Dear All,

Please find below a very good article by Mr. Narendra Kondajji for your reading:

http://procyonfp.com/blog/financial-literacy-a-revolution-waiting-to-happen/

FINANCIAL LITERACY – A REVOLUTION WAITING TO HAPPEN

Author’s Note:  This article was originally published in the Special Annual Edition of “FP Pulse” Ezine for Council of Financial Planners, Bengaluru, launched in their Annual Convention 2014, on 05/04/2014.  This article is mainly focussed to professionals and other people involved in financial services industry.

Introduction

The regulator of Capital Markets in India, Securities and Exchange Board ofIndia (SEBI), in its 2011 “Concept Paper On Regulation Of Investment Advisors” made a grave assertion that:

“(…) in a country like India where levels of literacy are low and financial literacy even lower, disclosures have a limited effect”.

India is traditionally a country of enthusiastic savers.  Report published by the Reserve Bank of India (RBI)[i] indicates that household average savings (per cent of GDP at current market prices) has steadily increased over time.  It was 11.8% in 1970s and 23.5% in 2005-11 period. RBI’s projections show an increasing trend in the savings rate, from 23.2% in 2011-12 to 25.2% in 2016-17[ii], giving an average of 24.4% during the Twelfth Plan.

According to the India Census 2001 data[iii], as many as 560 million people in the country are literate. While the overall literacy rate works out to be 64.8%, the male literacy rate is 75.3% and that for women is 53.7%.

What is literacy ?

United Nations Educational, Scientific and Cultural Organization (UNESCO) defines literacy as under:

“Literacy is the ability to identify, understand, interpret, create, communicate and compute, using printed and written materials associated with varying contexts. Literacy involves a continuum of learning in enabling individuals to achieve their goals, to develop their knowledge and potential, and to participate fully in their community and wider society.”[iv]

India’s The National Literacy Mission defines literacy as

“acquiring the skills of reading, writing and arithmetic and the ability to apply them to one’s day-to-day life.”[v]

There are good reasons for the market regulator SEBI to worry about lack of financial literacy in spite of high household savings rate and increasing levels of literacy. Hindustan Times reported[vi] that:

“India is at the bottom among 16 countries in the Asia-pacific region with 59 index points, according to the annual MasterCard’s index for financial literacy”.

People may recite Shakespeare’s Sonnet 116 exact, yet not know how money and the financial world function.

Regulatory approach to financial literacy

To tackle the larger issue of financial inclusion, literacy itself has to be defined in many ways, financial literacy being one. A real concern to the regulators is the fact that disclaimers and disclosures are not very effective in the absence of financial literacy.  Let us see world over how the regulators are directing their efforts to tackle the issue of lack of financial literacy.

National Strategy for Financial Education

The Organisation for Economic Co-operation and Development (OECD) is directing the efforts to carry out a national strategy to increase the levels of financial literacy. OECD defines financial literacy as

“a combination of financial awareness, knowledge, skills, attitude and behaviours necessary to make sound financial decisions and ultimately achieve financial well-being [vii]”.

OECD recommends the following high-level principles on National Strategies for Financial Education (NSFE)[viii]:

• Recognise the importance of financial education – including possibly through legislation – and define its meaning and scope at the national level in relation to identified national needs and gaps;
• Involve the co-operation of different stakeholders as well as the identification of a national leader or co-ordinating body/council;
• Establish a roadmap to achieve specific and predetermined objectives within a set period of time; and
• Provide guidance to be applied by individual programmes in order to efficiently and appropriately contribute to the National strategy.

In line with OECD’s recommendations, India created a top-level institutional structure in 2011 under the aegis of the Financial Stability and Development Council (FSDC). The FSDC is chaired by the Finance Minister, with heads of all financial sector regulators as members. The Technical Group on Financial Inclusion and Financial Literacy (TGFIFL) is headed by the Deputy Governor of the Reserve Bank of India (RBI) and includes representatives from all financial sector regulatory authorities. FSDC also established a national-level specialised institute named The National Centre for Financial Education (NCFE) to carry out the national strategy.  One of the important goals of the national strategy is to set up first contact with 500 million adults and educate them on key savings, protection and investment-related products.  The timeframe envisaged by RBI[ix] to meet this task is five years, a daunting one by any reckoning.

Financial literacy and women

If you educate a man you educate an individual, but if you educate a woman you educate a family.

- The old African proverb

Visa’s International Barometer of Women’s Financial Literacy ranked India 19th (of 27) with a score of 36.8 on a 0-100 index, with Saudi Arabia in our front and Serbia right behind us[x]. Lack of financial literacy among women is mainly because of lack of acquaintance. Women play a passive role in the financial affairs in a male dominated family and have limited or no opportunity to learn about money and finance.  The process of urbanisation and increasing employment opportunities are slowly bridging the gap but yet more needs to be achieved in this area.  Financial illiteracy in women can create many problems in the long run because,

(a)    Women live longer than men and they have to fend for themselves at the end of their life when learning is not an option.

