CRESCENT-16 ISSN : INTERNATIONALJOURNALFORADMINISTRATION IN MANAGEMENT, COMMERCE AND ECONOMICS

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1 IJAMCE INTERNATIONALJOURNALFORADMINISTRATION IN MANAGEMENT, COMMERCE AND ECONOMICS Importance & Need of Financial Literacy for Economic Development Dr. Prashant M. Pisolkar Asst. Professor & Head Dept. of Commerce, Shankarlal Khandelwal College, Akola (M.S.) Abstract The economies around the world have increasingly considered financial literacy as a key pillar for the development of their financial system. In the recent years financial literacy has become a much talked about phenomena. It is attracting the attention of not only central and state government, central bank and commercial banks but also the common man trying to meet his financial needs on a daily basis and planning for a safe future. This paper summarizes the growing efforts in the field of financial literacy.an attempt has been made to understand the meaning of financial literacy and identify the need for it taking into consideration the previous research and literature as back ground. The finding indicate Reserve Bank of India, Securities Exchange Securities exchange board of India (SEBI) and Insurance Regulatory and Development Authority (IRDA) are working actively towards promoting financial literacy The paper has implications for the policy makers in identifying the growing need for financial awareness and developing suitable financial literacy programs It will also help investors in better financial decision making and creating awareness about the importance of financial education besides providing a platform for future research Financial literacy is of utmost importance for any country s economic growth. Access to finance by the poor, disadvantaged and underprivileged group is a prerequisite of poverty alleviation on one hand and the economic growth on the other. Keywords: Financial Literacy, Financial Education, Financial needs, financial awareness Introduction: Financial literacy is the major challenge faced by Indian economy. Financial literacy is the mix of one s knowledge, skill and attitude towards financial matters. It helps to make informed decisions and well being of an individual. In today s world which has a market with complicated products, the need for financial literacy becomes inevitable. Country like India which has high young population, the government is in a position to increase the level of financial literacy. The government and other private institutions have taken steps

2 through financial education programs. excluded from the formal financial set Financial literacy goes beyond the up. provision of financial information and advice. It is the ability to know, monitor, and effectively use financial resources to enhance the well-being and economic security of an individual, his family, and his business. Objective of the paper: The objectives of this paper are to shed light on the following areas. 1. To understand the Meaning of Financial Literacy. 2. To understand the Importance and Financial literacy is mainly Need of financial literacy. concerned with better planning of 3. To suggest certain Suggestions for retirement life, gradual wealth Improvement of Financial accumulation and better financial Literacy. decision making. So to be financially literate becomes important from the initial stages of one s career. But due to some personal or professional hindrances they become financially illiterate. This Scope of study: In this paper the scope of study is limited to Meaning of Financial Literacy, the Importance and Need of financial literacy & The Suggestion leaves them with inadequate knowledge for Improvement of Financial about financial dealings, inappropriate decisions etc. So they have to be enhanced with financial knowledge and tools which are needed to make informed decisions. Financial literacy impacts the promotion of financial inclusion which ultimately results in financial stability of Literacy. Sources of Data: The paper is based on descriptive arguments, by referring the secondary data like reports, books, journals, newspapers and online data. Meaning of Financial Literacy: any economy. The need for financial Financial literacy is viewed literacy in India has gained importance differently by different people, and because of low level of literacy and large section of population which is financially this is reflected clearly in the

