1.

Introduction
Financial markets around the world have become increasingly accessible to the small
investor, as new products and financial services grow widespread. At the onset of the recent
financial crisis, consumer credit and mortgage borrowing had burgeoned. People who had
credit cards or subprime mortgages were in the historically unusual position of being able to
decide how much they wanted to borrow. Alternative financial services, including payday
loans, pawn shops, auto title loans, tax refund loans, and rent-to-own shops have also become
widespread. At the same time, changes in the pension landscape are increasingly thrusting
responsibility for saving, investing, and decumulating wealth onto workers and retirees,
whereas in the past, older workers relied mainly on Social Security and employer-sponsored
defined benefit (DB) pension plans in retirement. Today, by contrast, Baby Boomers mainly
have defined contribution (DC) plans and Individual Retirement Accounts (IRAs) during
their working years. This trend toward disintermediation increasingly is requiring people to
decide how much to save and where to invest, and during retirement, to take on responsibility
for careful decumulation so as not to outlive their assets while meeting their needs.

Despite the rapid spread of such financially complex products to the retail marketplace,
including student loans, mortgages, credit cards, pension accounts, and annuities, many of
these have proven to be difficult for financially unsophisticated investors to master.
Therefore, while these developments have their advantages, they also impose on households a
much greater responsibility to borrow, save, invest, and decumulate their assets sensibly by
permitting tailored financial contracts and more people to access credit. Accordingly, one
goal of this paper is to offer an assessment of how well-equipped todays households are to
make these complex financial decisions. Specifically we focus on financial literacy, by which
we mean peoples ability to process economic information and make informed decisions
about financial planning, wealth accumulation, debt, and pensions. In what follows, we
outline recent theoretical research modelling how financial knowledge can be cast as a type
of investment in human capital. In this framework, those who build financial savvy can earn
above-average expected returns on their investments, yet there will still be some optimal level
of financial ignorance. Indigenizing financial knowledge has important implications for
welfare, and this perspective also offers insights into programs intended to enhance levels of
financial knowledge in the larger population.

Another of our goals is to assess the effects of financial literacy on important economic
behaviours. We do so by drawing on evidence about what people know and which groups are
the least financially literate. Moreover, the literature allows us to tease out the impact of
financial literacy on economic decision-making in the United States and abroad, along with
the costs of financial ignorance. Because this is a new area of economic research, we
conclude with thoughts on policies to help fill these gaps; we focus on what remains to be
learned to better inform theoretical/empirical models and public policy.

2. The meaning of financial literacy and its importance

Financial literacy is the ability to understand how money works: how someone makes,
manages and invests it, and also expends it (especially when one donates to charity) to help
others.
In-depth knowledge of financial literacy is required to understand how money works and how
it can work for you even when youre sleeping by investing in profitable areas like the
stock or money market. To understand money and how it works, its important to understand
common financial literacy principles such as; financial goals, budgeting, investments,
superannuation, contracts and employment models.

Research studies across countries on financial literacy have shown that most individuals
(including entrepreneurs) dont understand the concept of compound interest and some
consumers dont actively seek out financial information before making financial decisions.
Most financial consumers lack the ability to choose and manage a credit card efficiently, and
lack of financial literacy education is responsible for lack of money management skills and
financial planning for business and retirement.

Most potential retirees lack information about saving and investing for retirement. Many
people fail to plan ahead and they take on financial risks without realizing it. Problems of
debt are severe for a large proportion of the population because of financial illiteracy. Youth
on average are less financially capable than their elders.

Financial education can benefit consumers of all ages and income levels. For young adults
just beginning their working lives, it can provide basic tools for budgeting and saving so that
expenses and debt can be kept controlled. Financial education can help families acquire the
discipline to save for their own home and/or for their childrens education. It can help older
workers ensure that they have enough savings for a comfortable retirement by providing them
with the information and skills to make wise investment choices with their individual pension
and savings plans. Financial education can help low-income people make the most of what
they are able to save and help them avoid the high cost charged for financial transactions by
non-financial institutions.

Your level of financial literacy affects your quality of life significantly. It affects your ability
to provide for yourself and family, your attitude to money and investment, as well as your
contribution to your community. Financial literacy enables people to understand what is
needed to achieve a lifestyle that is financially balanced, sustainable, ethical and responsible.
It also helps entrepreneurs leverage other peoples money for business to generate sales and
profits.

3. Measuring Financial Literacy

Several fundamental concepts lie at the root of saving and investment decisions as modeled in
the life cycle setting described in the previous section. Three such concepts are: (i) numeracy
and capacity to do calculations related to interest rates, such as compound interest; (ii)
understanding of inflation; and (iii) understanding of risk diversification. Translating these
into easily-measured financial literacy metrics is difficult, but Lusardi and Mitchell (2008,
2011b, c) have designed a standard set of questions around these ideas and implemented them
in numerous surveys in the United States and abroad.