(b)   When a large sum is received because of unfortunate event of disability or death of male bread-winner, female spouse finds herself helpless to handle money matters.

(c)    Young women who otherwise are independent, may have to depend on others to do even simple tasks such as understanding a statement of account or being ‘Know Your Client’ compliant.  Such basic skills, if left unlearned, lead to financial exclusion.

Women are generally more risk averse[xi] and prefer stable and steady returns in comparison to more adventurous and risk seeking men.  This maladjustment is a cause of friction when male spouse decides the investment options for both.  Financial literacy can help in removing such frictions.

Control over money and social status go together.  A financially literate woman who has control over her money can also decide her and her children’s future better.

Financial literacy and consumer protection

While financial literacy is an enabling and empowering model, lack of it has serious consequences on people’s financial well-being.  Inability to align risk tolerance and financial products, becoming victim of mis-selling, contracting unsuitable financial products, and falling victim to the machinations of fly-by-night or Ponzi scheme operators are some of the avoidable yet persisting maladies of lack of financial literacy which may also lead to exploitation and indebtedness.

Financial illiteracy impedes communication between the planner and the investor.  Most of the regulations insist that an advisor should give advices in writing.  In the absence of financial literacy, investors may have trouble in understanding or correctly interpreting the advices they receive.  They may also start distrusting their advisor assuming that the process is made unnecessarily complex because the planner might be just meeting the regulatory requirements. Financial illiteracy may hinder future-oriented thinking which in turn may lead to under-funding of retirement income.

What can a financial planner do to change the situation?

There is an overloaded information today and the investor has no alternative but to be financially literate. A financially literate client is an ideal client by any measure.  However, such a client is not born but made.  Financial planners can play a major role in the making of such clients.   Planners regularly conduct seminars, workshops and write articles and blogs.  In addition, few other suggested actions are:

1. Financial coaching – even before a financial plan is created, the planner should don the role of a financial coach and impart the desired financial education to the client, taking care to involve both the life partners in the process.
2. Remembering the fundamentals of personal finance – planners are many a times accused, rightly or wrongly, of making things more complicated than necessary.  To the uninitiated clients, who would have thought of an easily workable solution from a planner, it may be difficult to get suddenly exposed to many high-level financial planning concepts.  Initial year of clients’ engagement could be the ideal period to educate them about the myriad aspects of personal finance in a simple and easily digestible way.
3. Putting language skills to good use – Women are more comfortable in asking questions in their native tongue.  A planner can communicate more successfully if she is conversant similarly.
4. Serving all – Planners are also accused of serving the élite and the rich.  It is often the excluded people who need a professional opinion to make things happen with their limited resources.  Planners may have a pro-bono or social responsibility programme to reach-out to less literate.
5. Catching them young – It is fine to conduct seminars to the white collared eager audience.  What about catching them young when their minds are most impressionable?  Planners can develop and execute financial literacy programmes to client’s children and sow the early seeds of good financial behaviour.
6. Identifying the behavioural anomalies –Planners are increasingly adopting the principles of behavioural finance and economics.  Explaining hyperbolic discounting may be more useful and fruitful even before they explain the power of compounding.
7. Connecting to the network – Today’s net savvy people use social media tools such as Facebook and Twitter to interact and socialize with people in their network.  People are possibly spending more time in the social network than meeting up in person.  Planners are well advised to have a scientific and sustainable strategy to use social media tools to spread financial literacy.
8. Approaching retirement plan differently – Lack of financial literacy is one of the reasons why people are always under-prepared to face their retirement.  With the removal of defined benefit retirement schemes, it becomes imperative that planners have to make concerted efforts to create awareness among their clients about the importance of planning for retirement.
9. Protecting the client – Consumer protection and financial literacy are inalienable.  Planners can put in place a robust customer grievance redressal mechanism and make financial literacy the core of it.  It is a protection to the planner against probable mis-selling allegations as well.

Conclusion

There is a need and opportunity for the members of Council of Financial Planners (COFP) or for that matter any financial planner to be actively involved in spreading financial literacy and thus help the stakeholders to meet the goals of national strategy. This is a good business strategy as well. National strategy provides specific guidelines to industry associations and commercial financial institutions for channeling their efforts.  Increasing the levels of financial literacy, similar to that of literacy itself, is a challenging and time taking task.  It requires persistent and prolonged efforts by all the stakeholders to yield perceptible results.  It is hoped that in the coming days COFP and its members would play a stellar role to make the national strategy a success.  An educated and financially literate client is the one to aspire for.  It could be the financial revolution that is waiting to happen.