3 definitions used in the literature. For A spectrum covering financial few it is a broad concept, an understanding of economics and how individual financial decisions are affected by economic conditions and circumstances. For others, it means knowledge and the understanding, confidence and motivation to make financial judgments and decisions. Thus, financial literacy is the knowledge on basic money knowledge, ability and skill to management: budgeting, saving, and investing. understand, control, and use one s financial resources wisely ultimately According to RBI, Financial leading to the well-being and literacy can broadly be defined as economic security of oneself, one's Providing familiarity with and family, and the economy as a whole. understanding of financial market Importance and Need of financial products, especially rewards and literacy: risks, in order making informed choices. The Organization for Economic The following points build up the case for importance & need of financial literacy. Co-operation and Development To Filter relevant information (OECD) defines financial literacy as and analyzing it: A combination of awareness, In case of financial services, it is knowledge, skill, attitude and not sufficient to provide information to behavior necessary to make sound consumers and then expect them to be financial decisions and ultimately able to take informed decisions. achieve individual financial well Effectiveness of information given to a being. consumer as a result of financial The ability to use knowledge and skills to manage financial resources effectively for a lifetime of financial well-being. consumer protection regulation, depends not only on quality of the information, but also on capacity of the consumer to understand it. It is also important to

4 ensure that consumers understand this makes the consumers vulnerable to information and that important aspects misconduct on the part of financial are not lost due to information overload. service providers. They are also Aggressive marketing strategies might vulnerable to conflicts of interest, the lead to consumers choosing an possibility that an institution or its agents inappropriate financial product or will put their own interests or those of service. Important information relating to affiliated parties or even another terms & conditions or risk & return might get lost in a mountain of fine print. customer above those of the client in question. Even worse, service providers Information overload reduces the might engage in outright fraud. usefulness of disclosure. Complexity of products: Advancements in technology and increased marketing efforts for financial Spill over effects: Financial literacy can make a difference not only in the quality of life that individuals can afford, but also the products and services necessitate integrity and quality of markets. It can financial literacy. There isn t paucity of information, what is lacking is the ability to interpret this information. Which will be helpful in understanding 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 the complexity of products. retirement. Financially literate To control over Unfair practices consumers, in turn, can benefit the by financial services providers: economy by encouraging genuine A major difficulty consumers face is competition, forcing the service that the assessment of quality of many providers to innovate and improve their financial products often cannot be levels of efficiency. accomplished at the time of purchase. The fact that retail consumers cannot readily discern the quality of financial products has a number of implications. It To help overcome irrational behavior and biases: Researchers in behavioral finance have stated that investors tend to behave

5 irrationally at times. These biases include Reserve Bank of India (RBI) over the mistaken beliefs where consumers years to increase access to the poorer assume that interest rate charges or segments of society. But in trying to penalties will not apply to them: they are achieve our objective of financial over optimistic about their financial futures and thus unable to accurately forecast their future financial status. Individuals often over-estimate their financial capabilities, including their understanding of the concept of the time inclusion, we need to tread with caution. Though lack of financial knowledge affects people all across the board whether high income or low income, educated or uneducated, men or women, but it is the resource-poor, those who are value of money and the impact of marginalized who are the most compound interest over time. Such behavioral patterns might be overcome by imparting financial literacy. Financial literacy or appropriate education can help vulnerable and end up losing the most. Suggestion for Improvement: Several measures can be taken to improve financial literacy levels. people reduce the impact of their irrational behavior as investors. 1) Integration education in of High financial School Financial inclusion and inclusive growth: Financial literacy is linked to consumer protection, in India; financial Curriculum: It is suggested that schools should consider including financial literacy in their curriculum and also encourage their literacy is more linked to financial students to participate in financial inclusion. One of the aims of making people more financially literate is to end their financial exclusion and bring them literacy contests. For these, bodies like SEBI, BSE, NSE, etc. should sponsor business and economics festivals in within the formal financial loop. colleges to improve financial literacy. Financial Inclusion has become a policy These programs will evaluate and certify priority in India over the last few years. students on day-to-day money Multiple steps have been taken by the management, based on their

