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Institutionalise financial education

`The reform era had made it imperative for policy makers to look at and impart financial education in the widest sense possible'

— PHOTO: KAMAL NARANG

KNOWLEDGE ASSIMILATION: Reserve Bank of India Governor, Y. V. Reddy (left), with D. Swarup, Chairman, Pension Fund Regulatory and Development Authority, at a conference on Financial Education in New Delhi recently.

FINANCIAL EDUCATION in the sense of making individuals aware of the risks and rewards of investing in financial products in a market based economy may not be new to India. Across the three principal sub-sectors of banking, insurance and capital markets, at various points in time, there have been substantial initiatives aimed at educating customers and equally significantly the financial intermediaries.

Thus, as part of the opening of the insurance sector, the authorities saw to it that the professionals entrusted with selling products of the new insurance companies were licensed for which they had to undergo a course (including class room attendance). That was a way of ensuring that the ultimate customers were suitably educated and made aware of the risks and rewards while purchasing new policies.

Banks too are supposed to educate their customers, perhaps even more directly. However, such efforts seem to focus on disseminating information about their products and services rather than serve as a broad-based educational exercise. The latter would imply that financial education is really about personal financial education and aims at providing individuals with opportunities to keep themselves informed of financial matters. The objective is to improve their well-being and avoid financial distress. Therefore, financial education should be much wider in its scope than what is imparted today.

Much wider scope

Elaborating on the theme, Y. V. Reddy, Governor of the Reserve Bank of India, in a recent talk*, pointed out that there was a felt need today for such a comprehensive interpretation of financial education. The reform era characterised by deregulation and the growing importance of the market mechanism had made it imperative for policy makers to look at and impart financial education in the widest sense possible.

Such concern for imparting financial education is universal. In developed countries, financial products are becoming more complex by the day. Social security in the traditional sense of being taken care of by the government is giving way to market based schemes. And individuals are having a much greater say in decisions pertaining to their retirement planning.

For developing countries too, the case for financial education is hardly less. Many of the reasons — for instance, the strong likelihood of pensions being linked to the markets — are equally relevant here. Education can play a salutary role in the efficient functioning of the markets. Besides, globalisation and technology have made such education a universal concern.

Education can help the regulators in several ways. By empowering the common man, it makes it easier for the regulator to protect him from market failure. As much as it helps in improving the quality of life of individuals, financial education is also seen as a means to strengthen the integrity and quality of markets. A wider pool of knowledgeable customers can keep the service providers on their toes.

For these reasons, many countries have emphasised financial education as a key component of their public policies. In the United Kingdom, the Financial Services Authority has launched the biggest ever campaign to improve financial literacy. The United States established an Office of Financial Education way back in 2002. Under the Financial Literacy and Education Improvement Act, the Congress set up a commission under the same name for the sole purpose of improving literacy at the national level. Many other countries — Australia, Malaysia and Singapore among them — have taken substantial initiatives to further financial literacy. In many instances, imparting financial literacy begins at the school level itself. Children are made to understand the importance of managing their money. In India, the need to institutionalise the mechanisms for furthering financial literacy is keenly felt. The increasing choice now available to consumers is one important reason. Financial education is an integral part of consumer protection. Already there have been a number of initiatives _ the ombudsman scheme, the fair practices codes and, in the case of commercial banking, a board to administer the codes banks have voluntarily adopted. Financial education supplements these efforts.

According to the RBI Governor, there are several ways to go about the process of expanding financial literacy. Financial education is best imparted at the grassroots level. Another channel could be the work place (where it can benefit working adults). Several central banks and governments are actively involved in the provision of financial education, either directly or indirectly, the common focal areas being consumer credit, investment and other issues that are highly relevant to a public policy of investor and borrower protection.

*"The Role of Financial Education: the Indian Case'' by Dr. Y. V. Reddy. Speech delivered at the International Conference on Financial Education organised by the Organisation of Economic Cooperation and Development and co-hosted by the Pension Fund Regulatory and Development Authority in New Delhi on September 21, 2006. (RBI website).

C. R. L. NARASIMHAN

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