As increasing range and complexity of products has made it very difficult for an ordinary person to take an informed decision,financial literacy will develop the knowledge,confidence and skills to manage financial products and services and enable people to have more control of their present and future needs.
The Insurance Regulatory and Development Authority (Irda) has come out with a draft National Strategy for Financial Education,which recognises that financial literacy and financial education play a vital role in financial inclusion and inclusive growth.
The national strategy seeks to create a financially aware and empowered India and aims to undertake a massive financial education campaign to help people manage money more effectively to achieve financial well-being by accessing appropriate financial products and services through regulated entities.
Globally,countries like Czech Republic,the Netherlands,New Zealand,Spain and the UK have already implemented a national strategy for financial education and many other countries are in the process of formulation and implementation.
The national strategy underlines that the key components of financial education efforts would be to understand the key financial products one may need throughout one’s life,including bank accounts,insurance,retirement savings plans and securities market investments like stocks,bonds and mutual funds. It will also focus on understanding basic financial concepts like compounded interest,present and future value of money,annuity,investment return,risk,protection and diversification.
The strategy also underlines developing skills and confidence so that one can be aware of financial risk and opportunities and benefit from them. It will also deal with making good financial choices about saving,spending,insurance,investing and managing debt through one’s life at various stages like starting a job,buying a house,starting a family,getting ready to retire and living out the senior years.
The strategy says that the most effective way is to weave financial education in the normal content of curriculum. For example,the note says compound interest is taught in arithmetic as an abstract concept of A lending to B at some interest rate compounded annually. This can be turned into an opportunity of financial education by weaving into a problem of a company that borrows from a bank customer who opens a Cumulative Deposit Account instead of a simple Fixed Deposit Account, the note explains.
The modes of delivery of financial literacy can be different depending on the recipient. The note says that schoolchildren can reached best through school curricula,employees can be reached through employers and homemakers through non-government organisations.
The content and method of presentation has also to be tailored according to the target groups. Similarly,a large number of financially excluded rural folk will have to be reached through the network of rural branches of banks and lead district managers of lead banks.
The note also says that content has to be sector neutral. The ministry of human resources (MHRD) should take the lead role in ensuring inclusion of financial literacy material in school curriculum across India through coordination with various boards,ministries and state governments.
The ministry of finance shall be the facilitatory for the inclusion of financial literacy in school curriculum through MHRD.
For sector-focused financial education,four sectors have been identified banking,securities market,insurance and retirement planning. Education for the actual and potential securities market investor may consists of basics of stock exchange mechanism,clearing and settlement mechanism,dematerialisation and depositories and the role of various intermediaries,such as brokers,merchant bankers,registrars,transfer agents and underwriters.
Potentially risky areas such as margin trading and derivatives need to be flagged. Various instruments,such as shares,mutual funds units,corporate bonds and pension plans,need to be explained.
Similarly,bank-related financial education would consists of details such as responsibilities under Negotiable Instruments Act,precautions while dealing with ATMs and net banking. It will also include fundamentals of payment system lockers and safe custody,loans and guarantees,fixed versus floating rates of loans.
The insurance sector must cover both life and non-life,which must include adequacy of cover and the need to pay regular premium. Retirement planning should be targeted to all persons in earning age bracket and the role of pension fund managers properly explained. The sector regulators will be responsible for designing and monitoring the study material.
The product education has to be neutral between the various available options within the product range. The note suggests that the best agencies for delivery of product education would be the respective industry association like Indian Banks’ Association,Amfi,Fimda,etc.
The note says that the more important part of the product education lies with the manufactures of the products. The regulators will have to ensure that the product manufactures impart product education at the point of sale in particular.
The note also says that regulators will have to ensure that the product education is comprehensive while being simple and true.
The draft national strategy on financial education underlines the fact that illiterate people are in most dire need of financial education.
It says illiterate people need not have to wait for alphabet knowledge as money has its own language.
Adult education methodologies like role plays,charts,discussions,games and other audio visual modes of communication would be ideal for such groups.
The note has also underlined the importance of multi-lingual toll-free helpline where an investor can call and get friendly assistance.