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Access is Not Enough

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).  
% of correct responses
Sample Size
Addition  (81+24)
Subtraction (20-13)
Multiplication (5*12)
How much is Rs.100 worth after 1 year with 10% simple interest calculated annually?
How much is Rs.100 worth after 5 years with 10% simple interest calculated annually?
How much is Rs.100 worth after 1 year with 10% compound interest calculated annually?
How much is Rs.100 worth after 5 years with 10% compound interest calculated annually?
                                                                   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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