Reserve Bank of India is organizing a workshop on “Delivery of Financial Literacy – Challenges, Approaches and Instruments” on March 22-23, 2010 at Bangalore and this blog post is an attempt to introduce and delve into the topic.

The text book definition of financial literacy is the ability to make informed judgments and to take effective decisions regarding the use and management of money.

Thus, it includes budgeting, spending and saving and using financial products and services through borrowing, investing and planning for the future.

Financial literacy has become an increasingly important requirement for functioning in matured economies. Trends in work patterns, demography and service delivery suggest that it will become even more important in the years ahead.

Improvements in financial literacy can not only support social inclusion but also enhance the contribution to the economy as a whole.

Financial illiteracy leads to financial exclusion, financial exploitation and financial discrimination.

Socially under privileged, poor, disabled, women as a group, uneducated, ethnic minorities, unemployed, children as well as old people form the nucleus of financially excluded population in any country.

Therefore to ensure against financial exclusion, there is an urgent need to promote and enhance financial literacy.

Financial inclusion will attempt delivery of financial services at an affordable cost to vast sections of disadvantaged and low income groups.

The basic financial services under financial inclusion plans will include savings, credit, insurance, remittance facilities etc.

Some of the reasons which come in the way of facilitating financial inclusion are

- high transaction costs for borrowers

- high transaction costs of savers which deny enhanced returns

- High operating costs of service providers

- High risks and high risk costs

- Extension of totally inappropriate products and services.

Financial service providers will there fore

- need to design their products and services so as to cater to the needs of the above under privileged classes of customers

- need to have flexibility in terms of working hours, documentation, mode of interactions and transactions

- need to economize on transaction costs and provide better access to the underserved.

The problem of financial exclusion can be tackled by the financial services providers by recognizing that the poor are bankable and credit worthy as they carry good credit risks. The focus on financial inclusion has to come from the recognition that this serves the interests of both society and the financial system.

Thus, financial inclusion is a big challenge for the financial service providers and they will need to change their mind set and target the under privileged through specially designed products and services.

In the words of Dr.Reddy (2004-05), Former Governor of Reserve Bank of India “There has been expansion, greater competition and diversification of ownership of banks leading to both enhanced and systemic resilience in the banking sector. However, there are legitimate concerns in regard to the banking practices that tend to exclude rather than attract vast sections of population, in particular, pensioners, self employed and those employed in unorganized sector. While commercial considerations are no doubt important, the banks have been bestowed with several privileges, especially of seeking public deposits on a highly leveraged basis, and consequently they should be obliged to provide banking services to all segments of the population on equitable basis.”

Let us therefore promote financial literacy to facilitate financial inclusion.