Financial literacy a must for right decision-making

Indian financial markets have turned increasingly complex for the common man, and a necessity has risen to increase financial literacy to enable people to make informed decisions. Financial literacy consists of knowledge of financial concepts such as spending, saving, borrowing, investing, etc., and using it to manage personal resources efficiently.

Individuals faced with having to make complex financial decisions because of the complicated financial environment find that imprudent financial decisions like excessive spending, living on borrowed money and deferred debt payment made earlier in life can prove to be costly.

Financial education can be seen as the best strategy to help individuals to manage their limited financial resources wisely, ultimately resulting in a decrease in the number of individuals being declared bankrupt.

The Organisation for Economic Cooperation and Development (OECD) has defined financial education as, “the process by which financial consumers/investors improve their understanding of financial products and concepts and risks, and through information, instruction and/or objective advice, develop the skills and confidence to become 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 and protection.”

Financial literacy has assumed a significant role in the present era due to factors including development of new financial products, complexity of financial markets, information asymmetry, and the changes in other economic factors.

It results in the intersection of financial inclusion, financial development, and financial stability.

Financial inclusion

The Indian government has tried to provide financial products and services to all sections of society concentrating particularly on the weaker sections and the low-income groups to enable their inclusion in the market. People are getting literate enough to understand the banking and financial concepts and terminology. Reserve Bank of India (RBI) has aggressively looked into it by joining hands with non-governmental organisations (NGOs), self-help groups (SHGs) and commercial banks.

Financial literacy and credit counselling centres have inculcated saving habits among people, to make them aware of the financial products and the credit schemes, and to counsel them to prevent unmanageable debt levels. Increased financial literacy supports social inclusion and enhances the wellbeing of the community.

The Securities and Exchange Board of India (SEBI) has undertaken measures through stock exchanges, depositories, mutual funds association, associations of merchant bankers, etc. by organising seminars wherein study material is disseminated to educate investors. Other material related to financial education is available on the official website of SEBI.

Furthermore, the advancements in information and communications technology (ICT) sector, advent of mobile phones, internet, and ATMs have also changed the way financial business is conducted.

Financial development

Financial illiteracy has been a barrier as per as delivering services is concerned. If individuals are not familiar or comfortable with products, they will not go for it. In recent years, the knowledge about interest rates, exchange rates, etc. have been influencing decision-making of individuals and they face financial risks despite informed decisions. It leads them to devise risk management strategies. Businesses sometimes try to control financial risks with private insurance coverage and sometimes through various financial products.

Financial literacy programmes have played an important role in reducing economic inequalities as well as empowering citizens and decreasing information asymmetries between financial intermediaries and their customers.

Innovations such as electronic payments are helping those who have been excluded from the system. Financial development is widely recognised as an important determinant of economic growth.

Financial stability

Financial stability is also an integral component of customer protection. Customers are often penalised for minor violations in repayments, although they have limited redressal mechanisms to rectify deficiencies in service by banks, rendering the banker-customer relationship one of unequal.

The literacy has empowered the common person and thus reduced the burden of protecting him/her from the elements of market failure from a regulatory perspective. They understand the details of the regulations and avoid any kind of mistake that can have adverse effects.

Financial literacy has improved the integrity and quality of markets. It has provided individuals with basic tools for budgeting and helped them to acquire the discipline to save. It has ensured that they can enjoy a dignified life after retirement. It relates to personal finance, which enables individuals to take effective action to improve overall well-being and avoid distress in financial matters.

Hence increased financial knowledge has enabled people to participate in financial markets. Numerous households have improved money-related proficiency and individuals as well as households have been observed to be inclined to possess a retirement plan and savings.

Financial literacy plays a vital role in the efficient allocation of household savings and the ability of individuals to meet their financial goals. It has resulted in stability in the market and individuals’ financial conditions have improved.

Conclusion

Knowledge is crucial for financial decision-making. This conclusion may be drawn on the basis that a strong co-relation exists between the extent of an individual’s education and that individual’s investment acumen, propensity to save, and management of personal credit.

A positive correlation between greater education and increased investment in higher-yielding assets and higher investment-related income and a lower incidence of personal credit mismanagement like bankruptcies, can be achieved.

RBI and SEBI’s initiatives are strides taken in the right direction for achieving its objectives of financial inclusion and financial literacy. Various NGOs and SHGs are also contributing towards improving the financial education of the people.

ALSO READ

Is the lockdown a perfect opportunity to talk about family finances?

However, more capital infusion towards financial literacy workshops, seminars at schools, colleges, workplaces, and residential areas is required so as to boost its effectiveness and spread. Early financial education and increased financial literacy are imperative, and should be a first order concern for public policy and educators alike.