Financial Literacy and Financial Inclusion


Finance has been widely appeared as a powerful intervention to foster economic growth (King and Levine 1993; Rajan and Zingales 1998; Demirgüç-Kunt and Klapper 2013; World Bank 2014; Demirgüç-Kunt et al 2015). And but, as of 2017, roughly a third of the adults globally stay unbanked, down from nearly 50% in 2011 (Demirgüç-Kunt et al 2018). What this suggests is a discernible hole among the availability of finance and relatedly, its use.
The evidence at the worldwide level is likewise echoed within the Indian context. To illustrate, even though 690 million adults have been brought into the fold of account holders between 2011 and 2017, the volume of financial inclusion—defined as an grownup (aged 15 years and above) having an account at a formal monetary organization or thru a cellular money issuer—stood at eighty% in 2017, up from 35% in 2011. What is less stunning is using finance. On average, 14% of Indian individuals stored at any economic organization in 2014, up simply 2 percentage points on the grounds that 2011. By 2017, even though this extended to twenty%, it turned into lots decrease than the global common of 27%. The photograph is even starker in terms of the use of formal credit with most effective 7% of individuals in India borrowing from a economic organization in 2017, lower than the global average of 11% and the bottom a few of the other Brazil, Russia, India and China (BRIC) countries (Ghosh 2019b).
Realising the no longer-so-amazing development of finance, policymakers were constantly devising progressive ways to improve economic inclusion. Most coverage measures thus far have focused on the supply-facet, taking the demand-facet as a standing quo. However, after the global financial disaster, it’s miles being an increasing number of recognised that any concerted try and sell economic inclusion would want to take a holistic view of the procedure, encompassing the call for-side as nicely.


One place at the demand-facet of the monetary inclusion procedure that has gained currency is monetary literacy. By now, there may be persuasive proof which suggests that ok knowledge of basic monetary principles, inclusive of interest price compounding, inflation or monetary threat diversification equips individuals to incur decrease transaction prices, deleverage their remarkable debts and make certain lower interest outgo on loans (Lusardi and Tufano 2015). Central banks stand out as establishments which are main programmes on economic literacy. Consistent with this worldwide fashion, the Indian principal financial institution has also undertaken sizable steps to promote financial literacy of its populace. A key initiative on this regard has been the established order of Financial Literacy Centres (FLCs).1 Accordingly, starting 2007, commercial banks have been counseled to installation FLCs on a pilot foundation inside the nation/union territory beneath their jurisdiction. How far have such FLCs been powerful in improving financial inclusion remains a moot empirical difficulty.
Research Questions
To make contributions to this debate, I even have used family statistics across districts for 2013–15 to have a look at the impact of FLCs on the possession and use of financial institution debts, whilst controlling for other confounding elements. An evaluation on the district level is crucial for two reasons. First, below the FLC module, every financial institution has been entrusted with the responsibility of acting as a sponsor bank for an allotted district inside a state. Second, even within a kingdom, there are instances where a FLC changed into installed in a district and a contagious one in which it became not.
In addition to this primary problem, I explore numerous associated questions as properly. First, do financial institution characteristics remember for economic inclusion? Second, what are the channels via which monetary literacy impacts monetary inclusion? I awareness on several such channels to recognize which of these exert a perceptible impact on economic inclusion. And finally, does the organisational set-up of FLCs exert any have an effect on on monetary inclusion?
The evaluation informs the existing literature in some wonderful approaches. First, my analysis is a contribution to the ever-expanding literature on financial inclusion (Beck et al 2007; Allen et al 2016; Demirgüç-Kunt et al 2018). Reviewing the latest empirical literature, Demirgüç-Kunt et al (2017) locate that the proof strongly supports the effective impact of savings account on economic inclusion and virtual payments. Focusing on a pass-country wide pattern of over 2,500 banks, Ahamed and Mallick (2019) show that economic inclusion promotes monetary stability in banks with a higher percentage of customer deposits. In the Indian case, Burgess and Pande (2005) record that rural department enlargement approach throughout the social banking length made a significant dent on rural poverty. Utilising state-stage statistics, Ghosh (2019a) uncovers sturdy complementarities between cellular telephony and monetary inclusion, an effect that changed into compounded next to the initiation of the biometric identity (Aadhaar) manner. Unlike these studies, I analyse the effect of financial literacy and discover a discernible impact on economic inclusion.
