Distinguished Ladies and Gentlemen,
I am thankful to Shri Swarup for
inviting me to this august gathering. The Conference represents an important
step by the Pension Fund Regulatory and Development Authority (PFRDA) to distil
from the experiences of other countries in its quest for enhancing the levels
of financial education in our country. The collaboration with Organisation for
Economic Co-operation and Development (OECD) which has been playing a pivotal
role in this respect is a laudable idea which will certainly contribute to furthering
the cause of financial education. The eminence of several speakers adds great
value to the discussions. We in the Reserve Bank are also keen on this subject
and look forward to benefit from the deliberations of this Conference.
My remarks on this occasion will
be structured along the following lines. I will provide some introduction on
the importance of this topic in modern day societies, followed by an overview
of the global practice in this area. Any discussion on financial education in
India would need to acknowledge the Indian realities as well. The concluding
thoughts are in the nature of possible approaches towards expanding the outreach
of financial education in India.
Background
Financial education can broadly
be defined as the capacity to have familiarity with and understanding of financial
market products, especially rewards and risks in order to make informed choices.
Viewed from this standpoint, financial education primarily relates to personal
financial education to enable individuals to take effective actions to improve
overall well-being and avoid distress in matters that are financial.
The focus of any discussion on
financial education is primarily on the individual, who usually has limited
resources and skills to appreciate the complexities of financial dealings with
financial intermediaries on matters relating to personal finance on a day-to-day
basis. The process of economic reforms, which includes deregulation and marketisation,
should have educating and empowering the common person to participate in the
financial marketplace with knowledge and confidence, as a critical component
of public policy.
The need for financial education
is felt in the developed and the developing countries alike. In the developed
countries, the increasing number and complexity of financial products, the continuing
shift in responsibility for providing social security from governments and financial
institutions to individuals, and the growing importance of individual retirement
planning make it imperative that financial education be provided to all.
In the developing countries also,
the increasing participation of a growing number of consumers in newly developing
financial markets will necessitate the provision of financial education – if
these markets are to expand and operate efficiently. In addition, the substantial
growth of international transactions during the last decade, resulting from
new technologies and the growing international mobility of individuals, makes
the improvement in financial education, increasingly, an international concern.
From a regulatory perspective,
financial education empowers the common person and thus reduces the burden of
protecting the common person from the elements of market failure, attributable
to, de facto, information asymmetries. For example, the emphasis on market
discipline, as one of the three pillars of banking regulation, especially under
Basel II, is best served by participation of financially literate bank customers
in the financial marketplace.
Financial education 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. 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.
Global practices
It has been said, particularly
in the context of the developed economies that while the young do not save enough
and do not fully understand the need for investments for future, many of the
elderly tend to feel the pinch of poverty. In this background, priority need
to be accorded to financial education.
For example, in the UK, the Financial
Services Authority has launched the biggest ever campaign to improve the financial
skills of the population and imparting education to enable a better appreciation
of the risks and rewards inherent in financial instruments.
The US Treasury established its
Office of Financial Education in 2002. The Office works to promote access to
the financial education tools that can help all US citizens make wiser choices
in all areas of personal financial management, with a special emphasis on saving,
credit management, home ownership and retirement planning. The Financial
Literacy and Education Commission (FLEC), established by the
Congress in 2003 through the passage of the Financial Literacy and Education
Improvement Act, was created with the purpose of improving the financial literacy
and education of persons in the United States through development of a national
strategy to promote financial literacy and education. The Federal Reserve, along
with numerous other federal government agencies, is a member of this commission,
which is supported by the Office of Financial Education.
The Federal Reserve System’s recently
redesigned financial education website, FederalReserveEducation.org, is dovetailed
to increase the use of Federal Reserve educational materials and promote financial
education in the classroom. The website has material intended for the general
public, as well as materials specifically geared toward teachers and high school
and college students. It provides easy access to free educational materials,
a resource search engine for teachers, and games for various ages and knowledge
levels. The other regional Feds also have various interactive on-line programmes
on their website designed to generate awareness about better financial management
and assessment of one's own financial position.
