Financial Literacy in India
The author is member of the Institute. He can be reached at eboard@icai.in.
1. Introduction: Generational Preference for Physical Assets & Literacy Gaps
The most preferred investment avenues for the people of our country from generations are in gold and real estate. Gold is one of the most conventional investments in India and is often considered as an alternative to fiat money, and well accepted as a medium of exchange. India is the second highest consumer of gold, as the yellow metal is considered auspicious and has high emotional value. One of the reasons for the investment in gold and real estate compared to other financial products could be financial exclusion and lack of financial literacy regarding different financial products.
Governments since independence have made conscious efforts to promote financial literacy as its directly related to financial inclusion, which in turn, plays major role in fostering economic growth of the country. The regulatory bodies RBI, SEBI, IRDA and PFRDA are working together for the improvement of financial literacy and inclusion in the country.
The Literacy Deficit: It is alarming to note that financial literacy in India lags behind that of many countries. According to a survey about 27% of Indian adults are financially literate and understand key financial concepts, including risk diversification, inflation, and compound interest. Financial literacy in India though lower than global average, but is in line with other BRICS and South Asian nations.
2. Consequences of Low Levels of Financial Literacy
In the recent times, the issue of financial literacy has acquired great significance globally, not limited to developing countries with otherwise low literacy rates. The negative effects of inadequate financial planning spread beyond economic well-being and hinder a decent quality of life. The consequences of poor financial decision-making at an individual level are not just confined to an individual but the outcomes are borne by the future generations. The mishandling of financial resources can pull an individual into spiralling debts, which at times may lead to bankruptcies.
Financial illiteracy results in inaccurate and inefficient decisions. Limited knowledge and inability to plan for future, lead to insufficient savings and unplanned retirement that in turn lead to financial difficulties in later stage of life.
Another implication of limited financial literacy is limited financial market participation as most of the individuals are not aware about various financial products. However financial literacy is important not only for financial markets but also for banking and various financial products, as a wrong decision in choosing insurance product or taking loan could cost one dearly. Similarly, there are various rules and conditions of various products and not adhering to same may attract penalty. Therefore, financial illiteracy exposes an individual to perils and risk associated with various financial products. Financially illiterate individuals are usually targeted by Ponzi-finance scheme operators where gullible investors have lost lakhs and crores in the lure of high returns.
Macroeconomic Liability on the Nation:
At a country level, financial illiteracy puts a huge liability on a nation in the form of higher cost of financial security and lesser prosperity. An illustration to this is the fact that most people choose to invest more in physical assets and short-term instruments, which conflicts with the greater need for long-term investments, both for individuals to meet their life stage goals and for the country to meet its long-term capital requirements for its welfare and prosperity.
3. Why is Financial Literacy Important?
Financial markets have evolved becoming more complex and complicated. With emergence of new products and financial innovations, information gap between markets and the traditional investor has increased, leading to problems in making correct financial decisions. Indian financial markets are recognized amongst the most effectively regulated financial markets globally. India as a country has one of the highest savings rates in the world. Indians prefer to save, but the savings are not invested in an efficient manner to earn higher return. A majority of the Indian population do not have access to all financial products and most of them do not use modern financial products. Making an individual informed and literate about the changes in the financial markets and products could help one to protect himself from financial distress, and lead to wealth creation for the common man and the economy.
Financial literacy will equip an individual with the knowledge about personal management of finances and strategies that are crucial for financial growth and success. It gives the individual the two-fold benefit of planning a financially secured future as well as protection from various prevalent financial frauds. It equips consumers with the requisite knowledge and skill required to comprehend the suitability of various financial products and investments available in the financial market. A financially evolved consumer takes prudent financial decisions which not only helps him but also the economy as a whole.
4. Financial Literacy Education Initiatives
In India, Financial Literacy is crucial to improve financial inclusion and a cohesive strategy is being developed wherein various stakeholders like financial regulators, financial institutions, educationists and other agencies are working in tandem to promote financial literacy. Continuous efforts are made to improve the level of financial literacy across the country especially at the grassroot level. Increasing financial literacy is a long-term project, the efforts made in this direction are already yielding dividends. Some of the initiatives undertaken are discussed below: -
Securities Exchange Board of India (SEBI)
The Securities Exchange Board of India (SEBI) has addressed the issue of financial literacy for investors and acted by mandating that all mutual fund companies set aside 2 bps of their asset under management (AUM) for investor education and awareness initiatives. At the current level of AUM, it translates into an annual budget of around Rs. 750 Cr. Also, there are multiple workshops organised by SEBI Certified professionals on different investment topics like financial planning, retirement planning, wealth management and insurance investments etc. to educate investors and the general public across the country.
Reserve Bank of India (RBI)
The Reserve Bank of India (RBI) has initiated “Project Financial Literacy”, with an objective to disseminate information on the subject of basic banking concepts to various target groups, including school and college students, women, rural and urban poor and senior citizens. The project is carried out with the help of banks, self-help groups, local government agencies, schools and colleges and knowledge is disseminated by material provided by RBI.
