Financial literacy policy impact in India
Identifying knowledge gaps for targeted intervention
By Dennis Philip - July 2019
Financial literacy – what is it? An important element for economic development, as has recently been recognised and advocated by policymakers around the world.
The Organisation for Economic Co-operation and Development (OECD) provides the following working definition for financial literacy:
“Financial literacy is knowledge and understanding of financial concepts and risks, and the skills, motivation and confidence to apply such knowledge and understanding in order to make effective decisions across a range of financial contexts, to improve the financial wellbeing of individuals and society, and to enable participation in economic life.”
Financial literacy policy impact in India The Centre for Banking, Institutions and Development (CBID) at the Business School partners with the National Centre for Financial Education (NCFE) in India to investigate the levels of financial literacy there. The project is led by Professor Dennis Philip, Dr Anurag Banerjee and doctoral researcher Kamlesh Kumar. The research analyses the national benchmark survey database of financial knowledge and inclusion fielded by NCFE across India. The survey spanned over 150 districts to ensure adequate representation of all the 28 states and 7 union territories and gathered granular information on 76,762 respondents.
From the NCFE-Durham collaborative research, two overarching policy contributions have emerged:
It enabled policy-makers in India to benchmark the financial literacy levels for the first time against other OECD countries. The project findings, summarised in a high-level white paper, were presented to ministers at two policy forums and inform the national strategy for financial education in India.
It highlighted important gaps in financial knowledge and identified vulnerable socio-economic groupings, such as ‘Backward Class’ and ‘Jawans’ (soldiers), for targeted educational interventions. One of the outputs produced through the School’s research is the Mapping of Financial Literacy, which displays the levels of financial literacy across the states. The average response scores for the survey questions are presented in the form of dynamic maps that display several dimensions covering financial knowledge, behaviour and attitude. The mapping results provide important information to policy-makers, grassroots microfinance organisations, non-governmental organisations (NGOs) and educational bodies across the states in India on their financial literacy performance and inform their priorities for the region.
How financially literate is India?
Financial knowledge is measured with survey questions related to seven important topics: purchasing power (time value of money), interest paid on loans, simple interest calculation, the benefits of compound interest on savings, the risk-return relationship, the benefits of diversification, and the understanding of inflation.
Across the Country the highest number of incorrect responses were for questions on the understanding of compound interest and purchasing power of money, and there is considerable variation in the response accuracies in financial knowledge, which indicates that there is no one-size-fits-all approach to interventions. The North and West Zones of the Country perform best overall, with 12.7% and 11.11% of respondents, respectively, answering all seven questions correctly. This is driven by the fact that two of the major cities of India, Delhi and Mumbai, belong to the North and West Zones. The lowest financial knowledge scores are observed in the East Zone.
The state-level results for financial knowledge, financial behaviour and financial attitude show considerable diversity. Financial attitude scored the lowest, as compared to financial behaviour and financial knowledge. Comparing the financial knowledge and financial behaviour average scores across states, we observe greater variation in financial knowledge than behaviour. Several states show particularly low average financial knowledge scores, indicating limited effective financial decision-making among the population. The research recommended taking into account cultural aspects of respondents in order to gauge the factors driving these state-level results.
So how does India compare with the other OECD countries in terms of financial knowledge?
The average correct responses to the financial knowledge questions are compared with the Organisation for Economic Co-operation and Development (OECD) results. The average scores in India are lower than the OECD averages for all the financial knowledge dimensions, with the highest difference observed for understanding of time value of money and the risk-return relationship. The lowest difference in average scores are seen for simple interest calculation and benefits of diversification.