Chapter 7

Financial Literacy – Reserve Bank of India’s Initiatives

By.V.S.Das*

Financial education or financial literacy has assumed greater importance in the recent years, as
financial markets have become increasingly complex and there is also an information
asymmetry leading to making informed choices more and more difficult for the common
person.
Financial education can broadly be defined as providing the familiarity with and understanding
of financial market products, especially, rewards and risks, in order to make informed choices.
Viewed from this standpoint, financial education primarily relates to personal financial
education to enable individuals to take effective actions to improve overall wellbeing and avoid
distress in matters that are financial.
Organization for Economic Co-operation and Development (OECD) has defined financial
education as “the process by which financial consumers/investors improve their understanding
of financial products, concepts and risks, and through information, instruction and/or objective
advice, develop the skills and confidence to become more aware of financial risks and
opportunities, to make informed choices, to know where to go for help, and to take other
effective actions to improve their financial well-being”.
Thus, Financial Literacy is the ability to grow, monitor, and effectively use financial resources to
enhance the well-being and economic security of oneself, one's family, and one's business.
Recognizing the need for financial education, many countries, both developed and developing,
have launched financial education or financial literacy programmes for their people. The OECD
has brought out Recommendations on Principles and Good Practices for Financial Education
and Awareness", which is furnished below:
i) Governments and all stakeholders concerned should promote unbiased, fair and coordinated
financial education.
ii) Financial education should start at school, for people to be educated as early as possible.
iii) Financial education should be part of the good governance of financial institutions whose
accountability and responsibility should be encouraged.
iv) Financial education should be clearly distinguished from commercial advice; codes of
conduct for the staff of financial institutions should be developed.
v) Financial institutions should be encouraged to check that clients read and understand
information, especially when related to long-term commitments or financial services with
potentially significant financial consequences; small print and abstruse documentation should
be discouraged.
vi) Financial education programmes should focus particularly on important life-planning
aspects, such as, basic savings, debt, insurance and pensions.2007
vii) Programmes should be oriented towards financial capacity building, appropriately targeted
on specific groups, and made as personalised as possible.
viii) Future retirees should be made aware of the need to assess the financial adequacy of their
current public and private pension schemes.
ix) National campaigns, specific websites, free information services, and warning systems on
high-risk issues for financial consumers (such as fraud) should be promoted.
These recommendations are intended to help countries, both developed and developing, in
designing and implementing effective financial education programmes.
In this context, some of the efforts initiated in other countries for imparting financial education
would be of interest.
In the United Kingdom, the Financial Services Authority (FSA) has launched the biggest ever
campaign to improve the financial skills of the population and imparting education to enable a
better appreciation of the risks and rewards inherent in financial instruments. The FSA carried
out a Financial Capability Survey, covering 5300 in-depth interviews, a representative of the UK
population. The Department for Education and Skills (DfES) in England, the Welsh Assembly in
Wales, the Scottish Executive with the support of Learning and Teaching Scotland (LT Scotland),
the Department of Education in Northern Ireland, H. M. Treasury, the Financial Services
Authority (FSA), the Basic Skills Agency (BSA), financial services industry, community and
voluntary sector, Local Education Authorities (LEAS), schools and other education institutions
work in partnership to provide financial education in the UK for both under-16 and post-16 age
groups. For the pre-16 age group, provision of financial education is through the statutory
education system, and differs slightly across the UK in line with each constituent county's
curriculum. The purpose is to facilitate acquisition of skills, knowledge, understanding and
responsibility. For the post-16s, there are the Social Inclusion Agenda of the Government, Adult
Financial Literacy Advisory Group (AdFLAG), Adult Financial Capability Framework, BSA Financial
Literacy Project, Citizens Advice and Community Sector, FSA Statutory Requirement and the
financial services industry.
The Bank of England Museum features exhibitions for different age groups. The Bank has
conducted a 'Times Interest Rate Challenge' for students aged 16-18 (secondary schools).
Teams of students are given a chance to take on the role of the Bank of England's Monetary
Policy Committee, assess economic conditions and the outlook for inflation and tell panels of
judges what interest rate they would set to achieve the inflation target of 2.0 percent. A new
school resource 'Made of Money' is aimed at secondary school students aged 14–16 and
describes how the economy works and how it relates to them. For university students, the Bank
has prepared a film presenting its activities. Students and their tutors participate in a free-
guided tour of the Bank itself, which includes multimedia presentation on the Bank's historic
and current role, as well as an insight into the history of money in general, history of banknotes,
gold bullion reserves and day-to-day banking operations. The Bank also encourages staff to
become involved in the initiatives of social and educational organisations.
In the United States of America, with a view to improving the financial literacy and education of
persons in the United States through development of a national strategy, the Congress passed
the Fair and Accurate Credit Transactions (FACT) Act in 2003. The Act included Title V, which
established the Financial Literacy and Education Commission, made up of 20 federal agencies.
The FACT Act became a law on December 4, 2003. The strategy recognizes that the
infrastructure of financial education can only be erected with the cooperation of three builders:
the government, the private sector and the individual.
The Department of Treasury has established an Office of Financial Education (OFE) that has a
mission to provide all Americans with the practical financial knowledge and skills that enable
them to take informed decisions. The Department of Treasury is working to promote the
integration of financial education in schools by using reading and mathematics lessons as a
vehicle for teaching personal financial topics. Integrating financial education into reading and
mathematics courses ensures that financial skills are taught and reinforced year after year, with
fewer resources than would be required if financial education courses were to be offered
separately.
In Malaysia, a Consumer Education Programme was launched to provide consumers with
greater understanding and to make more informed decisions of financial products and services.
The approach comprised ( i ) school programme targeting primary and secondary school
children (ii) education programme targeting rural folks, women, single mothers and university
students, and (iii) provision of information to general public. The school programmes tried to
promote savings through school adoption programme. Briefing and workshop sessions were
conducted for rural folks, women, etc. For the general public, two consumer education
programmes were launched in 2003 pertaining to banking information and insurance
information. The information dissemination was through booklets, websites, print media, and
third party publications.
Further, a Credit Counseling & Debt Management Agency has been started as a subsidiary of
Bank Negara Malaysia. It provides financial counseling, advises on financial management, and
conducts debt management and financial education programmes.