Insurance Regulatory and Development Authority (IRDA)
The Insurance Regulatory and Development Authority have also taken numerous steps in the field of financial literacy. IRDA conducts awareness programmes regularly to teach about the rights and duties of policyholders, mechanism available for dispute and grievance redressal etc. through National Strategy for Financial Education (NSFE).
5. Status of Financial Literacy in the Country (NSFE 2020-2025)
India is demographically a young nation and to take advantage of be amongst the fastest growing economies, financial literacy and education has a huge role to play. As part of efforts or inclusive growth, India launched National Strategy for Financial education in 2013. Since then the financial literacy in the country has increased to 27.18% in 2019 from 20% in 2013 as per NSFE 2020-2025. Financial literacy is on the rise with increasing participation of retail investors across the asset class like Stocks mutual funds, insurance products etc.
Today the youth is taking interest in financial literacy and with easy availability of information through internet and mobile the trend will increase. We need to understand that financial literacy needs are universal and the phenomenon observed is concentrated to urban areas, and lot of work is needed to build the financial literacy in rural areas. The various initiatives like UPI, Aadhar based banking is improving the financial inclusion and education across the country. Steps are being taken to build financial literacy as part of curriculum to inculcate these habits amongst the children and youth.
NSFE 2020-2025 Survey Data: Demographic & Occupational Literacy Trends
| Occupational Category | 2013 Literacy Rate | 2019 Literacy Rate | Growth Trend |
|---|---|---|---|
| Self Employed (Agriculture) | 14% | 31% | +17% |
| Agricultural Labourer | 10% | 11% | +1% |
| Self-Employed (Non-agricultural) | 28% | 31% | +3% |
| Student | 17% | 26% | +9% |
| Salaried (Private) | 29% | 37% | +8% |
| Salaried (Govt) | 39% | 45% | +6% |
| Homemaker | 13% | 16% | +3% |
| Retired | 25% | 38% | +13% |
| Others | 14% | 17% | +3% |
Source: NSFE-2020-25 Report
Another important aspect is proper financial planning for which financial literacy is the basic requirement. In this uncertain economic environment, where interest rates are dwindling, building wealth for a secure future needs financial skills and knowledge for participation in the financial markets.
Overall, financial literacy is poised to grow in the country and as proposed in NSFE all stakeholders like regulators, institutions, financial service organizations, fintech companies must work together to propagate Financial literacy for building a financially inclusive society.
Structural Shift: Physical Assets vs. Financial Assets (2013 vs 2019-2020)
Others precious metals & gems account a share of 30% in 2013 and out of the 54% invested in financial, equity as an asset class constituted a share of 13% in 2013. A burgeoning middle-class, along with structural reforms in the financial, infrastructure sectors and increasing awareness about financial markets by financial regulators, the individual wealth across different asset classes has witnessed a significant change in 2019-2020 compared to asset-wise break-up in 2013.
At the end of FY-19, individual wealth invested in physical assets stood at 40% whereas wealth in financial assets stood at 60%. Out of the total individual wealth across all assets, the share of gold and others precious metals & gems had reduced to 22% compared to equity which has increased from 13% in 2013 to 19% in 2019. The share of equity in FY20 is lower compared to FY19, as markets had witnessed a drawdown on 23rd March 2020, at the start of pandemic in 2020.
6. Increase of Retail Participation in Capital Markets and Mutual Funds
With increased awareness about financial products in the past decade, Indian markets have witnessed a rise of retail investors flocking to the stock markets. India’s stock markets have evolved with increase participation by retail investors, who now contribute 45% of trading turnover on the stock exchange. As per data released by NSE, the retail investors market share has slowly moved up from 33% since 2016, to 45% in 2021.
Category-Wise Participation in Capital Markets (FY-16 to FY-21) [Source: NSE]
| Category | FY-16 | FY-17 | FY-18 | FY-19 | FY-20 | FY-21 |
|---|---|---|---|---|---|---|
| Retail Investors | 33% | 35.9% | 38.6% | 39% | 39% | 45% |
| Proprietary (PROP) | 21% | 16.9% | 18.1% | 21.5% | 23% | 25% |
| Foreign Institutional Investors (FII) | 23% | 20.6% | 16.2% | 15.4% | 15% | 11% |
| Domestic Institutional Investors (DII) | 9% | 9.9% | 10.2% | 10.3% | 10% | 7% |
| Corporates | 10% | 11.8% | 10.7% | 6.4% | 5% | 5% |
| Others | 4% | 4.8% | 6.2% | 7.3% | 8% | 7% |
In addition to capital markets, equity mutual funds in India have also seen a steep rise in number of retail folios and assets under management in the past decade. The number of retail folios investing in equity schemes have increased 85% from 3.81 crore folios in Sep 2011 to 7.05 crore folios in Sep 2021. The assets under management have grown at a CAGR rate of 19.4% from Rs. 1,19,448 Cr in Sep 2011 to Rs. 7,02,595 Cr at the end of Sep 2021.
