Fin Literacy Pays. Consumers Need Protection, Redressal To
Financial decision-making is getting increasingly complex for most Indians. Despite the fact that we make decisions about money every day, less than a tenth in India are equipped with financial knowledge.
Complexity of financial products, changing consumer habits and evolving behaviour is making it more difficult for Indians to manage their finances, and plan for the long term.
Retiral benefits and pension are becoming ‘fluid’, equally complicated, accompanied by an increasing shift of responsibility from employers to employees. There are several products to select from: one more sophisticated, more complicated than the other. Fixed deposits and their interest rates, bonds, and yields, etc. are dynamic and difficult to understand. Similarly, ‘insuring’ life, vehicle or home is highly intricate. Most go blind. One needs to be a genius to understand mutual funds (MF).
*Financial literacy not a sideshow. Key to wealth, wellness & security
Most, including the educated fail to make judicious financial decisions. As a result, financial decision-making is getting more onerous. It’s anxiety-inducing, even stressful.
The lack of financial understanding may explain why many Indians struggle with saving and investing, and underscores why the more vulnerable are in a perpetual debt trap.
A Crux study across 22,000 participants highlights ubiquitous financial ‘illiteracy’. The study measured the awareness and knowledge of different financial instruments, and the features. Only a tenth managed to score a ‘pass’; some demographic groups (women, less educated), score even lower. Only a miniscule percentage understand and possess the ability to develop a long-term financial plan. There is widespread financial illiteracy even in more well-to-do neighborhoods, clearly dispelling the belief that education is corelated to financial knowledge.
The financialisation of the economy is accelerating. The regulatory framework hasn’t kept pace and is weak. About 100 million own Demat accounts. There are about 75 million credit cards in circulation, with an average spend of Rs15,000 per user. As many as 20 million have accessed home loans. Another 460 million have active personal loans. Over half a million ATM withdrawals, and nearly 120 million point-of sale transactions are made every month. India’s household debt accounted for a seventh of the nominal GDP.
The stock markets are volatile, and increasingly linked to global events. Currency and commodities impact domestic prices, and the indices. Only a fraction has the ability to evaluate the associated ‘risks and returns’ of the equity markets. As many as 2,500 mutual fund (MF) schemes are on offer!
The vulnerable seeking the proverbial ‘multi-bagger’ rely on ‘stray’ advisors’ (operators) ‘preying’ on telegram and YouTube’. Some bet their homes, many others lose their retirement savings. Many mistake cryptos for assets and currency. It has ended badly.
*Pull is alluring, push is equally persuading
The Consumer Act is ineffective, the administration lacks capacity and intent, and as a result, the number of families susceptible to mis-selling is growing. ‘Buy now pay later’ is enticing. Online shopping, and other financial institutions both overwhelm and ‘overload and induce’ the consumers. Lack of financial education compounds the problem and shows up ‘expensive’ and irreversible blunders. Even devastating, for many.
India needs to democratise financial education with a goal to make people understand the economic world around them. The focus must be to modify behaviour.
Financial literacy initiatives need to be large, scalable, and consistent. The programme managers must present influencers who people connect with, through channels they relate to, and a language they understand. Financial education should be a combination of information, skill, and ‘motivation’ and go beyond ‘knowing’, with a focus on application and behaviour.
*Financial Literacy and Financial Advice are Complements. Not Substitutes
Those who regulate and supervise financial markets would do well to devote close attention to the financial ecosystem holistically. Financial education is only one part of the strategy and must serve to complement financial access, substantive protection, and robust redressal mechanisms. There is a pressing need to ‘simplify’ financial products and ease and speed up redressal. Similarly, there is a need to regulate organisations and institutions to eliminate mis-selling and punish habitual offenders. Corporates have a role to play.
While the modern economy requires consumers to make many complex choices, the marketers and the financiers are not helping. Respondents bemoan that financial ‘advisors’ often influence consumers and investors to ‘shift’ funds (even retiral) into high-risk investment vehicles, endangering their life saving, potentially impacting their life, hurting children’s education, and often depriving them of a dignified retired life.
Mis-selling is rampant and often encouraged, raising ethical issues. The playing field is far from level. It’s all the more imperative for the middle class to understand basic finances.
Men are better than women, and particularly in families where men are more likely to make financial decisions. However, men are more confident than they should be; and more likely to repeat mistakes. This is potentially dangerous and worrisome. The study suggests that women are more likely to embrace financial education, even adopt it.
The Crux study highlights that the financially literate are prudent and judicious. They are more likely to plan, save, invest, and accumulate more wealth. Most manage loans better, refinance their mortgages and never borrow against their retirement savings. They are less likely to have credit card debt. The cost of financial illiteracy is often compounded by arrogance of ‘little’ knowledge and show up as extortionate costs. It also translates into rancorous behaviour, driving away and discouraging high yielding initiatives. The consequences of poor decisions can spread to the rest of the economy.
*Democratise financial literacy. It pays off
It must concern the policymakers, and societies at large that the financial knowledge gap is not narrowing but widening in some societies. The Crux study estimates that a third of wealth inequality, particularly at the mid wealth pyramid could be accounted for
by poor financial decisions. Over half the respondents have indicated that they were willing to ‘invest’ in financial literacy as they do believe the investment will enhance their wellbeing and financial health. Over 80 per cent understand that making poor financial decisions, can get them into deep financial trouble, which can spill over to their families; and hurt opportunities.
Financial knowledge is an investment in human capital. The knowledgeable make better financial decisions, and have a material impact on individuals, families, and the economy.
