The Soldiers of Finance: Making India Financially Literate and Inclusive

In times when people have been saddled with big financial decisions, the lack of financial literacy in the country is critical and one that needs to be addressed by policy makers writes MOIN QAZI.

Financial services are analogous to safe water, basic healthcare, and primary education. They are essential to enable people to participate in the benefits of a modern, market-based economy. Ideal financial societies are those which provide safe and convenient ways that enable people to navigate their daily financial lives. The poor need to set aside money in times of plenty and draw it in lean times. In addition, they should be able to borrow,make and receive payments, and manage risk.

Without a safe place to save money, it's difficult to cope with the unexpected or to plan for the future. Without access to affordable credit, it is difficult to acquire an asset or set up a business. Without insurance, all your security can be wiped out by one misfortune.

But for people to be able to use financial services, they need to be literate enough to understand the basics of these monetary affairs.

Merely opening physical accounts as flag posts of financial identity won't help unless they are actively used by people for managing their money. To make this possible people must be given the ability to understand and execute matters of personal finance, including basic numeracy and literacy, budgeting, investing, and risk diversification. This skill is known as financial literacy.

Financial Literacy is a combination of financial awareness, knowledge, skills, attitude, and behaviours necessary to make sound financial decisions and ultimately achieve financial well-being.

In simple terms, financial literacy refers to a set of skills that allows people to manage their money wisely along with some understanding of essential financial concepts, not the least of which is an appreciation of the trade-off between risk and return. It is the single biggest skill that can ensure economic well-being and freedom.

A necessary bid for Financial Literacy: The case of Fin Lit Project

In the last few years, financial literacy has gained great momentum because it is seen as an assured path to universal financial inclusion. The financial inclusion ecosystem has become active as several socially-minded young entrepreneurs have come on board.
A promising young social entrepreneur to join this community is Neha Mishra whose Fin Lit Project has a singular aim- to spread financial literacy among young corporate employees initially and then to cover educational institutions too.

The Fin Lit Project is aiming to educate engineers about personal finances and make them understand how, with the right tools, they can become financially literate and independent.

In 2017, Neha's husband was diagnosed with a life-threatening disease and had to take a break from his career. That is when she realized the need for a proper balance between financial planning and financial management. She realized the importance of learning to manage personal finances on one's own so that one could make their own money grow and prepare for uncertainties.

The financial environment is now populated with a huge range of complex and nuanced products. In such a situation, literate and working populations tend to feel overwhelmed by the range of options and the arcane financial vocabulary in which these options are couched. To keep abreast, even those who are financially literate need to brush up on the latest developments.

''We need to develop a full suite of financial literacy interventions so that more youth and women develop the confidence and skills to manage their own finances. On account of financial illiteracy, they get saddled with risky levels of debt," avers Neha.

Neha is an alumnus of IIT Madras. She has worked for about a decade in software firms, in the learning and development departments. She was one of five people from across the world shortlisted and among the final two who got a chance to work with Eric Ries, author of 'The Lean Startup', who was setting up an ethical stock exchange in New York. Prior to that, she worked as an independent financial analyst and investor for two years and in 2019, she was a NISM-certified Currency Derivatives and Equity Trader.

Her experience of working with Long Term Stock Exchange [LTSE]  taught her so much about life at Wall Street, the internal functioning of stock exchanges, and gave her huge opportunities to be at NYSE, Nasdaq, Stern School of Business, and so on. Once back from New York, she decided to work on The Fin Lit Project.

The Fin Lit Project is preincubated at IIM Bangalore and has most recently won funding support and incubation from IIT Delhi.

Their flagship module is a Basic Financial Literacy Programme, a five-hour web session that covers stock market anatomy and products, stocks, bonds, mutual funds, and an introduction to derivatives. Sessions cover elementary yet critical concepts like time value of money, the power of compounding, basic numeracy, and risk diversification.