Second, my analysis pertains to the flourishing literature on financial literacy more widely and for India, specially. Studies in this trouble usually pertain to the US (US) (Lusardi and Mitchell 2013) and other advanced economies, including the United Kingdom (UK) (Atkinson et al 2007), Japan (Sekita 2011) and Switzerland (Brown et al 2018). Others rely on go-sectional statistics to decipher the association between financial literacy and monetary inclusion in a cross-u . S . A . Context (Grohmann et al 2018). Studies for rising economies are admittedly confined and tentative at fine (Shen et al 2017; Klapper et al 2013). Prior studies for India consciousness on simplest one state (Cole et al 2011; Calderone et al 2018), one vicinity (Agarwalla et al 2015) or based totally on thin samples (RBI 2017), thereby appreciably proscribing their coverage appeal. More current research constructs a country-level economic literacy index and uncovers huge and widespread gender- and schooling-associated differences (Gunther and Ghosh 2018). In contrast, I attention at the impact of economic literacy on financial inclusion and discover a nice impact on the usage of finance.
Third, the paper pertains to the literature that focuses on the channels through which financial literacy affects monetary inclusion. Microeconomic studies consisting of Carpena et al (2011), Cole et al (2011) and Doi et al (2014) hint at the beneficial influence of monetary education on monetary literacy, however do no longer delineate the viable channels of such influence. Focusing on Uttar Pradesh, Calderone et al (2018) show that economic training programme ends in a nearly 50% growth in savings for rural families. Other research emphasises the relevance of bank facts rules as a beneficial channel which could enhance monetary literacy (Fort et al 2016). Taking a cue from earlier research, I take a look at the relevance of each traditional and non-traditional channels in driving financial literacy.
Financial Literacy in India
Financial literacy has assumed increasing prominence as a result of the growing complexity of the economic products and services being provided together with records asymmetry concerning the equal. The developing significance of monetary literacy inside the quest for inclusive growth has precipitated significant banks to adopt important measures to ensure a greater financially knowledgeable and literate population.
Accordingly, in 2007, primarily based at the tips of an expert committee, the Indian primary bank counseled the banks to set up FLCs on a pilot foundation in any individual district within the kingdom/union territory under their jurisdiction. Subsequently, based totally on an evaluation of the FLC version, banks were recommended to immediately installation FLCs in each of the lead district supervisor (LDM) places of work in a time-certain manner.
Under the stipulated recommendations, the lead financial institution turned into needed to installation FLCs with the key targets of facilitating economic inclusion thru provision of essentials, that is, literacy and smooth get admission to, for disseminating statistics regarding the vital bank and trendy banking standards to the various goal businesses, and for providing education on economic making plans and responsible borrowing, along with debt counselling and insurance.
Beginning 2007, the FLCs had been steadily hooked up in the united states.2 Figure 1 highlights the 12 months-sensible established order of FLCs.3 Illustratively, as many as 60 FLCs were established via 2007 and over a hundred and eighty districts throughout 20 states had been included via FLCs in 2010.
Akin to Ghani et al (2014), I actually have divided the sample into districts having installed FLCs on or before 2009 (period 1), districts having established FLCs in 2010–eleven (length 2) and sooner or later, the ones districts which established FLCs after 2011 (length three).
Such coverage cognizance on monetary literacy isn’t always unique to India. Several nations such as Russia, Belgium, Sweden and Turkey are imposing a country wide method for monetary literacy. Others which include Czech Republic, Netherlands, Slovak Republic, Spain and the UK are revising their first countrywide method for economic education based totally on the experience received.
Data and Key Variables
Three units of facts, specifically household-level, district-degree and ultimately macroeconomic records were used for this evaluation.
Household-stage records: The household level information is obtained from the Financial Inclusion Insights (FII) survey. The FII survey is operated by means of the worldwide studies institution InterMedia and sponsored by means of the economic services for the bad initiative of the Bill and Melinda Gates Foundation. For India, three survey rounds were undertaken until 2015. In every of these rounds, the survey changed into nationally consultant protecting all most important states and union territories of adult people (elderly 15 years and above).
The surveys observe a multistage, stratified and randomised sampling layout.Operationally, the sample respondents have been first allocated to states in share to their estimated grownup population and thereafter, the resultant pattern became proportionally allocated to city and rural areas. In the second degree, households were decided on using the random walk technique. In the 0.33 and very last level of choice, one eligible respondent in every household changed into decided on using the Kish grid method. The present day evaluation uses household-level facts for the applicable variables, which include, inter alia, records regarding the ownership and use of financial institution account, the age, gender, location as well as instructional and earnings status of the respondent.
However, several modifications have been made inside the current statistics. First, facts for certain states such as Delhi that is protected as a capture-all in the survey data have been deleted, as the FLCs are disaggregated via geography (East Delhi, West Delhi, and so forth), making it hard to make certain a consistent fit. Second, the nation of Telangana is not dealt with one by one from Andhra Pradesh. Third, given the thinness of the pattern, the smallest north-japanese states are handled as kingdom-composite, even though Assam (the largest in terms of vicinity) is categorised as a separate country.Four After those adjustments, the very last sample accommodates 21 nation and nation composites. Comprising over 44,000 individuals every yr, the pooled sample includes a most of 1,33,646 individuals in a total of 538 districts (Table 1), entailing a median of 250 respondents consistent with district.
