Professional Documents
Culture Documents
Finacial Literncy
Finacial Literncy
CHAPTER
ABSTRACT
INTODUCTION
MEANING
DEFINITION
NEED
OBJECTIVE
IMPORTANCE
LIMITATION
RESEARCH METHODOLOGY
LITERATURE REVIEW
PRATICAL
ANALYSIS AND INTERPRETITION
IMPACT
CONCLUSION
REFERENCE
DISCUSSION
ABSTRACT
Financial literacy has assumed greater importance in recent
years especially from 2002 as financial markets have
become increasingly complex and the common man finds it
very difficult to make informed decisions. Financial literacy is
considered an important adjunct for promoting financial
inclusion, financial development and ultimately financial
stability.
Financial development is widely recognized as an important
determinant of economic growth (Levine, 2005). It can be
argued that limited financial literacy serves as an important
barrier to demand for services: if individuals are not familiar
or comfortable with products, they will not demand them.
Financial Inclusion comes with potential dangers. Recent
experiences in the microfinance arena have shown that poor
people take loans that they have no capacity to service.
Farmers have also taken loans that they have not been able
to repay. Many have been driven to suicide because of debt
problems. Unless financial literacy goes hand in hand with
financial inclusion, instead of helping the poor, they will be
put into more trouble. Another example is the mortgage
crisis, in the U.S., which has lead to global crisis.
Financial Literacy can broadly be defined as the capacity to
have familiarity with and understanding of financial market
products, especially rewards and risks in order to make
informed choices. It refers to the ability to make informed
judgments and to take effective decisions regarding the use
and management of money. It is regarded as an important
requirement for functioning effectively in modern society.
Trends in retirement income policies, work patterns and
demography suggest its importance can only increase in the
years ahead. Raising financial literacy supports social
inclusion and enhances the wellbeing of the community. .
There is need for financial literacy in both the developed and
the developing countries alike. The increasing number and
complexity of financial products, the continuing shift in
responsibility for providing social security from governments
and financial institutions to individuals, and the growing
importance of individual retirement planning make it
imperative that financial literacy be provided to all in the
developed countries. In the developing countries financial
literacy can be seen as the first step toward alleviation of
poverty and development.
In India, the need for financial literacy is even greater
considering the low levels of literacy and the large section of
the population, which still remains out of the formal financial
set-up especially in the rural areas.
India is among the world’s most efficient financial markets in
terms of technology, regulation and systems. It also has one
of the highest savings rate in the world. While savings are
more in India, where the savings are invested is a cause for
concern. It is also to be noted that most Indians do not have
a regular savings habit also. Further only a minority of
Indians is covered by mandated, and/or government
financed social security schemes and social safety nets.
Wealth creation for the investor and the economy will remain
a distant dream, unless the common man becomes a wiser
investor and is protected from wrong doings. We need to
convert a country of savers into a nation of investors.
Everyone saves money for future needs but the approach
most of the time is to save surplus money without preparing
household budgets, without prioritizing personal financial
goals, without properly allocating investments in different
asset classes and without understanding the real rate of
return (after adjusting for inflation).
Investors tend to use thumb rules or seek advice from
friends and relatives. Most of the time these are poor
approximations compared to those that follow from a
systematic process. These results often in poor outcomes
and they lose faith in the financial sector.
Financial education primarily relates to personal finance,
which enables individuals to take effective action to improve
overall well-being and avoid distress in financial matters.
Hence improvement of financial knowledge of households is
necessary for them to participate continuously in financial
markets. Financial literacy plays a vital role in the efficient
allocation of household savings and the ability of individuals
to meet their financial goals.
Financial literacy thus goes beyond the provision of financial
information and advice. It is again a major issue for finance
markets as it both drives and distorts investment behavior. It
empowers the common person and thus reduces the burden
of protecting the common person from the elements of
market failure from a regulatory perspective
Financial literacy can make a difference not only in the
quality of life that individual scan afford, but also the integrity
and quality of markets. It can provide individuals with basic
tools for budgeting, help them to acquire the discipline to
save and thus, ensure that they can enjoy a dignified life
after retirement.