"Functional proficiency in core money skills and their subtle nuances are crucial if we are to successfully manage future money needs. Financial literacy is expected to impart the means to transform ordinary individuals into informed and questioning users of financial services," emphasizes Neha.

A unique feature of this initiative is that since she is from a technology background, she is keen to make techies financially savvy. Finance and technology make for a wonderful combination and are prime drivers of modern sophisticated banking which has made universal financial inclusion a reality.

With Financial technology [fintech] becoming the dominant tool in the new financial revolution, Neha's efforts are expected to spur greater involvement of tech graduates in finance. This can help in bolstering the fintech space which requires much needed infusion of talents. In turn, they can grow into innovative and committed champions of digital financial literacy. Thus, she is also improvising the fintech ecosphere.

Financial literacy imperative for financial inclusion

There is a gamut of financial concepts that Neha believes every college student must know in order to handle personal finances prudently. These include interest compounding; loan amortization; inflation and how it affects an individual's income, wealth, debt, and savings; mortgage borrowing and various mortgage terms, mortgage length, fixed vs. floating rate, and mortgage points; the trade-off between risk and returns, and risk diversification and its role in common financial situation.

She understands that financial inclusion and financial literacy are two sides of the equation. Financial inclusion works on the supply side by providing financial market/services what people demand, whereas financial literacy stimulates the demand side by making people aware of what they need. Therefore, financial inclusion and financial education must move in concert; each triggers a supportive reaction in the other.

Everybody is happy while getting a loan. The problem begins when you must repay the loan. Neha further goes on to stress that It should be dinned into borrowers' minds again and again that excessive borrowing (taking multiple loans) and sub-lending or ghost lending (allowing the use of your identity for a loan that someone else uses) can be extremely toxic for financial lives and for communities at all levels of income.

According to Neha, people with robust financial skills and a strong grasp of financial principles can better understand and negotiate the financial landscape and avoid possible traps. Conversely, people with a lower degree of financial literacy struggle to understand money matters and its potential impact on financial well-being.

Financial ignorance, she furthers, carries significant costs and results in people spending more on transaction fees, getting over extended with debts since they are ripe prospects for predatory practices. People usually fall prey to aggressive marketing and end up with troublesome financial products.

Financial literacy has now acquired nuance with the onset of digital financial services [DFS], considered the most powerful tool for financial inclusion. Offering basic financial services through mobile phones, point-of-sale devices, and networks of small-scale agents, DFSs have the potential to reach more people at a lower cost with greater convenience as compared to the traditional "brick and mortar" banking services.

However, millions of people cannot read, write, or understand the long number strings necessary to transact on mobile phones. We need to aggressively train the end-users on the nuances of digital finance that will empower them to adopt technology with ease. For instance, women are eager to learn how to use digital payments because it gives them greater privacy and financial control, something they value a great deal.

At a time when individuals are increasingly being called upon to make complex financial decisions, a large fraction of households only have a rudimentary understanding of basic concepts. Moreover, participation in financial markets is far from universal, and individuals with low levels of education and financial literacy are the least likely to participate in these markets. These correlations have motivated policymakers to devote substantial resources to financial literacy education.

If individuals wish to successfully manage their future money needs, functional proficiency in core money skills and its subtle nuances are crucial. The complex nature of our financial lives has given rise to a new concept called financial capability.

There is still a lot of illiteracy on issues relating to loan defaults and how they can be handled. A deferment of repayment of loan installment, which borrowers and their representatives usually clamour for in such events, doesn't give any real benefit to the borrower; it is not even a palliative.

A loan holiday or deferment is just a postponement of a liability on which the borrower will continue to incur costs by way of the accruing interest. Thus, increasing his own financial burden.

There is a strong need for collaboration and convergence between those working towards financial literacy. A major weakness is the absence of a strong conduit for transfer of knowledge and practice between institutions and geographies that have successful experiences. Such collaboration can lead to cross-learning and cross-pollination, sharing of best practices, unique experiences and breakthroughs, and both successes and failures

(Moin Qazi is a development professional. Views are personal.)