In Australia, the Government established
a National Consumer and Financial Literacy Taskforce in 2002, which recommended
the institution of the Financial Literacy Foundation in 2005. Working closely
with states and territories, the Foundation has produced a National Curriculum
Framework for Financial Literacy to provide benchmarks for teaching the school
children the importance of managing their money.
In Malaysia, the Financial Sector
Master Plan, launched in 2001, includes a 10-year consumer education program.
This agenda includes infrastructure and institutional capacity development in
the areas of financial education, advisory services, distress management and
rehabilitation. For this purpose, the Bank Negara Malaysia in partnership with
the financial industry and other government agencies, has introduced the Financial
Mediation Bureau, Deposit Insurance Scheme, Basic Banking Services Framework
as well as created a new class of licensed Financial Advisers. Savings and education
programs are also being promoted in schools. A one-stop centre has recently
been established within the central bank for the public to obtain information
about financial services in Malaysia and to provide face-to-face customer service
on general enquiries and complaints. These initiatives have been reinforced
by high levels of transparency and disclosure.
In collaboration with the government
agencies, Monetary Authority of Singapore launched a national financial education
programme (MoneySENSE) to enhance financial literacy and self-reliance of consumers.
The programme covers three tiers of financial literacy: basic money management
covers skills in budgeting and saving as also tips on responsible use of credit
(tier I); equipping citizens with the skills and knowledge to plan for their
long-term financial needs (tier II); and imparting knowledge about different
investment products and skills for investing (tier III).
Above all, the OECD has been taking
a pro-active initiative in generating awareness about financial education. It
has recently released a major international study on financial education titled
'Improving Financial Literacy' encompassing practical guidelines on good practices
in financial education and awareness. These guidelines, in the form of a non-binding
recommendation, are designed to help countries devise and implement effective
financial education programmes, drawing from the best practices in this area
in OECD countries. They promote the role of all the main stakeholders in financial
education: governments, financial institutions, employers, trade unions and
consumer groups. In addition, they also draw a clear distinction between public
information provided by the government and regulatory authorities, and that
supplied by the financial analysts.
It is also important to devise
ways to ascertain whether financial education has achieved its objective, such
as generating increased consumer awareness or a changed behaviour, a point I
will return to a little later. The balance of evidence, however, suggests that
such programmes tend to be effective. For instance, in the United States, it
has been observed that workers increase their participation in retirement savings
plans funded by employee and employer contributions when the latter offers financial
education programmes, whether in the form of brochures or seminars. Consumers
who attend one-on-one counselling sessions on their personal finances have fewer
delinquencies.
Indian realities
Prior to the initiation of financial
sector reforms in the early 1990s, the Indian financial system essentially catered
to the needs of planned development. Customers had little choice in financial
instruments. The segmented and underdeveloped financial markets meant that their
exposure to risk was also limited. In such a situation, customers could employ
their basic skills to invest in simple financial products with assured returns,
unconcerned about their risks. The relevance of financial education was, at
best, limited.
Pursuant to the process of globalisation,
the economic and financial landscape in India is undergoing a significant transformation.
In the process, the economy has become more diversified with new sources of
growth. In tandem with these changes, we have seen the modernisation of the
financial sector that has also become increasingly more diversified to meet
the new requirements of the economy. The financial sector has also increasingly
leveraged on advances in technology which has significantly changed the way
financial business is being conducted. As market advances continue to expand
the range of financial products and services, consumers are being faced with
increasingly multifaceted choices and options in the management of their personal
finances and exposure to a gamut of risks. In this complex financial landscape,
it becomes important for consumers to have improved access to information.
Significant changes have also occurred
in the social sphere. While on the one hand, costs of education have increased
substantially, the longevity levels have also risen, on the other. Taken together,
this implies that the elderly are now required to achieve a constant rebalancing
of their consumption and investment portfolios. The increased life expectancy
has also compelled employers to move away from ad hoc funded superannuation
schemes to defined contribution schemes. At the same time, the advances in information
technology have lowered the costs of information acquisition and processing
as also of searching a job. This, in turn, has significantly raised job mobility
with attendant implications for family size and expenditure patterns.
