Financial Inclusion & Financial Literacy: Intentions & Realities

Posted on July 14, 2010 by Ranjan

The newspaper today has stories on financial inclusion and financial literacy. This post is about my thoughts on the noble intentions v/s the hard realities in the areas of financial inclusion and financial literacy.

Mumbo Jumbo? Finance Minister Pranab Mukherjee described the FE Best Banks Awards function held yesterday as having evolved into a “popular event” for India Inc to highlight the importance of bringing banking to those “who need the very basic financial services.” He said that the event could significantly contribute towards highlighting the importance of expansion of banking activities for economic development.

High sounding words: Speaking about financial inclusion, the Finance Minister said competing needs for the financial resources required for high growth necessitate that these resources should be used at the maximum possible efficiency.

“The financial intermediation for these financial resources should be cost-efficient and allocation efficiency should be high,” Mukherjee said.

My Questions: It’s all good to network and celebrate performance. But I fail to understand the connect between the celebrations and the financial inclusion part. I don’t really understand the rhetoric. Am I fast becoming a dyslexic? What about you? If you are able to make sense of the high sounding words, please educate me.

As an aside, the Akshaya Patra Foundation in India has found a way to feed a child daily for the entire school year on just $28. (Source)

As another aside, the event cost of the Awards would be in crores. Just a rough guess.

As aside no.3, I quote Subramoney on the poor small investor, “small investor, financial literacy, financial awareness, financial inclusion….what an amazing array of words we have created for bureaucrats, politicians, businessmen, capital market pundits to meet and eat!”

Next is Financial Literacy. Here’s another high sounding quote:

U K Sinha, CMD, UTI AMC said, “Swatantra’ is India’s Journey to financial freedom and is the largest investor campaign in the country which will cover over 300 cities in 100 days through 100 investor meets. Financial Education is very crucial for the growth of India’s capital market and India will progress at a faster pace if there is higher retail participation in the capital markets. This Campaign will target inculcating financial literacy to potential investors which will help them to take informed decisions.”

My take:
Handing out visually beautiful brochures about the do’s and don’ts of finance does not help the small investors take informed decisions. Financial decisions are personal and you need to understand each individual’s situation to help him make an informed decision. A town hall method of imparting financial education will be totally ineffective.

Further, the financial education needs to be unbiased and independent. But who will be the resource persons for imparting the education. My feeling is that the Branch Heads of the UTI Branches across the country (having stiff sales targets) will be used. What will they do other than selling UTIMF products to the investors.

Conclusions:
There’s a wide disconnect between noble intentions and hard realities. If wishes were horses, beggars would ride, an English language proverb , clearly suggests that it is useless to wish; better results will be achieved through action.

But here the action itself is useless, IMHO. A lot of effort needs to be taken to design a financial literacy program. What do you say?

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Retirement Planning: How to Do It Yourself!

Posted on June 14, 2010 by Ranjan

Deepak Shenoy has a lucid explanation of an Insurer’s Pension Plan and how it compares with a simple low cost ETF.

Deepak explains how despite assuming a lower rate of return (9% instead of the 10% assumed by the Insurer), you can outperform the Insurer’s Pension Plan by a wide margin.

I am sure, comparing the Insurer Pension Plan with NPS (New Pension Scheme) will show similar results.

Btw, figuring out the numbers for your retirement plan is another big issue. Start with figuring out your retirement funds, how much every month will you need after factoring inflation and how long will the funds keep going. (you may like to spend time with this retirement planner, these sheets and calculators)

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Design & Policy Support for Delivering Financial Awareness

Posted on March 31, 2010 by Ranjan

This is in continuation to my earlier post

Understanding how to manage money, use credit responsibly, maximize our investments and minimize our expenses is not something we do with a lot of enthusiasm. In fact it is a frequently avoided issue. If we are asked to rank taking informed financial decisions in our priority list, I am sure it will rank somewhere last in the list. Even though money is somewhere top in our importance list.

That’s why; a workshop on financial literacy (where the Union Finance Minister was present along with Governor, RBI, and its Deputy Governors and the OECD Deputy Secretary-General Ambassador) was of interest to me.

You cannot argue against the need of spreading financial literacy. But I have a few basic questions that need to be answered at the planning stage for any policy:

How do we achieve greater financial literacy?
How do we measure the success of the programs?
How does a public policy on financial literacy help?

I did not attend the high profile workshop where issues like the above must have been discussed. However if I was asked to share my views on the subject, I would present those under two heads: One, Training Program design and two, Policy support.

A. Training Program Design:

The weaknesses of financial decision making are universal and afflict everyone. But the solution for me is different from the solution for you and is unique for everyone. That’s why; designing the financial literacy training program is not an easy task. Remember that our money competencies do not just depend on our knowledge but also depends on our various skills and attitudes. For example, a Professor of Finance may know a lot about investing but doesn’t have the risk appetite or an aptitude, may still be making bad financial decisions.

The program design will have the following elements.

1. Identification of required knowledge, skills and attitudes to make better decisions.

To start with, we need to identify the best practices for good money management. The knowledge part may be easy to identify. But we also need to identify the money management skills like risk profiling and asset allocation decisions. We also need to articulate the attitude required for taking optimum financial decisions.

2. Classification of target audience according to demographics as well as geographic classification

This can be done to understand the adult learner; design programs around personal preferences of learners;

3. Identification of teaching techniques for various types of learners.

Individual learners have preferences for audio, visual and kinesthetic style of learnings and a combination of the styles. The training design need to factor the individual styles and build effective content.

4. Design and use of activities, games, videos and case studies

Based on the three steps above, this is the crux of a good program. A lot of effort has to go into designing these activities, games, videos and case studies to make the learning interesting, useful and effective.

B. Financial Literacy Policy support

The Government has an important role in policy formulation and providing a framework where the financial literacy efforts can take roots and prosper. Here’s a starting list which can get this gigantic project off the ground:

Financial Literacy month: Let us have a widely celebrated Financial Literacy month to get started with. March is too late as it is the end of the financial year and April is the beginning. Can we have September as the Financial Awareness Month?
Competition for training program design: RBI and other Regulators like SEBI & IRDA do have a financial education portal. But as I mentioned earlier, a complete training programme needs to be designed for this purpose. Can we have a national level competition for the best training programme design among our talented HR Consultants and Trainers?
Awards for best corporate implementing the training program: After the training program is ready, they need to be implemented across the country. It may be a good idea to involve the Corporates to help their employees make better financial decisions. After all, this may lead to better employee engagement for the Corporates. The Corporates who run the best financial literacy drive in their company can be recognized and rewarded.
Awards for the best educational institute (schools, colleges, professional institutes) for implementing the training program. This will help in taking this topic more seriously by the educational institutes and get the students started on the learning trajectory.
Awards for the best trainers imparting the financial awareness program will help in recognizing significant effort by the individual trainers.
Empanel Trainers/Consultants/ NGOs: A directory can be created by the Government about the NGOs, Trainers and Consultants who are willing to work in this area.
Project Champion: Even when all of the above is put in ink, we need a passionate leader who can drive the change. He/She needs to have the full authority from the Government, be an able Administrator while being passionate about the project. Somebody like Nandan Nilekeni.

For implementing the financial literacy project, it is important to recognize the various stakeholders who can contribute in this gigantic project. And the Government will do well to empower them to do their best.

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