6 understanding of key concepts including exponentially. Another easily scalable financial and economic terms, principles model as mentioned earlier for large of savings and budgeting, banking, sections of poor people could be taxation and stock markets, prudent conducting literacy courses across investment avenues, basic accountancy and entrepreneurial skills. country through rural branches and LDMs of banks. 2) Use of Social Marketing 4) Adult Education: Campaigns: Government of India have Financial education should form an integral part of the adult education. So undertaken commendable programs of social marketing such as polio and small pox eradication, prevention of child marriage, etc. These campaigns can serve that all groups and classes of the society can cover under this programme. 5) Self Help Groups and others: as models for conducting social Financial literacy awareness can be marketing initiatives in financial propagated in society through SHG s. education. There is possibility of making use of Dedicated Financial Education Some of the Self Help Groups have helped in spread of financial education as websites, News papers, Radio and its discipline requires the groups to Television, Use of Social Networking Websites like Face book and Twitter, & Books / magazines in Cartoon Format for young people. maintain accounts and make budgets. The good work needs to be carried forward and put on a firm basis. 6) Microfinance Institutions: 3) Education through Resource This programme can also be Persons: The model undertaken by SEBI to impart financial education is by engaging Resource Persons across the country for various target groups. This initiative effectively implemented through social organization like NGO. Many NGOs have been running successful financial education programs for their borrowers. These programs need needs to be taken further and scaled up

7 to be dovetailed into overall strategy for work related to making their association people in other areas. 7) Integrated communication members aware of their rights and responsibilities in a particular product channels: category. They can further the cause of While the channels like TV, Radio, Financial Education Regulated internet should be exploited fully; there is a need to leverage the existing extension works and projects carried out by various ministries such as efforts of agriculture ministry to spread knowledge through panchayats. 8) Helpline: There is a need of multi lingual, toll free helpline where an investor/ customer / client can call and get friendly assistance / support. It should be like a friend who is available to guide you in case of difficulties. All regulators can think of such initiative, if they have not already thought of it. It can play an important role in Financial Education. 9) Other Channels: There is possibility of making use of intermediaries like Banks, DPs, brokers, PFMs, Annuity service providers etc. can play important part in making a person financially educated. They can make their consumers/ clients / investors aware of their rights and responsibilities. This can be done as part of product selling process. Conclusion: India is the nation of savers and investors; additionally, more than 52% of the population is below 25 years of age, which creates a need for developing a population which is financially literate. In an era of accelerating GDP and rising per capita growth, financial literacy has become more critical than ever before so that we all reap the tangible benefits of other established channels such as the nation's economic prosperity. Consumers Associations, Investors Financial literacy has been quite high on Associations, Association of Policy the governmental agenda, given its Holders Stock Exchanges, AMFI, ANMI, emphasis on widening the Banking & SROs associated with regulators. All Financial services network across the mentioned associations are already doing country.

8 Since financial literacy is a dynamic concept, focus of financial literacy initiatives should be on developing capability of consumers so that they are able to update their financial knowledge, awareness and skills on their own. This way, financial literacy initiatives can become meaningful in the long term. There are certainly many challenges relating to financial literacy. But with no dearth of information and technology at our disposal, ways and means to counter them can be found. In conclusion, financial literacy is the ultimate pillar of a strong financial system. Financial literacy and financial education should be on the agendas of educators, businesses, government agencies, policy makers, NGOs and the issues should be dealt with policy reforms at the national level. Thus, it is important to achieve highest possible financial literacy in the country as its benefits are not restricted to an individual or family, but to the society and the macro economy as a whole. References: 1) Seth, P. Patel, G.N. Krishnan, K.K.. Financial Literacy & Investment Decisions of Indian Investors: A Case of Delhi & NCR. New Delhi. Birla Institute of Management Technology, ) Noctor, M., Stoney, S. and Stradling, R.. Financial Literacy: A Discussion of Concepts and Competences of Financial Literacy and Opportunities for its Introduction into Young People s Learning. 3) Anilkumar, M., Beegam, S. Resia, (2009) Financial Inclusion: Challenges & Opportunities in the Liberalised Era. 4) Special Economic Zones in India - Financial Inclusion : Challenges & Opportunities, Publication, New Delhi, by P.K. Manoj, Serials 5) IIM A report on A Survey of financial literacy among Students, Young employees and the retired in India. 6) Improving Financial Education Efficiency OECD-Bank of Italy symposium on Financial Literacy )