Obstacles to financial inclusion

Uttam Nayak | Updated on March 12, 2018

There is an urban demand for financial education. — V.V. Krishnan

Financial inclusion can make little headway without efforts to further financial literacy.

India’s small towns are making their presence felt in the nation’s economic landscape. It is not just the FMCG or consumer durable companies or car makers who are rushing to India’s hinterland, but also a slew of banking and financial services companies that are ramping up their operations.

Over the last couple of years, these small cities and towns have shown an increasing appetite for financial products. But can financial inclusion ever succeed without financial literacy? If people are not aware about basic financial planning and lack the skills to save and invest, can they mitigate economic hardship and shocks that may come their way? Will this lack not impact the long-term strategy of companies to develop rural markets?

Financial literacy must be the centrepiece of financial inclusion. We did a survey recently to gauge the strengths and weaknesses of financial education worldwide, and to find solutions to challenges that exist. Among 28 countries surveyed across the world, India stands at 22nd spot, clearly indicating the work that lies ahead.

While urban areas are perceived to be high on financial literacy, this may not necessarily be the case. Financial literacy is also dependent on spread of the banking network. Only 40 per cent of India’s total population has access to formal banking channels, and the problem is acute when one looks at the villages, where only 5 per cent have a brick-and-mortar branch. This explains why financial literacy levels in rural India are poor.


The Government and the RBI have been working towards bringing the country’s hitherto unbanked regions and population into the fold of formal banking system. While improving penetration is one pillar of this strategy, the other key component is making India financially literate.

And while progress has been made, there is more to be done. The principal reason for improving financial literacy is the impact it has on financial inclusion and stability. You can establish a brick-and-mortar branch with all the financial offerings, but you can’t bring a customer on board unless you educate him. Higher degree of awareness and understanding about banking and financial products is the first step towards creating demand and increasing adoption.

The issue of financial literacy is not as simple as it sounds. It requires an understanding of the information gap across consumer segments, banked and unbanked, and crafting communication strategies that address the unique needs of specific segments.

It would be wrong to assume that a consumer living in a metropolitan city is financially literate because he is surrounded by a variety of financial institutions offering a plethora of choices. Maybe she invests in traditional banking instruments like savings and fixed deposits, but can be educated on managing her consumption better or investing in equity markets.

Indians are known to be great savers, something that is reflected in the overall domestic savings rate which stands at a healthy 31 per cent. However, this figure has dropped over the last couple of years, which is in part due to higher consumption expenditure by households, especially in urban areas. Also, our study reveals that Indians do not have more than three months of savings, in case they face an emergency.


At the other end of the spectrum are those who haven’t had any exposure to formal banking. An RBI study of financial literacy and credit counselling centres reveals low awareness levels about existence of such centres. The content distributed at these centres goes little beyond the bank’s publicity material.

So while at one end there is an urgent need to spread the network to educate citizens, it is equally important to ensure that the information shared by such centres is neutral and in a language that the average person can understand.

This brings us back to target consumer segmentation, and the need to match skills to be imparted with the population category. We need to create an army of financial literacy trainers, well equipped to educate people on money management.

There is also a greater understanding in India as well as around the globe of weaving financial planning skills in school education. Our survey reveals that the worldwide average age of introducing financial literacy to children is 11.3 years. It is heartening to note that the central bank is engaging with school boards to introduce these concepts in the curriculum.


Going forward, technology will play a key role in promoting financial inclusion and financial literacy. According to research by Sumit Aggarwal, senior financial economist with the Federal Reserve Bank of Chicago and a visiting professor at the Indian School of Business, Internet-savvy Indians are 20 per cent more financially literate than Americans and on par with Europeans. Real time information, updates on products and norms, better financial management and investment decision making can be enabled through safe and secure technology platforms.

The choices made by a financially aware consumer will help develop products that are relevant and lead to financial innovation. We need to develop a scalable and multi-pronged approach towards financial literacy. This requires time, planning and collaboration among various stakeholders.

Financial literacy is about changing behaviour, and this is the right time to sow the seeds of change.

(The author is Group Country Manager, India and South Asia, Visa.)

Published on August 17, 2012

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