‘Three out of four Indians are not financially literate’

Indians can surely explain what ‘inflation’ means in a financial literacy quiz. But a recent survey found that we know little about other key financial concepts, such as knowledge of interest rates, the effects of compounding and risk diversification.

In fact, three out of every four Indian adults are not financially literate, according to a survey by Standard & Poor’s Ratings Services. The rating agency’s Global Financial Literacy Survey tested 1,50,000 adults from 140 countries on their knowledge of four basic financial concepts: numeracy, risk diversification, inflation, compound interest (saving and debt).

With 76 per cent of Indian adults not adequately understanding these basics, India ranks below the global average in financial literacy but tests roughly the same as other BRICS and South Asian nations.

The survey is important because financial ignorance can prove expensive in the long run. The detailed report quotes studies that show that “consumers who fail to understand the concept of interest compounding spend more on transaction fees, run up bigger debts, and incur higher interest rates on loans”, besides borrowing and spending more than earning and saving.

On the contrary, financially savvy individuals are better at diversifying risks and are more secure through retirement.

According to the results, 56 per cent of Indians surveyed answered correctly about inflation, compared to a world average of 50 per cent and a South Asia (excluding India) average of 46 per cent.

On interest and compound interest, 48 and 44 per cent of Indians, respectively, answered correctly, while the Asian average was 46 and 39 per cent, respectively.

Spreading your investments across several asset classes — or risk diversification — clearly leaves Indians stumped, with only 14 per cent understanding the concept. The South Asian average stood at 18 per cent and the global figure at 35 per cent.

Singapore tops in Asia In Asia, Singapore is home to the highest percentage of financially literate adults (59 per cent), followed by Hong Kong and Japan (both at 43 per cent). Less than a third of adults in China (28 per cent) are financially literate. The countries with the highest financial literacy rates are Australia, Canada, Denmark, Finland, Germany, Israel, the Netherlands, Norway, Sweden, and the UK, where about 65 per cent or more of adults are financially literate.

Income and gender play a role too. In India, 26 per cent of adults in the richest 60 per cent of households are financially literate, compared to 20 per cent of adults in the poorest 40 per cent of households.

The survey also showed a material gap between men and women in almost every country. Worldwide, there is a five-point gender gap, with 65 per cent of men not being financially literate compared with 70 per cent of women. In India, the gap was wider with 73 per cent of men and 80 per cent of women not being financially literate.

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