Financial Literacy and Financial Inclusion

Financial Inclusion is a lofty ideal but Financial Literacy is the first step towards achieving Financial Inclusion. Financial Literacy can be seen as the demand side of Financial Inclusion. It is considered an important adjunct for promoting financial inclusion, financial development and ultimately financial stability. It has assumed greater importance in recent years especially from 2002 as financial markets have become increasingly complex and the common man finds it very difficult to make informed decisions.Financial Inclusion comes with potential dangers. Recent experiences in the microfinance arena have shown that poor people take loans that they have no capacity to service. Farmers have also taken loans that they have not been able to repay. Many have been driven to suicide because of debt problems. Unless financial literacy goes hand in hand with financial inclusion, instead of helping the poor, they will be put into more trouble. Other examples are the crisis of the Tirupur exporters on currency derivatives, and the mortgage crisis, in the U.S., which has lead to global crisis.Financial literacy refers to the ability to make informed judgments and to take effective decisions regarding the use and management of money. It is regarded as an important requirement for functioning effectively in modern society. It enables a person to understand the importance of savings.India is among the world’s most efficient financial markets in terms of technology, regulation and systems. It also has one of the highest savings rate in the world. In spite of the same, India is still one of the poorest countries in the world. While savings are more in India, where the savings are invested is a cause for concern. Wealth creation for the investor and the economy will remain a distant dream, unless the common man becomes a wiser investor and is protected from wrong doings. We need to convert a country of savers into a nation of investors.Financial literacy can make a difference not only in the quality of life that individuals can afford, but also the integrity and quality of markets. It can provide individuals with basic tools for budgeting, help them to acquire the discipline to save and thus, ensure that they can enjoy a dignified life after retirement.In India, the need for financial literacy is even greater considering the low levels of literacy and the large section of the population, which still remains out of the formal financial set-up especially in the rural areas. Unfortunately it is a fact that even graduates in India are not really financially literate. Wealth creation for the investor and the economy will remain a distant dream, unless the common man becomes a wiser investor and is protected from wrong doings. We need to convert a country of savers into a nation of investors. Financially educated consumers, in turn, can benefit the economy by encouraging genuine competition, forcing the service providers to innovate and improve their levels of efficiency.Government of India through its various agencies like RBI, SEBI, NABARD, State Bank of India etc have been trying to give financial literacy and financial education to its citizens in the last few years. There has been plethora of talks in this direction. But are we really walking the talk?This paper would look into various aspects of financial literacy in India and why it has not succeeded. It will also try to provide a suitable model that would be helpful for Indian conditions.