Expert Interview with Sudhir Raikar on Financial Literacy in the Third World for Mint

Sudhir Raikar knows how important financial literacy is: He's head of financial literary initiatives for Financial Literacy Agenda for Mass Empowerment, or FLAME. He was kind enough to speak with us about why financial literacy is so crucial, to India and the entire world.

Why is financial literacy so important to India and Sri Lanka?

It is a well-known fact that financial inclusion is a priority action area for all South Asian countries, including India and Sri Lanka. These nations face several common hurdles emanating from cultural sensitivities, gender imbalance and the vast rural and semi-urban hinterlands that are invariably devoid of low-cost, tech-driven financial solutions. This leaves a vast majority of people with lack of convenient access to capital, credit and insurance among other things. Obviously they fall prey to the vagaries and machinations of unscrupulous providers and fly-by-night operators.

The success of financial inclusion squarely hinges on the quality of financial literacy. More than merely designing curricula in target-friendly languages, the process of spreading financial awareness calls for exploding several deep-rooted myths, especially those plaguing the markedly cut-off rural populace. Underprivileged sections still view banks and financial institutions as elitist entities offering services that they either don't need or can't afford. There is an urgent need to reinforce the fact among them that financial awareness, and access to financial solutions, is a life-changing tool in their hands, not merely a state directive.

What are some of the challenges in teaching financial literacy?

To arrive at the challenge of teaching financial literacy, we need to acknowledge the fundamental difference between full inclusion and partial inclusion as derived from the sphere of education. While the former implies bringing all students, regardless of their disability, under the regular classroom curriculum, the latter extends support services to the concerned child rather than moving the child to the common service platform.

Like the service providers in education, suppliers of financial products and services have struggled to cope with the sheer depth and gravity of the inclusive challenge. The common dichotomy has always been an elementary question: whether to tailor products and services to address the special needs of target groups or to make the system dynamic and capable of addressing diverse needs through flexible one-roof mechanisms.

The elementary question hints at the need for providing financial products and services to target groups in line with their special needs. But the challenge comes in the form of more questions:

  • Are target groups ever aware of what they seek, rather what they need?
  • Should one regard the ignorance of target groups as an impediment or as a key business challenge?
  • Who's responsible for the financial literacy of target groups...government, local agencies, supply-side entities or demand-side activists?
  • Is financial literacy only about creating consciousness among target groups, or is it also about ensuring their protection from likely pitfalls and making them conscious about savings, investment and financial prudence?

Target groups of any awareness program, irrespective of specific regions and personal situations, are largely unaware of their real needs in life, but it's near-fatal to regard their ignorance as an impediment to creating awareness, for this ignorance is only an intricate mix of their perceived notions of wellbeing and the constricted visions of local bodies and activists who peddle muddled notions of growth and advancement.

Financial inclusion, full or otherwise, necessarily demands an effective enabling environment where access to financial services can be adorned with unflinching reliability, better proximity and fast and cost-effective service. Financial institutions have managed to provide this environment with reasonable success, but the challenges yet outweigh the accomplishments.

What does rapid GDP growth mean for the citizen on the street?

This is a very pertinent question. And the answer demands a mental shift in the way we conventionally probe and dissect economic concepts and policies. Rather than see GDP as an absolute macroeconomic figure, we should evaluate it in terms of its transformational impact on agriculture, industry, services, also on investments in public utilities, health, education and welfare. A rapid GDP growth should enable and empower the marginalized sections to augment their asset base and expand the range of their economic choices.

The outcome alone will help us measure if and how GDP growth improves human life at the grassroots. Rapid GDP growth will be deemed rapid only if it leads to the creation of better and plentiful employment opportunities across sectors. In periods of boom, the benefits should percolate down to the last granularity, else there's no boom in the real sense. And conversely, in times of depression, the deprived sections of the society should be insulated from the damaging effect at least to some extent.

For evaluating the real impact of GDP growth, we need to adjust it for inflation. Merely recording GDP as a nominal monetary value of the all-finished goods and services produced in a certain geographical area during a certain time period will prove to be an academic exercise. For the common man, a good GDP growth rate should result in a judicious blend of earning and spending that helps builds a virtuous cycle of confidence building for all stakeholders - whether consumers or investors.

What misconceptions about finance do you often run into?

Our field exposure has brought us face-to-face with many a misconception, but there are a few myths that seem to be more deep-rooted in the minds of common people than what meets the eye. One of the top-most myths in circulation is that kids can't absorb financial concepts. Based on our experience with several schools, we find that students are among the best suited audiences for such programs. Not only do they fare well in the contests and examinations, they ask probing questions and are keen to practice the learning in real life. The seemingly intricate concepts like compounding, leveraging and averaging - if taught effectively - are well received by young minds. In fact, it's elementary that such concepts be taught as early as possible to help them manage their money with authority and responsibility later in life.

