There has been a lot in the news lately about financial inclusion and extending banking services to the poor. With the expansion of the Aadhaar registration and new initiatives like the Financial Access at Birth (FAB), it seems that a lot more people will be brought under the umbrella of formal banking in the near future. The RBI governor, Raghuram Rajan has included it as part of his agenda in his inaugural speech as well. This is great news. However, what is conspicuous by its absence in this discussion is talk of financial literacy.
Taking the example of the ongoing study in Maharashtra on pensions, our sample of around 3000
respondents all have access to formal banking. They are all either current or
recent account holders of some sort of financial product (short-term savings,
recurring deposits or loans). While the level of ability in elementary math is fairly
good, the level of financial ability is not. Respondents were asked to answer
questions on simple addition, subtraction and multiplication as well as
questions regarding simple and compound interest. The understanding of how
simple interest is calculated is clear among half of the sample but only 4% of
the sample was able to correctly answer compound interest questions (See table
below).
Question
|
% of
correct responses
|
Sample
Size
|
Addition (81+24)
|
79%
|
3059
|
Subtraction
(20-13)
|
91%
|
3059
|
Multiplication
(5*12)
|
85%
|
3059
|
How much
is Rs.100 worth after 1 year with 10% simple interest calculated annually?
|
58%
|
3059
|
How much
is Rs.100 worth after 5 years with 10% simple interest calculated annually?
|
48%
|
3059
|
How much
is Rs.100 worth after 1 year with 10% compound interest calculated annually?
|
4%
|
3059
|
How much
is Rs.100 worth after 5 years with 10% compound interest calculated annually?
|
4%
|
3059
|
Table 1. Financial Ability Results
In a scenario where financial operations are
becoming easier and more accessible, it is all the more important that
customers are able to comprehend them and use them to their advantage. A pension
product is not very complex but it is definitely more sophisticated than
savings accounts. With asset values linked to the market and varied risk
compositions, customers need to be pretty savvy to know when to withdraw their
savings or when to invest more. The adult literacy initiatives (conducted by
local banks and societies) seem to be limited to preaching that “savings is
good while borrowing is bad”. With a wider range of products on offer, we need
to broaden the scope and reach of financial education lest all the inclusion be
in vain.
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