The records also gives information on whether a respondent has get admission to to information from traditional and non-traditional sources. Based on availability, I hire a binary variable depending on whether or not the respondent (i) has a mobile and/or landline cellphone; (ii) has a tv (TV)/DVD, and sooner or later; (iii) utilises the services of a financial institution agent. I rent those as channels through which the respondent can collect economic literacy (World Bank 2014).5
District-stage facts: Three key variables on the district degree are used. The first is the yr of status quo of FLC in a district. Information on this is acquired from the internet site of the sponsor bank for every kingdom, such as State Level Bankers’ Committee (SLBC) documents.6 I additionally extracted statistics at the geographical area of the FLC, (that is, rural, urban, semi-city or metropolitan) from the website of the Pradhan Mantri Jan Dhan Yojana. The sponsor financial institution internet site additionally affords data at the delivery approach of training by using the FLC (this is, unmarried or in any other case).7 This facts changed into then included with the survey facts, thereby making sure a steady country–district-year suit of financial inclusion with the relevant facts on monetary literacy. I employed district home product in line with capita as a manipulate for call for-side situations.
Macroeconomic and banking information: First, I culled out statistics at the economic (for example, asset, fairness and non-appearing loans [npls]) and bodily (for example, number of branches) indicators of the sponsor financial institution related to the FLC. At the combination stage, I hired the actual gross home product (GDP) boom to control for macroeconomic situations.
Ownership and use of bank account: Table 2 (p seventy eight) suggests that yr-clever variant in bank account ownership and use (Panels A1 and B1) disaggregated further through kingdom-year (Panels A2 and B2). In each the cases, I locate that there was a good sized development, despite the fact that using bank accounts has on average, remained roughly 20–25 percent factors lower as compared with get entry to.
The evidence throughout states (Panels A2 and B2) highlight significant variation in the possession and use of financial institution debts. Without lack of generality, states which rank excessive on the pecking order of account ownership additionally rank high on use. The 12 months-wise correlation between ownership and use of bank account are fifty four% in 2013, 73% in 2014 and ninety seven% in 2015, respectively.
Panel C of the desk depicts the establishment of FLCs through the years and one after the other at the kingdom level. Reflecting proactive coverage reaction, the average number of FLCs has improved through the years, from 1.Eight in 2013 to two.3 in 2015.
Key variables: A description of the applicable variables, consisting of summary information is in Table 3 (p seventy nine). On the monetary inclusion side, I locate that 56% of respondents had a financial institution account, while only in 31% of the cases those accounts were lively, reiterating the divergence between possession (deliver) and use (call for).
As regards financial literacy, kind of 10% of the FLCs have been installed on or before 2009 and nearly 7% had been installed in 2012 or after. Geographically, almost fifty seven% of the FLCs are in urban regions and near five% are in rural areas. In-house transport of education under FLCs is most not unusual, accounting for near eighty%. Among bank traits, the sponsor financial institution has average equity of almost 6% of its belongings with NPLs of much less than 5% and profitability averaging 0.5%. Looking at delivery channels, mobile and TV are generally to be had with most respondents, with 50% on average reporting the presence of cell and near 60% reporting having a TV or DVD. Using the services of a financial institution agent appears to the least desired, at less than 0.Five%.
Empirical Strategy
The empirical approach examines the impact of economic literacy on bank account ownership and use, at the same time as controlling for other confounding elements. Accordingly, for household h in district d at time t, I estimate the subsequent specification:
Bank_acchdt= α1 + β11 FLCdt2009 + β12 FLCdt2012
+γXhdt1 +Zdt + GDPt + ε1hdt …(1)
Active_Bank_acchdt = α2 + β21 FLC2009dt + β22 FLCdt2012
+γX2hdt+ Zdt +GDPt + ρ + εhdt2 …(2)
Equation 1 is the choice equation where the final results variable is binary if the respondent has a bank account, else 0. X1 is a vector of household controls consisting of gender (lady vs male), location (rural vs urban), earnings (based on the development out of poverty index [PPI]), work, marital (single vs otherwise) and schooling popularity; Z denotes district-level controls and X1 is the random errors time period.
Equation 2 is the outcome equation in which the final results variable is binary if the respondent has used a financial institution account within the final ninety days, else 0; X2 is a vector of household determinants and X2 is the random error time period.
For proper identification, it’s far important that X1 has as a minimum variable that is extraordinary from X2. In this