Financial Literacy and Financial Inclusion


Finance has 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 a 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 because 2011. By 2017, even though this extended to twenty%, it turned into a lot decrease than the global common of 27%. The photograph is even starker in terms of the use of formal credit, with the 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).

Realizing 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 recognized 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 that 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 that are the main programs on economic literacy. Consistent with this worldwide fashion, the Indian principal financial institution has also undertaken sizable steps to promote the financial literacy of its populace.

A key initiative in this regard has been the established order of Financial Literacy Centres (FLCs). How far have such FLCs been powerful in improving financial inclusion remains a moot empirical difficulty. 1 Accordingly, starting 2007, commercial banks have been counseled to install FLCs on a pilot foundation inside the nation/union territory beneath their jurisdiction.

Research Questions

To make contributions to this debate, I even have used family statistics across districts for 2013–15 to 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 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 properly. First, do financial institution characteristics remember for economic inclusion? Second, what are the channels via which monetary literacy impacts monetary inclusion? I awareness of several such channels to recognize which of these exert a perceptible impact on economic inclusion. And finally, does the organizational set-up of FLCs exert any effect monetary inclusion?

The evaluation informs the existing literature in some wonderful approaches. First, my analysis contributes 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 accounts 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 the rural department enlargement approach throughout the social banking length made a significant dent in rural poverty.

Utilizing 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 analyze 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, especially. 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 across-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 attended at the impact of economic literacy on financial inclusion and discovered 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, they do no longer delineate the viable channels of such influence. Focusing on Uttar Pradesh, Calderone et al. (2018) show that the economic training program ends in a nearly 50% growth in savings for rural families. Other research emphasizes the relevance of bank facts rules as a beneficial channel to enhance monetary literacy (Fort et al., 2016). Taking a cue from earlier research, I look at the relevance of each traditional and non-traditional channel in driving financial literacy.

Financial Literacy in India

Financial literacy has assumed increasing prominence due to the growing complexity of the economic products and services being provided together with records asymmetry concerning the equal. The developing significance of monetary literacy in the quest for inclusive growth has precipitated significant banks to adopt important measures to ensure a more 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 the 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 counseling and insurance.

Beginning in 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 one’s 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 impose a country-wide monetary literacy method. 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.