Fostering Financial Literacy in India through micro-enterprises
Financial Literacy is simply defined by a person’s ability to use the money to make more money. A basic understanding of income and investment helps in building a stronger financial plan and also accelerates financial inclusion for the economic growth of the community. Investing in financial products, advance planning of expenses, following a savings routine, practicing banking transactions, segregating funds under various heads, etc. are a few habits that can help in reducing debt and managing personal finance across all segments.
According to the World Bank’s 2017 Global Findex database, India reported to have 180 billion bank accounts, but out of these 48% were recorded without any transactions in the last year. And 11% of the 1.7 billion unbanked adults belonged to India, accounting for the second-highest contribution of the unbanked population in the world. Nearly 60% of the unbanked population in India comprises women only.*
The above data is indicative of a lack of understanding of Financial matters amongst the people. The idea is not just to educate and onboard the financially excluded people, but to ensure that they also exercise implementation in their routine activities. This can be achieved with the combined efforts of organizations and institutions to focus not just on attracting more users, but also on promoting the use of financial tools amongst the target segment. Though people are gradually advancing towards digitally enabled transactions, not all of them are familiar with its use, with a thorough understanding of the financial products they are actively engaged in. On the contrary, this gap in understanding could have otherwise brought about growth in their personal financial profile.
Why should Financial Literacy in India be promoted?
Lack of basic financial understanding results in poor financial and investment-related decisions. Hence, financial literacy is also directly proportional to the economic growth of the nation. It is thereby imperative for people to be more sound in financial matters, for the Indian economy to grow amidst these near-collapsing conditions.
From the lens of a micro customer, financial literacy is greatly significant and helps in:
1. Monitoring cash flow of micro-enterprises: Cash-flow management does not come in handy for micro-entrepreneurs. For them to be able to manage their cashflows, they first need to understand the few basics to further help them in tracking the movement of money in their business. This will in the long run give them a better insight into the performance of their micro-enterprise.
2. Understanding the calculation of interest rates: The uneducated or the lower-income people often find comfort in informal lending solutions, owing to the ease of the process. However, little do they know about the calculation of interest rates due to which the loan sharks are often attacked for lending money at exorbitantly higher interest rates and preying on the poor.
3. Financial planning in lower-income households: With lower profits and lower expenses, the households of the micro-entrepreneur are often at a higher risk of encountering financial disasters. Limited income and zero planning, often induce unprepared emergencies that eventually disturb the entire household.
4. Building on savings and investments: By planning ahead of time and well understanding the financial performance of a micro-enterprise and the household, savings, and investments can also take a place in the routine activities of micro-enterprises. These financial tools also help in improving household economics by enabling a backup fund for emergencies.
ARTH Foundation has been working on promoting Financial Inclusion through the spread of Financial Literacy. Our ARTH Vittiya Pathshaala (Financial Literacy session) is conducted twice a month to help the micro-entrepreneurs understand their personal finances better, with a special focus on educating women micro-entrepreneurs. All the micro-entrepreneurs seeking credit support, also undergo a mandatory financial literacy session that is conducted prior to the final disbursement of the credit facility. This has helped us to make our micro-entrepreneurs financially literate and also strengthen their individual financial well-being because we believe that the price of financial illiteracy is very high, especially for the weaker sections.
*https://globalfindex.worldbank.org/sites/globalfindex/files/chapters/2017%20Findex%20full%20report_chapter2.pdf
