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CAB CALLING July-September, 2007 16 Financial Literacy: Reserve Bank of India’s Initiatives 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 well- being 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. * Executive Director, Reserve Bank of India, Mumbai

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CAB CALLING July-September, 2007

16

Financial Literacy: Reserve Bank of India’s Initiatives

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 well-

being 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.

* Executive Director, Reserve Bank of India, Mumbai

CAB CALLING July-September, 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

17

financial products and services. The

approach compr ised ( i ) schoo l

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 Counselling & Debt

Management Agency has been started as

a subsidiary of Bank Negara Malaysia. It

provides financial counselling, advises on

financial management, and conducts debt

management and financial education

programmes.

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,

Financial Education and

Reserve Bank of India

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.

The absence of proper financial counselling, 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 counselling 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 counselling

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, counselling 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 Counselling 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 counselling 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

counselling centres, either individually or with pooled resources, for

credit and technical counselling with a view to giving special thrust in

the relatively under-developed regions. In the light of the

recommendations of these two groups, the convenor 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-counselling 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

Credit Counselling Centres

18

CAB CALLING July-September, 2007

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.

1. 'The Role of Financial Education: The Indian Case' - Inaugural Address by

Dr. Y. V. Reddy, Governor, Reserve Bank of India at the International

Conference on Financial Education organised by OECD and co-hosted by

Pension Fund Regulatory and Development Authority at New Delhi on

September 21, 2006.

2. Professor Sarah Mavrinac, INSEAD, The Business School for the World.

3. Taking ownership of the future : Quick reference guide by the National

Strategy for Financial Literacy 2006 of the U.S. Department of Treasury.

References:

4. Integrating Financial Education into School

Curricula- White paper prepared by the

United States Department of the Treasury

Office of Financial Education.

5. Evaluat ion of F inancial Educat ion

Programme : Presentation of Bank Negara

Malays ia a t the G8 In ternat iona l

Conference on Financial L i teracy,

November 29-30, 2006.

6. Policy Brief July 2006, The importance of

Financial Education, Organisation for

Economic Cooperation and Development

(OECD).

7. Jude England and Papiya Chatterjee, A

review of existing provision in the UK, A

report of research carried out by ECOTEC

Research and Consulting Ltd on behalf of

the Department for Work and Pensions,

Research Report No 275, Corporate

Document Services Financial education.

CAB CALLING July-September, 2007

19

Hyderabad office of the Reserve Bank has formulated a

multi-modal (informative display through posters,

brochures, multi-media presentations, video films,

demonstrations, computer games), multi-lingual

(English, Hindi, Telugu and Urdu) and customised

interactive strategies (like stalls in exhibitions, visits to

schools, colleges, villages, meeting with bankers,

traders, farmers, SHGs, tour of the Reserve Bank) for

spreading financial literacy among the common

persons in general and school children, college

students, farmers, women and villagers in particular.

(Source: Reserve Bank of India Annual Report 2006 – 07)

Chennai Office has brought out two comic books titled

'Currency Matters' and 'Bank Matters' in English and

Hindi as part of the Bank's financial education efforts.

The stories for the comic books were prepared in-house

by a team of officers, drawn from various departments

of the local office and the artwork was out sourced.

Copies of the comic books were handed over to the

officials of Government of Himachal Pradesh during the

inauguration of the Simla sub-office on July 1, 2007. The

books are being translated into Tamil.

New Delhi Office brought out a comic book on basic

banking, titled 'Raju and the Money Tree'. A Core

Committee on Financial Education, comprising of

officers from RBI, New Delhi conceived and scripted the

story of the comic book as also handled the artwork. The

comic book was brought out in English and Hindi.

Copies of the comic book were handed over to the

officials of Government of Himachal Pradesh at Simla on

July 1, 2007 coinciding with the inauguration of the sub-

office. The comic book was also brought out in Braille for

the benefit of visually impaired persons. The services of

National Association for the Blind, New Delhi were taken

for adapting the story from the comic book.

(Source: Reserve Bank of India Newsletters)

Bangalore Office has released, under its FIN-LIT project,

a series of four comic books, in English and Kannada,

dealing with (i) introduction to basic banking, (ii)

deposits, (iii) SHGs loans especially agricultural loans

and other livelihood loans like Govt. sponsored

schemes, etc. and (iv) other lifestyle enhancing loans

like housing loans, vehicle loans, etc. and other products

like ATM cards debit, credit cards. A short film, based

on the frames of the books, with voice over in Kannada

has also been released. As an initiative in reaching out to

a larger audience, the Office had put up a stall in the

Mysore Dasara Exhibition where this film was screened

along with other information of relevance to the common

man. The whole project of writing the stories and doing

the illustrations was undertaken in house.

(Source: RBI, Bangalore)

Initiatives by RBI offices