Retail Mutual Fund Growth: Folios & AUM (Equity Schemes) [Source: AMFI]
| Year (September) | 2011 | 2013 | 2015 | 2017 | 2019 | 2021 |
|---|---|---|---|---|---|---|
| Number of Retail Folios (in Crores) | 3.81 | 3.06 | 3.28 | 4.41 | 5.77 | 7.05 |
| Retail AUM in Equity Schemes (Rs. Crores) | 1,19,448 | 1,08,793 | 1,98,774 | 3,32,319 | 3,98,608 | 7,02,595 |
Source: AMFI; Data as of Sep 30, 2021; Data mentioned is only pertaining to equity schemes.
7. Drivers of the Rise of Retail Investment in Capital Markets & Mutual Funds
Firstly, the reach of Internet to the remotest corners of the nation opened a whole new world of online opportunities for Indians. The Internet led to improved accessibility to market news, various investing instruments leading to enhanced learning about investment and financial products. Additionally, with internet’s penetration to tier-2 and tier-3 cities a significant percentage of investors emerged with access to newer asset classes, investment channels and options to diversity portfolio for optimal returns. The emergence of investors from these towns is playing a pivotal role in expansion of financial products markets as well as retail participation in the capital market.
Also, with diminishing returns on traditional investment instruments, such as fixed deposits and debt instruments are becoming unattractive. Investors with new knowledge and access to various investment products are looking at new investment avenues to earn higher returns.
8. Increased Use of Banking Products in India
With increase in working population, growing disposable income and increased awareness about banking products, the demand for banking and related services is on a rise. As per the latest available World Bank’s Findex 2017 Report, the 80% adults are covered under formal banking system increased from 53% in 2014 and from 35% in 2011.
India has also made exemplary improvement in lowering the country’s gender gap in account ownership, falling from nearly 20% in 2014 to 6% in 2017. These improvements can be accredited to the flagship initiative of the Government of India towards financial inclusion, namely the Pradhan Mantri Jan Dhan Yojna (PMJDY), supported by the conducive ecosystem created by the financial sector regulators.
Source: World Bank Findex Report, 2017
9. Increased Digital Financial Literacy Among Masses & UPI Revolution
Over the past decade or so, three major trends have contributed to the creation of a robust foundation for digital financial inclusion in India. Two of these major initiatives were directly driven by the central government. The first was the introduction and rapid development of the Aadhar card and its use as a validation tool. The second was the mandate to open basic bank accounts to support Direct Benefit Transfer of cash under various government schemes. This has resulted in millions more citizens becoming a part of India’s formal banking system.
The third major tilt was the revolutionary evolution of Unified Payments Interface (UPI) infrastructure by the National Payments Corporation of India (NPCI) to enable inter-bank peer-to-peer (P2P) and person-to-merchant (P2M) payment transactions. The volume of transactions has increased at CAGR of 309% from 10 Million transactions in June-17 to 2,807 million transactions recorded at the end of June-21.
UPI Transactions Volume Growth (in Millions) [Source: UPI Statistics, NPCI]
| Period | Jun-17 | Dec-17 | Jun-18 | Dec-18 | Jun-19 | Dec-19 | Jun-20 | Dec-20 | Jun-21 |
|---|---|---|---|---|---|---|---|---|---|
| Volume (Million) | 10 | 146 | 246 | 620 | 754 | 1,308 | 1,336 | 2,234 | 2,807 |
Source: UPI Statistics, NPCI
10. How Does Financial Literacy Help in Efficient Portfolio Management?
Investment pattern of Indian investors are often limited to fewer asset-classes. Investors are more inclined towards traditional investments like gold, real estate and fixed deposits etc. Traditionally gold and real estate are believed good for long-term investments, investment options like fixed deposits and bank savings won’t be able to generate inflation beating returns. There is no concept of goal-based investing. This investment approach might lead to investments getting utilised in short-term duties and liabilities with very little being left for long term goals like retirement and welfare of family.
Financial literacy essentially helps in broadening the investment horizon of an individual to develop a holistic diversified investment approach, based on selecting investment instruments based on specific goals, from a concentrated investment approach. A diversified investment approach will minimize the overall risk associated with the portfolio and would allow the individual to seek advantage of investing in different instruments across varied asset-classes.
Being financial literate will allow the individual to understand the importance of risk-based investing where one should invest in less risky investments in the short-run like debt funds or money market instruments and get exposure to relatively riskier asset-classes like equity in the long run, which have higher potential for creating wealth in the long term which in turn can be used to fulfil crucial goals like child’s marriage, retirement, paying-off mortgage etc.
Tax Implications & Inflation-Adjusted Returns:
A financial literate individual would be aware that staying invested in safer instruments like bank fixed deposits can negatively affect his/her savings in the long term. In comparison to equity mutual funds and ETFs, returns on long-term investments are taxed at 10% for gains of more than 1 lakh, for a period of more than 1 year, whereas returns from bank deposits are taxed as per the investor’s tax slab. The higher the income, the lower fixed deposit return will be.
Moreover, investments in instruments like debt funds and international ETFs enjoy the benefit of indexation which is paying taxes only on returns earned over inflation. Thus, financial literacy can be one of the key ways to bridge the gap between your wealth creation journey and economic growth.