Small savers in the country have been falling prey to financial scams with alarming regularity. And try as they might, our financial regulators have been ineffectual at protecting them. A key reason is the lack of basic financial literacy. A recent global survey of 1,50,000 adults across 140 countries by Standard & Poor’s Ratings Services has shed new light on just how widespread this problem is in India. The results are quite disheartening.
The survey showed that 76 per cent of Indians aren’t financially literate, going by their inability to answer very basic questions on risk, inflation, and simple and compound interest. The prevalence of financial illiteracy in India was not just higher than the world average (66 per cent), it was also higher than every other BRIC nation. The country has a wide gender gap in financial literacy (while 27 per cent of the men made the cut, only 20 per cent of the women did). However, rich households (26 per cent were literate) didn’t fare much better than poor ones (20 per cent). These findings show that all the time, money and effort regulators have expended on investor awareness and education initiatives haven’t been very effective. Such initiatives have not been constrained by a lack of funds. Copious amounts of money flow into the investor protection funds maintained by the two stock exchanges, thanks to mandatory contributions from trading members. The ministry of corporate affairs appropriates all unclaimed dividends from listed companies for its own investor education initiatives, while RBI does the same with unclaimed bank deposits. SEBI, which has been slapping market offenders with huge penalties, deposits these into an investor protection fund. All this is apart from the mandatory 0.02 per cent of assets that mutual funds are required to spend on investor awareness programmes and the scores of voluntary camps conducted by other players. But the key problem with most of these initiatives is that they don’t deliver basic financial literacy at the grassroots level. Camps from financial firms, for instance, inevitably focus on convincing affluent urban savers to try out insurance policies, systematic investment plans or equities in place of conventional instruments. What we need, instead, is a serious effort at creating content that can integrate basic financial concepts such as inflation, risk and interest rates, for instance, into the school curriculum.
Another interesting finding of the S&P survey is that people who already have access to products such as bank accounts and bank loans, even if poor, have a far better understanding of financial concepts than those who don’t. This is a clear message that a critical piece in ensuring universal financial literacy is to make sure that no Indian citizen is denied basic access to regulated savings or credit products. So, financial inclusion initiatives such as the Jan Dhan Yojana or the Jan Suraksha Yojana, far from putting the cart before the horse, are just what small savers need to escape the clutches of Ponzi scheme operators and moneylenders.