand the level of financial
literacy awareness by using a questionnaire.
ASSUMPTION: The study was conducted under the assumption that the
students have financial resources in the form of pocket money, Earning or
Savings.
Statement 1: Preparation of budgets
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60
50
40
NO.OF PPL
TOTAL
30
20
10
0
YES
NO
Option Response
Yes
40
No
60
Statement 2: Pattern of budgeting
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60
50
40
no.ofppl
30
t otal
20
10
0
Always
Answer
Always
Occasional
Never
Occasional
Never
Response
20
50
29
28
29
60
50
40
30
Series 1
20
10
0
TRACK
DO NT TRACK
Option
Keep track
No track
Cant say
written Record
DNT KNW
WR RECORD
Response
26/100
57/100
7/100
10/100
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30
70
60
50
40
NO.OFPPL
30
20
10
0
No control
Option
No control
Fluctuates
Cant say
Fluctuates
Cant say
Response
30
65
5
30
31
Series 1
70
60
50
40
30
20
10
0
Entertnmt.
Education
Investment
Others
Series 1
Option
Entertainment
Education
Investment
Others
Response
59
9
12
20
31
32
50
45
40
35
30
25
Series 1
20
15
10
5
0
Family
Friends
Option
Family
Friends
Banks/Fin. Institution
Internet
Banks/FI
Internet
Response
46
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14
33
32
33
Series 1
60
50
40
30
20
10
0
none
unplanned
planned
some
Series 1
Option
Response
None
15
Unplanned
52
Planned
20
Some
16
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34
Series 1
60
50
40
30
20
10
0
Yes
no
Refused
Series 1
Option
Yes
No
Refused
Response
36
54
10
34
35
Series 1
70
60
50
Series 1
40
30
20
10
0
All
Option
All
Most
Few
None
Most
Few
None
Response
64
29
6
0
35
36
Series 1
50
45
40
35
30
Series 1
25
20
15
10
5
0
Newspapers
Television
social netwk
Option
Response
Newspapers
26
Television
43
10
Internet
21
internet
36
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FINDINGS
The study conducted resulted in the following findings:
1) The students budget on an infrequent basis.
2) The expense control is low and tends to go out of budget.
3) The factors for saving were found out to be short term
expenditures
4) The opinion of Family is very influential in financial
activities and money management.
5) Financial goals are undetermined by many students.
6) The students are less attracted to credit cards.
7) The awareness about financial products is high among
students and television plays a major role in awareness.
RECOMMENDATIONS
1.
2.
3.
4.
5.
6.
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CONCLUSION
The study made on the different aspects of financial literacy and
undergraduate students brings me to a following conclusion:
There is immense need to develop financial literacy awareness in
India.
The Government and Authorities like RBI, SEBI etc are taking efforts
to create financial literacy awareness.
The need to develop financial knowledge in Indian society is low and
measures like Financial inclusion will play a major role in
developing this need.
Parents should take efforts to create sensitivity towards financial
planning and inculcate need for budgeting in children from their
teenage.
The students should change their casual attitude towards finance
knowledge and understand importance of awareness of financial
activities.
BIBLIOGRAPHY
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WEBLIOGRAPHY
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