Financial illiteracy in India and how to tackle it?


Financial illiteracy in India and how to tackle it?


Illiteracy in India is a well-known trouble, and no doubt financial literacy is also dependent on the overall literacy of the citizens. There are numerous surveys conducted to evaluate the literacy rate in India. Recently, a survey conducted by Standard & Poor determined that 76% of the Indian adult population lacks knowledge about basic finance. This survey was carried out in over 140 countries and it tested the people’s knowledge on four basic topics like – compound interest, risk, numeracy and inflation. The most important finding from this survey was that only 14% of Indians save in a formal financial institution, which indicates that the foundation for financial literacy in India, is weak.


Recently, a survey conducted by Standard & Poor determined that 76% of the Indian adult population lacks knowledge about basic finance.


So what are the reasons for such low financial literacy in India?

One of the basic reason is general illiteracy itself. As per census in 2011, the literacy rate of India was about 74% while the world average was 84%. When people do not have the resources to get basic reading and writing education, then how will they know about the world of finance? Such people find themselves totally cut off from the world. It basically stems from the fact that in poor households, children are sent to work from a very early age, so as to earn bread for the house. In the process, they miss out on education and are poorly-skilled, hence rendering them incapable to face the fierce competition of the world.

Secondly, lack of financial inclusion is another factor responsible for low financial literacy. Many people in the rural areas do not even know about the basic instruments of finance such as savings account and recurring deposit account. They prefer to keep their money at home and generally have low trust on the financial institutions. However sometimes, the reason they do not make use of bank services is that most of the bank procedures are too tedious and complicated. They prefer informal money lenders and also borrowing money from friends or relatives over formal loans provided by banks.

Another reason for low financial inclusion is that there is not much incentive for people to store their money in the bank. There is no ongoing provision or services provided by the Government in which their wages can get directly transferred to a bank account. Also there are fewer ATMs in those areas so getting money out (cash withdrawal) is also a problem. Government of India is trying to solve this problem by working on financial inclusion and coming up with concept of payment banks.

Income gap is also a plausible cause of financial illiteracy as it is well known that in a society like ours, the rich gets richer and the poor gets poorer. This is evident from the survey in which the poor adults were 21% less likely to answer the questions on basic finance correctly.

An interesting fact revealed by the S&P survey was the gender divide in financial literacy. According to the survey, 73% of Indian men are financially illiterate whereas the same statistics for Indian women was 80%. This is due to the orthodox belief system that – women are seen to be housekeepers and all the finance related matters of the household are addressed by men – this belief is still prevalent in Indian societies and in quite a few places even now, women are denied access to education, let alone financial education.

We all know the importance of financial literacy in the development of an individual and also in the development of an economy as a whole. Hence, this problem of illiteracy must be dealt on a war-footing.


Some of the ways in which it can be tackled are:

Mass financial literacy drives must be conducted by the government. These drives must be particularly aimed at the poor and disadvantaged households and awareness must be raised regarding the savings instruments. The government already has plans for greater financial inclusion and it has already set up many microfinance institutions for the same. The Reserve Bank of India (RBI) has also granted licenses for setting up payments banks. All these efforts will collectively lead to a stronger trust on the financial institutions and greater willingness to accept their services.


Also, topics on basic finance terms and concepts must be included in the course curriculum of primary education. It is very important to build a strong foundation right from the school-days. There are four stages in an individual’s life when financial literacy comes into picture.


The first is the school age – this is the first time when a child will learn about the value of saving money. Next comes teenage and early working period – this is when the individual starts earning his salary and needs the assistance of a financial institution to store it and invest it. Then we have the family age when the individual has his whole family dependent on him. This is a crucial stage as savings investments and plans made in this stage will decide the future that he will reap. If the individual is still financially illiterate at this stage, chances are that he will have financial problems sooner or later in his life. Finally, we have the retirement age – the person no longer earns salary but may require the help of financial institutions for the funds he receives from government welfare schemes and also for his savings.


So, we see that the basics start right from the school age and if the person is soundly educated in this respect, then he will not face such problems like loan repayment burden and vulnerability of being cheated on borrowing from informal moneylenders. Such an individual will have a sound knowledge about the market or at least a rough picture of how the fund transfer system functions and he can very well save himself from fraudulent practices.


Financial literacy helps the people also in knowing the demands of the world – they can be at a better stand if they know what skills they need to have in order to compete in the world. We need more of innovators rather than blind followers. Knowledge opens the doors of opportunities and it drives away blind following. What’s more, at the lowest level, a financially literate labourer can protect himself from getting oppressed by his employer. However, this is not only the Government’s responsibility. If the people embrace change themselves and are proactive about it, only then will change come. Also that section of the society on the greener side of the grass, must take up this as their own goal and help the not-so-fortunate people in getting financially literate. Webinars can be screened by gram panchayats for the villagers on financial literacy. Also, there are a number of free financial websites that one can follow and remain up to date with financial education. Hence, at every level of hierarchy this mission must be implemented only then will India progress towards a brighter future for all.


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