Then there are people who are absolutely convinced that financial competence is an inborn skill. Nothing can be further than the truth. Like every other skill, financial acumen can be developed with consistent effort over time. Financial literacy is not about being financial wizards. It's all about making better financial decisions in life. And contrary to what many believe, it's not about number-crunching alone. Number-crunching is only a part of the whole sum for which help is readily available. What's more important is the awareness that we need to become more disciplined and diligent about our savings and investment plans.

Another top myth doing the rounds is that seeking knowledge of money matters is synonymous with being "money minded." Thanks to the influence of literature and the cinema, which has often painted money as a negative force which eventually leads to destruction of human values, people trust and transmit fancy ideas and ideals about money. They need to be explicitly told, through our sessions and workshops, that money's worth is not to be confused with its potential abuse, and that money skills are not an "elective" course in life. Earning good money and then growing it through saving and investing is in fact our foremost duty in life. Financial knowledge is not about being greedy; it's about being responsible and sensitive towards fulfilling the needs and aspirations of the family, which are invariably expressed in money terms. A majority of people are oblivious of the proven fact that small amounts of saving and investing over large periods of time can yield phenomenal returns. They may be faintly aware of the magic of compounding but, most often, they need to be coaxed and convinced to make a beginning.

How can we help ensure everyone knows what to do with their money?

Ever since IIFL launched its Financial Literacy Agenda for Mass Empowerment (FLAME) initiative, we have been engaged in a seamless and fruitful dialogue with a wider cross section of people - whether school students, collegians, housewives, young executives, entrepreneurs or senior citizens. What we learned in the course of time is the fact that financial literacy initiatives need to be astutely tailored in line with the sensibilities and needs of each target group. Hence, we have spread awareness through as many vehicles of communication and interaction - whether contests and quizzes, workshops, interactive sessions, seminars, portal and website information and, of course, books and publications.

The key learnings that helped us re-engineer our financial literacy initiatives for every section of the populace include the following:

  • Literacy has little to do with academic and professional qualifications. Some of the highly qualified professionals lack the most basic financial literacy.
  • College students do not like to be preached on lifestyle matters. The delivery needs to be informal and colloquial, subtly leading them to the larger cause through pertinent case studies and engaging group activities.
  • We have found the salaried class to be more than happy to know about the essentials of finance, provided it is made available to them in a lucid manner. The self-employed generally show more interest in products like loans rather than any saving-related instrument.
  • Audience engagement is often not measurable during large-scale investor meets. A small seminar format works much better.

What steps can India and Sri Lanka take to ensure better financial literacy for the citizens who need it?

The prime reason why conventional micro finance agencies of most countries could not decipher the real needs of target groups was the absence of a fruitful dialogue between supply-side and demand-side entities. In many cases, credit was extended based on hasty, unrealistic assumptions of needs, which resulted in haphazard distribution of credit, ripe with the possibilities of misuse or overuse at the cost of depriving other regions with more acute but undefined and unaddressed needs. Moreover, micro finance players were largely confined to the boundaries of their defined products. This invariably led them to force-fit client needs to match their offerings instead of the other way around. The credit bureau experience is similar if not the same.

If financial literacy initiatives precede financial inclusion initiatives, financial offerings would be tailored to the specific need. In one region, it could be a seasonal offering in line with the agricultural patterns; in another it could be a smart insurance offering to help combat a known health hazard. This strategy would be mutually rewarding as opposed to a perfunctory replication of a certain credit card scheme only because it was an instant hit in urban regions. It's imperative that financial institutions also develop clear, concise product literature, which is another crucial form of financial literacy. The target audience will obviously understand the product or service better in a language they understand and only in the context of their needs and aspirations. Inappropriate selling of products can then be significantly reduced.

In our experience, most queries during live public chats - both offline and online - focus on the stock market even when the chat is related to personal finance. But despite this widespread curiosity, the general public perception about stock markets is flawed...that it's a gambling den of make-or-break propositions.

Intervention agencies of both countries must foster a sound investment culture at the grassroots level, adequately unfolding the underlying purpose of primary and secondary markets and the benefits of investing for the long term. While it may be argued that household savings in India are high, the key question is whether savings are being optimally invested. It is estimated that 40% of household savings are channelized into physical assets such as real estate and gold, while financial assets popularly take the form of bank deposits and cash. The capital market is thus largely ignored. A financially literate target populace, complemented by low-cost, tech-enabled access to financial products and services, can contribute a humungous pool of household savings into the stock markets, which in turn can spell a wholesome and sustainable inclusive economic growth for all nations, including India and Sri Lanka.

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