Here, I intend to write what comes to my mind about India. This could be about anything, politics, religion, movies or remote happenings. Feel free to check this blog for updates, who knows some could be of some interest to you.

Sunday, March 28, 2010

Financial Literacy

"Experience is the lesson that nature gives us when we are bald" - Chinese proverb

This perfectly fits when we think about the financial literacy of our countrymen. A traditionally conservative culture. The default wisdom passed on for generations is that education leads to stable job which demands hard work resulting in a decent salary that needs to be spent with great prudence and 'savings' is the mantra. Nothing more than this piece of mind is given to the thousands of fresh graduates who pass out of our colleges joining the lakhs of worker ants already in the field hard-wired in their brains with again nothing but, the same thought.

I discount for a moment the very few who graduate with a degree in subjects related to economics and a few who postpone plans to participate in the job race and take-up higher education on these streams.

Everyone saves money for future needs but the approach is to save surplus money without preparing household budgets, without prioritising personal financial goals, without properly allocating investments in different asset classes and without understanding the real rate of return,after adjusting for inflation. Well, how many who earn a salary really understand the term 'inflation'? India has one of the highest savings rate in the world - our gross household savings rate, which averaged 19% of gross domestic product (GDP) between 1996-97 and 1999-2000, increased to about 23% in 2003-04 and has been growing ever since. Unless the common person becomes a wiser investor and is protected from wrong doings, wealth creation for the investor and the economy will remain a distant dream. We need to convert a country of 'savers' into a nation of investors.

Thankfully, the landscape is changing, though very slowly starting from Urban India. At least 'savings' is no longer seen as the tool to financial growth. The younger generations are more savvy about the opportunities in the marker at least lured more by the ability of equity market to pay higher returns at a shorter term. Urban population is very comfortable with credit cards and gone are the days when you are looked down upon if you owe money to someone else. The social status now is gauged by how much one owes to others, in other words how many credit cards one flashes and the life style one could purchase from borrowed money. While these avenues are encouraged, along with it comes the know-hows of the right ways of using these. Not many who use credit cards understand how it works. Not many who purchase a car on credit understand how the system works. With many private players in the fray, aggressively marketing personal loans, credit cards and the growing demand for money has increased the importance of Financial literacy.

Indian Government, just like many other countries like UK,Malaysia or Singapore has come up with various methods to improve the financial literacy of its citizens. One such effort is credit-counselling. Many banks have dedicated centers focusing only on educating people. Reserve Bank of India (RBI) is stepping up efforts to provide enough information to investors not just about the benefits but also about the risks and costs involved in every medium of investment. One of my favorites used to be RBI's initiative to explain things in very simple terms http://www.rbi.org.in/FinancialEducation/

Financial literacy is the ability to know, monitor, and effectively use financial resources to enhance the well-being and economic security of oneself, one's family, and one's business.

Financial literacy can make a difference not only in the quality of life that individuals can afford, but also the integrity and quality of markets, product offerings by financial institutions. I even foresee that it will go to the extent of regularizing things like our most corrupt real-estate market by demanding greater transparency so that mortgage backed securities (MBS) could be packaged as retail investment products. Knowledge is power, it will help consumers demand better quality products that will benefit them and also help them make informed decisions and not get carried away by sugar coated pills, ending up in something like the recent notorious mortgage crisis of US, the consequences of which rocked the entire world.

In my opinion, the final 2 years of all streams of under-graduate studies MUST have one subject on financial literacy. A medical practitioner has no need to know the internals of a microprocessor so does a civil engineer does not need to know the chemical composition of the liquid fuels used in a ballistic missile, but all of them being active participants of the economy MUST be equipped with the knowledge of economics.