Financial illiteracy remains a global problem, with the economically disadvantaged facing even more hurdles due to their situation and station in life. India suffers even more — as an emerging economy, as a victim of colonialism and as a poor nation with a huge population and limited resources.
However, any analysis needs to start with an acceptable definition. I define financial education as the ability to make informed judgements and take effective action regarding the management of money across the entire cycle of earning, spending, saving, investing, budgeting and passing it on. Opinions differ on how to define it, but there is consensus that financial education remains central to and is critical in achieving life goals of individuals.
India at present sees several unique challenges to the financial well being of its citizens. There are over 90 million senior citizens in India and a small proportion have fixed pensions that are inadequate in an inflationary environment. On the other hand, the 320 million strong young workforce needs and gets investment options that their parents generation never had in a closed economy.
All these combine to make the price of financial illiteracy huge. In fact, John Bryant, the founder of the financial education initiative ‘Operation Hope’ in the US described the roots of the subprime crisis thus: “Take the greed and the financial misrepresentation out of it, and the root of this crisis is massive levels of financial illiteracy.” The write-off bill is already $492 billion as on August 5, 2008 and is projected to rise to as high as $2 trillion even before this crisis works out of the financial systems worldwide.
In fact, from corporate treasurers and chief financial officers to bankers, financial advisors and retail investors, all segments, all strata have shown deep financial illiteracy. In India, the foreign derivatives write-offs have highlighted the financial illiteracy of corporate officers, boards of directors, bankers as well as auditors. At an individual level, the older segments face the risk of outliving their savings, of landing in ‘retirement poverty’.
A grim portent of this is that 50 per cent of those aged 65 today will be hospitalised before their demise, yet a miniscule proportion has any medical insurance. The young run the biggest risk of dying or getting disabled too soon, yet they are massively underinsured. The situation is the same with financial products penetration, with 60 million rural households having no access to formal banking credit, and hence being in the clutches of usurious moneylenders.
Financial literacy at a national level will go a long way in fixing many of these problems.
Ajay Bagga is CEO, Lotus India AMC