Chapter 4

Financial Literacy and Inclusive Growth

Since economic liberalization, Indian economy has been witnessing greater pace of economic
development. The economy has clocked a GDP growth of nine per cent in Financial Year
2011.The growth rate has receded during the current fiscal mainly due to global reasons
especially downgrading the United States by the rating agency Standard and Poor and the
sovereign debt problems of some Euro zone countries.   Still it is expected that the country can
achieve a GDP growth of more than six per cent for the current fiscal.   The growth momentum
will be continued in the coming years. But it is a great concern that the benefits of the growth
have not reached millions of people living in the country especially in the rural and backward
areas. Financial exclusion or not extending the basic needs like food and nutrition, housing,
healthcare, educational, banking and financial services, insurance facilities to large sections of
the society is to be addressed meaningfully to make economic growth sustainable and
equitable.  
The ‘inclusive growth’ as a strategy of economic development received attention owing to a
rising concern that the benefits of economic growth have not been equitably shared. Growth is
inclusive when it creates economic opportunities along with ensuring equal access to them.
Apart from addressing the issue of inequality, the inclusive growth may also make the poverty
reduction efforts more effective by explicitly creating productive economic opportunities for
the poor and vulnerable sections of the society.  The inclusive growth by encompassing the
hitherto excluded population can bring in several other benefits as well to the economy.   The
concept ‘Inclusion’ should be seen as a process of including the excluded as agents whose
participation is essential in the development process.
What is Inclusive Growth?
Financial inclusion and inclusive growth have become increasingly prominent issues in recent
years. Inclusive growth cannot be equated with redistribution of income or giving subsidies to
the poor. These are, of course, short term measures to reduce inequalities and reduce the gap
between the rich and the poor. But inclusive growth is much more than redistribution of
income. It is a long-term measure to bring the poor to the mainstream of the economy and
provide more opportunities to them and bring the benefits of growth to the underprivileged
group. The inclusive growth approach takes a longer term perspective as the focus is on
productive employment rather than on direct income redistribution, as a means of increasing
incomes for excluded groups. Inclusive growth is, therefore, supposed to be inherently
sustainable as distinct from income distribution schemes which can in the short run reduce the
disparities, between the poorest and the poor. While income distribution schemes can allow
people to benefit from economic growth in the short run, inclusive growth allows people to
contribute to and benefit from economic growth.
In India around 400 million people accounting for more than 36 percent of the population still
live below the poverty line. About 59 per cent population have bank accounts while 41 per cent
of the population is still unbanked. The Rangarajan Committee (2006) on financial inclusion
observed that in India 51.4% of farmer households are financially excluded from both formal
and informal sources and 73% of the farmer households do not access formal sources of credit.
When the excluded sections approach formal financial institutions they are confronted with
problems of accessibility, timeliness and inadequacy of credit. Meaningful inclusion entails
understanding the poor, their needs, their problems and their vulnerability to changes in
environment. It is estimated that globally over two billion people are excluded from access to
financial services, of which one third is in India.

Financial Literacy
Financial literacy and education are prerequisite for effective financial inclusion, which will
ensure access to financial products and services to all sections of the society. Financial literacy
provides basic knowledge of money and finance and empowers a person to manage one’s
financial affairs. It can prevent a person from falling prey to financial indebtedness and enforce
financial discipline in life. Financial literacy can also break the cycle of poverty which is often
associated with the non availability of banking and credit facilities. Individuals who have
experience in handling a bank account and saving schemes and an awareness of other effective
money management skills are more likely to pass these on to their children. .
Financial literacy refers to the ability to understand finance and developing necessary skills to
manage personal finance. In a broader sense it means acquiring knowledge about financial
products, banking, credit, savings and investment. It is the ability to make informed
judgements and to take effective decisions regarding the use and management of money and
seek efficient financial advice wherever necessary from a financial advisor.  It encompasses an
understanding of how to use credit, manage money, retirement planning, minimizing financial
risk, tax planning and derive long-term benefits of savings and investments. Financial literacy
covers setting financial goals, developing money management skills, preparing family budget,
exploring savings and investments including stocks, bonds and mutual funds. Other aspects of
financial literacy include planning for special expenditures, knowledge of banking products,
planning for retirement, insurance, taxes and understanding the impact of inflation and interest
on money and investments.
Needs for Financial Education and Information
The need for financial literacy arises due to the importance of safeguarding money, planning for
retirement, understanding complex financial products which offer high rewards and to invest
wisely in order to maximize earnings and minimize risk. Financial literacy is a good way to teach
consumers about the benefits of having a relationship with financial institutions and banks.
Among these are access to funds and credit, the ability to establish a positive financial
background, consumer protection and a higher propensity towards savings and wealth creation.
The deprived and financially excluded have little experience of using even fairly basic financial
products such as a bank account or savings account. In addition banks have very limited
physical presence in these areas and they are traditionally showing antipathy towards the
economically weak and the poor. Banks do not take any interest in marketing their products
and services to these people. As a result, people living in rural and backward areas often have
particularly low levels of knowledge about financial products and, more importantly, may be
very suspicious of the institutions that provide them. Many people living in deprived
communities lack basic skills such as literacy and ability to understand numbers, interest rates
etc. This further impedes their ability to become more financially literate. Efforts to overcome
financial exclusion in deprived communities have to take place within this context. The deprived
groups face a number of issues relating to financial literacy:
I. A widespread lack of knowledge about financial products and services;
II. A strong and widespread antipathy towards the financial services institutions, which is
a key barrier to their use of financial products.
III. A lack of basic money management skills, among young people and those who plan to
set up home for the first time;

Lack of Knowledge
Financial products and services include banking products, savings, credit, microfinance,
insurance products, small saving schemes, shares and securities etc. But to a vast majority of
people in deprived areas it means simply opening a no frills savings account in a bank or
cooperative society. Lack of knowledge of financial products and services is the important
reason for keeping large number of people excluded from the benefits of economic growth. Its
manifestation is wide and noticeable among young and women folk in rural areas largely
because of their non exposure to the financial services industry and limited experience of using
financial products. This lack of knowledge and understanding impeded their use of financial
products and undermined their confidence in engaging with the financial services industry. In
particular, people lacked a detailed understanding of everyday financial products, the factors
that determine access to financial products, financial services institutions and where to turn for
information on financial services.
Financial Antipathy
There is a deep and widespread antipathy towards banks and financial institutions by the
deprived class. The poor and illiterate people cultivate mistrust and misconceptions regarding
banking and financial services. The financial institutions neither understand the needs of
ordinary people nor do they take keen interest in educating the poor regarding the benefits of
their products and services. Many people are not aware of the organizations that provide
financial products and services and how to choose an appropriate institution for their particular
needs. Most people’s awareness of financial services providers is limited to banks and credit
cooperatives. Providers of insurance, healthcare, credit cards, savings or pension products are
much less widely known. Very few people have a clear understanding of the processes involved
in credit analysis or risk assessment or the reason why banks require particular forms of
identification before they open a savings account for a new customer.  
Developing Money Management Skills
There is a need for training in the basic money management skills required to effectively
manage a household budget. This is identified as a particular need for students and young
people who are likely to plan their personal finance and investment at an earlier age. Recent
interest in the issue of personal finance education has stimulated the development of a range
of projects, courses and initiatives aimed at promoting financial literacy among particular
groups of people. Most of this activity has been aimed at school children and young people.
Providing financial literacy training is not a one-size-fits-all effort. Financial literacy is most
clearly divided into four categories: early intervention, basic literacy, credit rehabilitation and
long-term planning or asset building. Introduction of training at the earliest stage can often
eliminate the need for corrective intervention at later stages.
Training programs focus on providing information on specific topics such as banking services,
budgeting, saving and investments. Many resources such as pamphlets, brochures,
demonstration classes, video presentations etc. can be used for training purposes. However,
the resources and other materials selected for disseminating basic information should be
appropriate to the target group.
School-based Schemes
Financial literacy to students is a thrust area in recent years. The National Curriculum
Committee has taken some initiatives in this direction by including financial education in school
curriculum. The core elements of school based schemes are financial knowledge and
understanding, financial skills and competence and developing financial responsibility. The
training may be imparted and supported by financial institutions, credit unions, banker’s clubs
and regulatory bodies. Training schemes include websites and education packages featuring
information, worksheets, quizzes, competitions and notes for teachers. National Institute of
Securities Markets (NISM), established by the Securities and Exchange Board of India (SEBI), the
regulator for securities markets in India, has developed a program to impart basic financial skills
to school students (Classes VIII upwards). Named as 'Pocket Money', this program has been
developed as an eight (90 minute) session course.
Schemes for Adults
There are a number of options for teaching money management skills to adults. But these
groups are scattered, less organized and more localized with heterogeneous social and
economic profiles. Face to face training methods like class room teaching model may be
adapted to appropriate groups. Seminars, conferences, workshops, case studies presentations
along with printed resources and materials are best suited to educate the adults. ‘Investor First’
is an initiative by NISM's School for Investor Education and Financial Literacy. This website
provides unbiased information on Investing and Financial Planning and aims to empower
individuals with right knowledge and tools that will help them make wise investment decisions
and long term wealth. Stock exchanges in India like NSE and BSE have websites that provide
independent information on financial products and services for customers.
Conclusion
Financial literacy is a basic need of Inclusive Growth. It is a long term process to educate the
students, youths and adults by providing basic knowledge of personal finance, financial
services, and developing money management skills. Enabling poor people to participate in the
growth economy requires ensuring that they get access to a whole range of financial services
like payments, remittances, savings, insurance and not just credit. By inclusion we mean a
knowledgeable people and an inclusive financial sector gaining access to all. In fact, the
inclusion is a continued banking relationship which cannot rest until the poor households
become environmentally and financially sustainable.