Four principles informed the design of these questions. The first is Simplicity: the questions
should measure knowledge of the building blocks fundamental to decision-making in an
intertemporal setting. The second is Relevance: the questions should relate to concepts
pertinent to peoples day-to-day financial decisions over the life cycle; moreover, they must
capture general rather than context-specific ideas. Third is Brevity: the number of questions
must be kept short to secure widespread adoption; and fourth is Capacity to differentiate,
meaning that questions should differentiate financial knowledge to permit comparisons across
people. These criteria are met by the three financial literacy questions designed by Lusardi
and Mitchell (2008 Lusardi and Mitchell (2011b), worded as follows:

Suppose you had $100 in a savings account and the interest rate was 2% per year.
After 5 years, how much do you think you would have in the account if you left the
money to grow: [more than $102, exactly $102, less than $102? Do not know, refuse
to answer.]
Imagine that the interest rate on your savings account was 1% per year and inflation
was 2% per year. After 1 year, would you be able to buy: [more than, exactly the
same as, or less than today with the money in this account? Do not know; refuse to
answer.]
Do you think that the following statement is true or false? Buying a single company
stock usually provides a safer return than a stock mutual fund. [Do not know; refuse
to answer.]

The first question measures numeracy or the capacity to do a simple calculation related to
compounding of interest rates. The second question measures understanding of inflation,
again in the context of a simple financial decision. The third question is a joint test of
knowledge about stocks and stock mutual funds and of risk diversification, since the
answer to this question depends on knowing what a stock is and that a mutual fund is
composed of many stocks. As is clear from the theoretical models described earlier, many
decisions about retirement savings must deal with financial markets. Accordingly, it is
important to understand knowledge of the stock market as well as differentiate between levels
of financial knowledge.

Naturally any given set of financial literacy measures can only proxy for what individuals
need to know to optimize behaviour in intertemporal models of financial decision-making.
Moreover, measurement error is a concern, as well as the possibility that answers might not
measure true financial knowledge. These issues have implications for empirical work on
financial literacy, to be discussed below.
x
Executive Summary
It is all about
financial inclusion!
The inclusion of the financially and socially excluded disadvantaged needy, underprivileged and poor
people of
our country, India.
Though for centuries we have been in the forefront of the world affairs in the past centuries, maybe
because of
civil, social and economic vagaries that the country had to suffer resulted in over 65% of the people
excluded
from any kind of financial inclusion.
Now the question is what exclusion is and what inclusion is? Exclusion broadly can be said of an
individual
deprived of having any facility to earn an income, safeguard the same, transfer or invest for a further
benefit,
protect from risks etc. Inclusion is to help him acquire all these facilities.
An adage in our classic language Sanskrit says Dhanam Moolam Idam Jagat. Freely translated, this
means
Money is centre of this universe. While dogmatically one can argue on this adage, pragmatically one
needs to
accept this, as money, which has an immense exchange power, can open almost all doors.
When a major portion of the countrys people cannot open the doors because of financial exclusion,
there arises
an imminent need to include them and bring them into the mainstream. And to this the first and most
important
action is to tell them and teach them. This process is called financial literacy.
But the process of financial literacy is not as easy as it sounds. With vast population, different
languages and
cultures, with illiteracy as a major stumbling block this is indeed a challenge. But we need to accept
this challenge
and make forays into the bastions of illiteracy to make the people literate and financially literate at
that.
The successive governments in India have taken up this task since the early 1950s soon after we
attained our
independence. Yet, one can say, the momentum really gained after 2005 when Reserve Bank of
Indiahas given
directions and guidelines towards a more practical financial inclusion pathway of which Financial
Literacy
combined with technology becomes a major aspect.
Lending their shoulders are many Banks, MFIs, NGOs, Insurance Companies, technology providers
and national
and international aid agencies such as United Nations Development Programme (UNDP). Supporting
the Indian
governments national priorities, the India-United Nations Development Assistance Framework
(UNDAF) 2008-
2012 articulating the vision, strategy and collective action of the UN systems objective is Promoting
Social,
Economic and Political inclusion for the most disadvantaged, especially women and girls
Towards achieving this objective, UNDP has identified the seven states of Bihar, Chhattisgarh,
Jharkhand,
Madhya Pradesh, Odisha, Rajasthan and Uttar Pradesh as priority states requiring more focus than
others and
initiated many programmes in these focus states. Providing Financial Literacy to the needy in these
states as an
integral part of the UNDPs Poverty Reduction Programme for 2008-12 is one such programme.
After the projects have been initiated, several studies have been undertaken to a) understand the
effectiveness of
the various financial literacy programmes undertaken and present, b) analyse the programmes
impacts on
xi
enhanced use of financial services and c) to draw out best practices and their relevance for enhanced
and
continued financial inclusion programme.
Towards this end three studies and two e-discussions took place whose data is compiled in relevant
detail in this
book. 5,637 respondents have contributed to the main analytical study from across 332 locations
spread over 100
blocks of 43 districts of the seven focus states in addition to other respondents for the other studies.
Many
practitioners and experts have taken part in the two e-discussions and enriched the knowledge with
contribution of
experiences.
In a nutshell all the studies have confirmed the faith in Financial Literacy as a Tool for Financial
Inclusion and
Client Protection Three important aspects, to make it short, emerge out of these studies.
Objectives of study

1. To know relation between gender and their financial literacy level.

2. To know relation between monthly income and level of financial literacy.

3. To know relation between education and their financial literacy level.

4. To know relation between occupation and their financial literacy level.

5. To know relation between age and their financial literacy level.

6. To offer recommendations that help to enhance financial literacy

The importance of Financial Literacy

Almost all studies have more or less concluded that Financial Literacy is a crucial part of the
financial inclusion. A majority of the respondents willing for repeated programmes also
confirm this belief.

In the wake of rapid invasion of technology across the world it also becomes imminent that
ICT plays an important role in the financial inclusion and it is strongly advised that the
financial literacy curriculum includes technological interventions in a bid to reach quicker
and cost effective as also secure financial products and services to the needy.