Focus

Financial literacy – the need of the hour

Financial education can be comprehensively defined as “the process by which financial consumers/investors improve their understanding of financial products, concepts and risks and, through information, instruction and/or objective advice, develop the skills and confidence to become more aware of financial risks and opportunities, to make informed choices, to know where to go for help, and to take other effective actions to improve their financial well-being.”
— Mrs. Shyamala Gopinath,
Dy. Governor, RBI

In a country like India with diverse social and economic profile, financial education is particularly relevant for people who are poor in resources and operating at lower margins.
The general literacy levels in India being low, financial literacy is even lower. When people are struggling to make ends meet on a daily basis, money management becomes a difficult affair. While people may use their own methods to manage their resources, these are basically worked out through trial and error method. