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It's time to get serious about investor education

About half the people are not aware of the balance in their accounts, reports Ravi Srinivasan.

india Updated: Jan 24, 2007 20:05 IST
Ravi Srinivasan
Ravi Srinivasan

Do you know how much money you have in the bank? Do not be too surprised if you cannot come up with a figure. About half your fellow citizens are in the same boat. It is a bit unfair to expect anybody other than those either terminally obsessed with money or with absolutely nothing else better to do with their time to name the balance in their savings account to the paisa.

Of course, most of us do know the amount we have in fixed deposits. The original sum, that is. In fact, a survey conducted by the Asian Development Bank a couple of years ago, found that slightly over half the respondents (it was an all-India survey which covered 50,000 people in both urban and rural areas), were aware of their investments (predominantly bank deposits) and also knew what interest rate they were getting on it. But that does not mean that they knew the actual worth of their investments.

That is a much more complicated exercise, since you should also know how often your bank compounds the interest on your deposit (monthly, quarterly, every six months or just once a year) and also be able to calculate compound interest. Worse, you will then have to set it off against the current inflation rate in order to arrive at the real value of your money.

Which looks pretty much impossible. Despite the 'headline news' status given to inflation statistics by both print and electronic media, the survey found that only 19 per cent were aware of the current inflation rate. As to calculating its impact, forget it. Over half the respondents did not even have a clear idea of what inflation actually meant.

This is scary. But another finding of the survey is even more frightening. Eight out of 10 respondents were under the completely false impression that all their deposits in the bank (I am not even beginning to start splitting hairs over the differences between co-operative banks, private banks, scheduled banks and the like here) were perfectly safe, because they were "guaranteed by the government".

In reality, only sums up to Rs 1 lakh are guaranteed, that too, with a lot of ifs and buts attached. No wonder that in the fiscal 2005-06, government statistics showed that an overwhelming 47 per cent of the financial savings (some form of money or a monetary instrument and not other assets like property or gold) were in the form of bank deposits. Another 14 per cent was in life insurance, another category considered 'safe' because of the overwhelming legacy of the government having been, until recently, the sole provider of insurance cover of any kind. About 10 per cent was locked up in provident or pension funds and only five per cent was in shares.

This is an appalling failure of investor education. Everybody is guilty – the government, the regulators, market players and yes, even the media. There is an urgent need to review and tighten the existing regulations covering investor education. Non-compliance should be punished severely. If India is to pursue its goal of becoming a global financial powerhouse, then it must start the process by setting its own house in order.

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