Ineffective Financial literacy

Inadequate financial literacy as one of the most critical global issues is widely spoken, inadequately understood, and scantly acted upon. On the other side, the financial markets are becoming more complex and having more risks.

Reserve Bank of India (RBI) has been widely promoting financial literacy. Other central banks and authorities have also been promoting financial literacy. Despite all the efforts, the levels of financial literacy are considerably lower.

The financial literacy is effective if financial frauds, scams, corruption and consequent losses are minimal. Of the global fraud cases, the three financially active economies have about 45% share viz., USA with 26%, India with 11%, and China with 8%. Most of the cases are investment scams and financial frauds. Global annual loss due to financial frauds is estimated as $6 trillion and estimated annual loss due to inadequate financial literacy as $2 trillion.

World over, the literacy levels have been increasing but the financial literacy levels are relatively lower. The financial literacy of US is 57%, UK is 67%, Canada is 68%, Germany is 66%, Japan is 43%, China is 28%, and India is 24%. The countries with highest financial literacy are Sweden, Denmark, and Norway which have more than 71% financial literacy.

Interestingly, financial literacy is understood merely as saving money, ability to use money, opening bank accounts, and investing in assets. But, it is not just the knowledge and ability to make informed financial decisions, it is indeed making wiser financial decisions and deriving fruits from those decisions. ?

Financial literacy comprises of knowledge of financial aspects, formation of financial attitude, and financial behaviour. Financial literacy requires ability to comprehend, analyse, decide, and act morally and wisely for one’s own benefit. The knowledge levels of financial aspects have increased significantly and have been increasing furthermore. The financial attitude has also been increasing as reflected in the increasing participation in stock markets, lowered current and savings accounts (CASA) deposits, and rise in investments in mutual funds, real estate, etc.

Despite increasing financial participation, finance behaviour appears to be lagging as evident from the number of financial frauds. Reckless spending, unplanned borrowing, and delinquent attitude are other consequences of inadequate financial literacy. Instead of their improving financial literacy and acting wisely, people started believing fraudsters, blaming government and institutions, and have been irresponsibly encouraging the financial frauds and scams. This is more to do with false risk appetite.

The Adam Smith’s doctrine of invisible hand appears to be ineffective in financial sector which is evident from the speculation, avarice, and unscrupulous financial behaviour of the people. The 12-6-3 guidance that one may normatively expect 12% returns from equity investments, 6% from debt investments, and 3% from savings is no more the order of the day. The reasons include dispositional greed, fraudulent schemes, feeble laws, soft regulation, and delayed enforcement. These resulted in savers becoming suspicious, toxic credit culture, and prejudiced lending practices.

The golden chain of ‘savings to capital formation to credit origination to employment creation’ is severely affected. Except those involved in the financial scams, all others suffer, but those who do not have adequate financial literacy, who are vulnerable, and less privileged are the most impacted. What is needed is inclusion of financial literacy in the syllabus of all courses, more financial literacy programs, and most importantly tyrannical and timely enforcement of law against the financial fraudsters.

Disclaimer:

Dr. Kishore Nuthalapati is an Economist and a Corporate Finance Professional. Dr. Kishore is serving as the CFO of BEKEM Infra Projects Pvt Ltd, Hyderabad, India. Views are his personal and do not reflect those of any of the organizations he is or was associated with.