What is the issue?
- Pradhan Mantri Jan Dhan Yojana (PMJDY) has ensured universal access to a bank account a near reality.
- But the level of usage of accounts remains quite low, which calls for ensuring financial literacy.
What are the concerns with financial inclusion?
- India’s flagship financial inclusion programme PMJDY has ensured universal access to bank account.
- India now has 180 billion accounts. But 48% of the bank accounts have seen no transactions in the last one year.
- Insurance providers push products without adequately assessing the consistency in income streams of the buyers.
- In view of the lack of proper awareness, people buy insurance policies without adequate planning and give up midway.
- Consumers who cannot comprehend basic financial concepts often end up paying higher transaction fees.
- They pile up unmanageable debts and end up paying higher interest on loans, which can mean more harm to the poor.
- So financial literacy is crucial for making successful use of financial services and enabling people to make right financial choices.
What is financial literacy?
- It refers to a set of skills that allow people to manage their money wisely, with understanding of essential financial concepts.
- The OECD has a working definition of financial literacy -
- it is a combination of awareness, knowledge, skill, attitude and behaviour necessary to make sound financial decisions and ultimately achieve individual financial well being
- Building on OECD’s global paradigm, India’s National Strategy for Financial Education (NSFE) aims -
- to spread awareness about basic financial products in order to link new users to the formal financial sector
- to educate existing users of financial products and services to make informed choices
- to ensure consumer protection for all the users
- It is expected to impart the means to transform ordinary individuals into informed and questioning users of financial services.
What should be done?
- Individuals should be imparted skills and knowledge as well as the ability to put these into practice through their attitudes and self-efficacy.
- A basic financial education must comprise -
- an understanding of financial planning
- debt management investing
- mechanics of interest rates and investment diversification
- People must be trained in smart spending -
- prioritising needs over wants
- using credit card wisely
- avoiding waste, funding expenses from savings and not loans
- understanding terms of EMI (equated monthly instalments) before buying on EMI
- Government must thus take into account that the right measure of financial inclusion is not access, but regular usage.
Source: BusinessLine