Financial education assumes importance
in this changed financial environment. In considering means to improve the financial
status of families, financial education can play a critical role by equipping
consumers with the knowledge required to choose from a myriad of financial products
and providers. In addition, financial education can help provide individuals
with the knowledge necessary to create household budgets, initiate savings plans,
manage debt, and make strategic investment decisions for their retirement or
for their children's education. Being educated financially also enables individuals
to better appreciate the possible contingencies and save for a rainy day, in
an appropriate manner. It can empower consumers to become better shoppers, allowing
them to procure goods and services at lower cost. This process, in turn, raises
consumers' real purchasing power and multiplies the opportunities for them to
consume, save, or invest. Having these basic financial planning skills can help
families to meet their near-term obligations and maximise their longer-term
financial well-being.
Financial education is also an
integral component of customer protection. Despite concerted efforts, the current
state of transparency coupled with the difficulty of consumers in identifying
and understanding the fine print from the large volume of convoluted information,
leads to an information asymmetry between the financial intermediary and the
customer. For example, customers are often penalised for minor violations in
repayments, although they have limited redressal mechanisms to rectify deficiencies
in service by banks, rendering the banker-customer relationship one of unequals.
In this relationship, it is the principal, that is, the depositor, who is actually
far less powerful than the agent, that is, the bank. The representations received
in regard to levying of unreasonably high service or user charges and enhancement
of user charges without proper and prior intimation, and the growing number
of customer complaints against the banks, also testify to this fact. In this
context, financial education may help to prevent vulnerable consumers from falling
prey to financially disquieting credit arrangements.
There are however, issues that
would need to be addressed upfront in the Indian context. First, the regional
profile in our country is diversified, with people across different regions
being typically conversant in their vernacular languages. Second, there exists
a wide divergence in literacy levels across States. Thus, for instance, in several
States and union territories, the literacy rates in 2001 were well above the
national average of 65.4 per cent; in contrast, there were also regions where
literacy levels have remained perennially low. Third, the dependency ratio varies
markedly across states. Fourth, within a State, there are marked differences
between rural and urban areas. Fifth, there is also a perceptible variation
in the penetration of banking across regions. Taken together, these unique conditions
in our country create a role for the public policy to devise enabling mechanisms
to improve the levels of financial education, reckoning the regional differences.
To the extent the common person is better able to understand and appreciate
the need for financial education, the task of the financial regulators is greatly
simplified, lowering the overall costs of regulation.
Possible approaches
It is an imperative of increasing
globalisation that the difference in the pace of growth of the financial sector
and financial education be minimized. There are several ways to go about this
process. For purposes of illustration, these can be classified as institutional
mechanisms, delivery mechanisms and decentralisation of efforts.
Institutional mechanisms
As regards the institutional mechanism,
there is near consensus on the fact that any attempt at expanding the outreach
of financial education needs to start at the grass-roots. Present day school
pass-outs need to be a lot more financially literate than their parents were,
if they are to manage their personal finances successfully through life. In
addition, universities and business schools have an important role in training
financial specialists able to provide the public with high quality advice on
financial matters.
Yet another channel for imparting
financial education could be the workplace where it can reach most of the working
adults. It would, therefore, be a potent mechanism for providing information
about a number of financial services such as retirement schemes and insurance.
The role of financial institutions
in providing financial education, not only to the clients but also to their
own staff, needs to be better defined and further promoted. More information
is needed at both international and national levels on good programmes and practices
and on the ways to promote access to financial services by harnessing the role
of non-government organisations (NGOs).
International organisations are
well-positioned to coordinate international surveys and studies on the various
aspects of financial education, to evaluate the comparative efficiency of various
financial education programmes, and to develop guidelines and good practices
for policymakers for implementation. International agencies can also provide
a forum where countries can compare and discuss strategies to educate consumers
about financial issues.