Financial Education and Reserve Bank of India

In India, the need for financial education is even greater considering the low levels of literacy
and the large section of the population, which is still out of the formal financial set-up.
Towards this end, the Reserve Bank of India has undertaken a project titled "Project Financial
Literacy". The objective of the project is to disseminate information regarding the central bank
and general banking concepts to various target groups, including, school and college going
children, women, rural and urban poor, defence personnel and senior citizens. The project
envisages a multi pronged approach. The project has been designed to be implemented in two
modules, one module focusing on the economy, Reserve Bank and its activities, and the other
module on general banking. The material will be created in English, Hindi, and regional
languages. It would be disseminated to the target audience with the help, among others, of
banks, local government machinery, schools and colleges through presentations, pamphlets,
brochures, films, as also, through the Bank's website.
The Bank has also created a link on its web site for the common person to give him the ease of
access to information, in 13 regional languages, which he can use in his dealings with banks.
Credit Counseling Centres
The absence of proper financial counseling, coupled with inadequate financial literacy levels has
often resulted in pushing the consumers towards costlier options and eventual debt traps.
Thus, there is a need for financial counseling in all the areas.
A few banks have taken initiatives to start some centres in rural/ semi urban areas, which offer
financial education and credit counseling services. The objective of these centres is to advise
people on gaining access to the financial system including banks, creating awareness among the
public about financial management, counseling people who are struggling to meet their
repayment obligations and help them resolve their problems of indebtedness, helping in
rehabilitation of borrowers in distress, etc. Some of these Credit Counseling Centres (also
known as Knowledge Centres) even train farmers/ women groups to enable them to start their
own income generating activities to earn a reasonable livelihood.
The Working Group (Chairman: Prof.S.S.Johl) constituted by the Reserve Bank to suggest
measures for assisting distressed farmers had recommended that financial and livelihood
counseling are important for increasing the viability of credit. Further, the Working Group
constituted to examine procedures and processes for agricultural loans (Chairman: Shri
C.P.Swarnkar) had also recommended that banks should actively consider opening of
counseling centres, either individually or with pooled resources, for credit and technical
counseling with a view to giving special thrust in the relatively under-developed regions. In the
light of the recommendations of these two groups, the convener banks of the State / Union
Territory Level Bankers' Committees were advised in May 2007 to set up, on a pilot basis, a
financial literacy-cum-counseling centre in any one district in the State/ Union Territory, coming
under their jurisdiction. Further, on the basis of the experience gained, the Lead Banks
concerned were advised to set up such centres in other districts.
To conclude, economic and financial sector reforms have placed higher disposable incomes
with the public. Availability of a variety of new financial products on both, credit and
investment sides, which are provided by a host of financial intermediaries has necessitated that
the investing public understands the nuances of each product and product supplier, and takes
an informed decision about where he should invest. At the same time, those who are not part
of the formal financial system need to be educated about banking and why they should have a
relationship with banks. Financial education is considered an important element for promoting
financial inclusion and ultimately financial stability. Financial education would benefit the
financially-excluded by enabling them to understand the benefits and the ways to join the
formal financial system. It could also benefit the financially-included by helping them make
informed choices about the products and services available in the market to their best
advantage.

* Executive Director, Reserve Bank of India.

Published in CAB Calling, July-September 2007 issue