INTRODUCTION
The development and growth of the Indian economy and the
expansion of financial markets post industrial policy as a
result of liberalization, privatization and globalization have
resulted into tremendous growth of financial products as an
investment alternative or a credit one. The increasing
complexity and available choices of financial products, shift
of providing social security from government to individuals,
growing importance of planning for retirement have made it
compulsory to provide financial literacy at all levels for the
countries as the low level of financial literacy prevents
people making a judicious choice in regard to their financial
decisions and consequently render them incompetent to
select most appropriate investment alternative to beat the
prevalent inflation rate of economy.
In the developing countries provision of financial literacy
could be treated as first step towards alleviation of poverty
and development. In India it is although more important
because of large section of the population especially in the
rural areas which are deprived of formal financial set up.
India has world's best efficient financial markets in terms of
technology, system and its regulation. The policymakers and
academicians world over through various ongoing projects,
studies - academic and empirical, reports etc have
highlighted the importance of financial literacy as a core skill
necessary for participants operating in a complex financial
landscape. A higher level offinancial literacy of market
participants plays a complimentary role in helping afinancial
market achieve its primary function of mobilizing and
allocating the savings more effectively and efficiently. The
existence of larger number of financially literate participants,
investors and borrowers, enhances efficiency of financial
intermediation by letting them understand risk pooling and
risk sharing opportunities in a better way. A look at the level
of financial literacy in a particular economy provides a good
indicator of its economic growth and development prospects.
A step towards financial literacy is also a step towards
reducing poverty, alleviating standard of living and
increasing financial stability of an economy.
A global initiative was taken by the OECD to address the
issue of financial literacy by establishing the International
Gateway for Financial Education in March, 2008. The
Gateway serves as a clearinghouse for education and
awareness, containing information on financial education
programmers in more than 90 countries. The Consumer
Protection and Financial Literacy Project, another global
initiative was taken in 2010 by the World Bank with an aim of
helping a household in making correct choice about the
financial services as per the requirement.
In India, 'Project Financial Literacy' was started by RBI with
the aim of disseminating information regarding the central
bank and general banking concepts to various target groups
(discussed in details later in this chapter). Sanchayana is
India's first non-profit social venture which is dedicated
exclusively to financial literacy for the youth and adults.
Sanchayana conducts free workshops for the
underprivileged youth on topics ranging from the basics of
banking, credit cards and PAN cards to investing in shares
and mutual funds, so that these youth can become
financially aware and also a part of the mainstream banking
and financial services industry.
Financial literacy is of utmost importance for an individual
operating in a complex financial framework. The structure
and operation of financial systems world over have
undergone marked changes in the past few decades. At
present, India has world's most efficient financial markets in
terms of technology and systems. There have been
substantial regulatory, structural, institutional and operational
changes in our financial markets. The establishment of
Securities and Exchange Board of India (SEBI), introduction
of nationwide s c reen based trading, dematerialization of
securities, electronic trading, sophisticated risk management
techniques, derivative trading, rolling settlement, shortening
of settlement cycle, and demutualization of Stock Exchanges
and many more have marked a new era in the functioning of
the Indian financial markets.
The term financial literacy can be defined as, Financial
literacy comprises of skills and knowledge that enables the
individual to understand, firstly, the principles of finance that
an individual requires to know to make informed financial
choices and decisions. Secondly, the financial products that
influence the financial well-being of an individual.
Firstly, The Reserve Bank has directed all its leading banks
in each district to prepare a road map to ensure that all the
villages must have access to the financial services for a
village having population more than 2000, through a banking
outlet which may not necessarily be a banking branch.
Secondly, all the commercial banks including private sector
banks, public sector or foreign origin banks to prepare a
specic board approved plan to enhance financial literacy.
The Reserve Bank of India giving freedom to each and every
bank to prepare their own plan of action and not to impose
its own plan on other banks which should be consistent with
their line of strategy and comparative advantage, this in turn
will ensure better ownership.
MEANING
Financial Inclusion is a lofty ideal but Financial Literacy is the
first step towards achieving Financial Inclusion. Financial
Literacy can be seen as the demand side of Financial
Inclusion. It is considered an important adjunct for promoting
financial inclusion, financial development and ultimately
financial stability. It has assumed greater importance in
recent years especially from 2002 as financial markets have
become increasingly complex and the common man finds it
very difficult to make informed decisions.