Several governments and central
banks, either directly or indirectly, are actively involved in the provision
of financial education about consumer credit, investment, and other financial
issues, often as part of a public policy campaign to improve the protection
of individual borrowers and investors, for instance, as part of the ongoing
pension reform efforts. Exchange of experiences amongst central banks would
thus be productive.
Delivery mechanisms
The delivery mechanisms for imparting
financial education can be manifold. However, the content and delivery of financial
education should correspond to the needs of specific sub-groups of consumers
that is, the young or elderly, less or better educated, well- or ill-informed.
Presentations, lectures, conferences, symposia, training courses and seminars
can be actively utilised for this purpose.
Second, publications in diverse
forms, including books, brochures, magazines, booklets/pamphlets, direct mail
documents, can also be useful in this regard.
Third, leveraging information technology
through concerted media campaigns using all possible avenues of mass communication
can be expected to impart greater efficacy to the process. Other methods include
advisory services from institutions, including the fast growing telecommunication
services.
Not only the supply of financial
education, but also the demand is very important. Most delivery channels are
good for those who are already interested in particular topics. An important
challenge is to create demand for financial information and education.
Decentralisation of efforts
Given the unique conditions in
our country, any attempt at expanding the outreach of financial education should
take cognisance of the role of regional differences in language, workforce and
penetration of finance. Thus, banks with strong presence across different regions
could explore the possibility of introducing a local-language based web-site
providing details of facilities for customers.
Second, in recent times, the explosion
of the internet has altered the relationship between financial organisations
and its clientele. Organisations can examine ways to better communicate with
both the prospective and existing clients by enriching the information content
of their website on the lines of those practiced in the mature markets.
Third, credit counselling can be
a potent tool for financial entities to expand the reach of financial education.
Fourth, it might be of interest
for reputed organisations like the National Council of Applied Economic Research
(NCAER) to conduct surveys at periodic intervals to ascertain the degree of
consumer awareness about financial products and services. The findings emanating
from such studies could be shared with financial entities to enable them to
address the gaps in their service delivery and promote informed decision-making.
Fourth, several bodies, such as
the Financial Planning Standards Board of India (FPSBI), a professional standards
setting body constituted with public-private enterprise, are reportedly making
proactive efforts to uniformly regulate personal financial planning practitioners.
Much more of such efforts will be required to guide the development and promotion
of standards for financial planning professionals to benefit and protect the
public in the country.
Role of the RBI
The RBI, on its part, wishes to
advance the cause of financial education in our country as part of an overall
strategy. The strategy pursued in this regard can be elucidated as follows.
Concerted efforts are underway to expand the reach of formal finance in view
of recent emphasis on financial inclusion. This needs to be buttressed with
financial education to generate greater customer awareness and understanding
of financial products and services. Concurrently, a process of credit counselling
is being encouraged to help all borrowers, but particularly those in distress
to overcome current financial problems and gain access to the structured financial
system. The Banking Codes and Standards Board of India (BCSBI) has also been
instituted which is expected to ensure that the banks formulate and adhere to
their own comprehensive code of conduct for minimum standards of banking services,
which individual customers can legitimately expect. And finally, a Banking Ombudsman
Scheme has been instituted for redressal of grievances against deficient banking
services, covering all the States and Union Territories.
The RBI has also been exploring
the possibility of instituting a Depositor Protection Fund (DPF). The Fund can
be utilised towards generating greater awareness for the common man on issues
relating to financial education and counselling. This could be complemented
with providing greater role to our Regional Offices to promote financial education
in their respective jurisdictions.
Conclusion
The international co-operation
of the kind which OECD and PFRDA have embarked upon is a welcome development.
I would like to congratulate them for undertaking this useful initiative and
thank them for giving me an opportunity to be a part of this process.
I have no doubt that this Conference
will prove to be an important milestone in the area of financial education for
our country.
We, at the RBI, too look forward
to benefiting from the deliberations.
Thank you.
Inaugural Address by Dr. Y.
V. Reddy, Governor, Reserve Bank of India at the International Conference on
Financial Education organised by OECD and co-hosted by Pension Fund Regulatory
and Development Authority at New Delhi on September 21, 2006. |