Financial Inclusion comes with potential dangers. Recent
experiences in the microfinance arena have shown that poor
people take loans that they have no capacity to service.
Farmers have also taken loans that they have not been able
to repay. Many have been driven to suicide because of debt
problems. Unless financial literacy goes hand in hand with
financial inclusion, instead of helping the poor, they will be
put into more trouble. Other examples are the crisis of the
Tirupur exporters on currency derivatives, and the mortgage
crisis, in the U.S., which has lead to global crisis.
Financial literacy refers to the ability to make informed
judgments and to take effective decisions regarding the use
and management of money. It is regarded as an important
requirement for functioning effectively in modern society. It
enables a person to understand the importance of savings.
India is among the world’s most efficient financial markets in
terms of technology, regulation and systems. It also has one
of the highest savings rate in the world.
In spite of the same, India is still one of the poorest
countries in the world. While savings are more in India,
where the savings are invested is a cause for concern.
Wealth creation for the investor and the economy will
remain a distant dream, unless the common man becomes a
wiser investor and is protected from wrong doings. We need
to convert a country of savers into a nation of investors.
Financial literacy can make a difference not only in the
quality of life that individuals can afford, but also the integrity
and quality of markets. It can provide individuals with basic
tools for budgeting, help them to acquire the discipline to
save and thus, ensure that they can enjoy a dignified life
after retirement.
In India, the need for financial literacy is even greater
considering the low levels of literacy and the large section of
the population, which still remains out of the formal financial
set-up especially in the rural areas. Unfortunately it is a fact
that even graduates in India are not really financially literate.
Wealth creation for the investor and the economy will remain
a distant dream, unless the common man becomes a wiser
investor and is protected from wrong doings. We need to
convert a country of savers into a nation of investors.
Financially educated consumers, in turn, can benefit the
economy by encouraging genuine competition, forcing the
service providers to innovate and improve their levels of
efficiency. Government of India through its various agencies
like RBI, SEBI, NABARD, State Bank of India etc have been
trying to give financial literacy and financial education to its
citizens in the last few years. There has been plethora of
talks in this direction. But are we really walking the talk
This paper would look into various aspects of financial
literacy in India and why it has not succeeded. It will also try
to provide a suitable model that would be helpful for Indian
conditions.
DEFINITION
The conceptual definition of financial literacy is complicated
since scholars and financial experts have long disagreed on
how to define this concept. For the first time, Jump Start
Coalition for Personal Financial Literacy in its inauguration in
1997 championed financial literacy as a construct (Hastings
et al, 2012). However, prior to that, the idea dates to the
early 1900s with the advent of consumer education research
and initiatives which began in the United States (Jelley
1958). General literacy refers to a person’s ability to read
and write (Zarcadoolas, Pleasant, and Greer 2006) but the
most general definition Of financial literacy is pointed to a
person’s competence in money management. Indeed, the
standard definition of literacy developed by the Literacy
Definition Committee and used bythe National Adult Literacy
Survey is “using printed and written information to function in
society, to achieve one’s goals, and to develop one’s
knowledge and potential” (Kirsch et al. 2001, p. 3). Based
upon a review of research studies the many conceptual
definitions of financial literacy fall into four categories:
knowledge of financial concepts, ability in managing
personal finances, skill in making financial decisions and
confidence in future financial planning (Remund, D. L, 2010).
It is worth mentioning that numerous scholars who have
published studies about financial literacy have not plainly
defined this
concept (Chen and Volpe 2002; Meier and Sprenger 2007;
Morton, 2005; Servon and Kaestner 2008).
NEED OF FINANCIAL LITERACY
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and the Class of 2016." https://ticas.
org/sites/default/files/pub_files/classof2016.pdf.
Klein, Asher and Giordano, Jackie, 2014. "Bill Clinton Visits USC
to Teach Kids Value of Financial Literacy." Channel 4, Southern
California. http://www.nbclosangeles.com/news/local/Bill-Clinton-
VisitsUSC-to-Host-Financial-Literacy-Event-282070241.html.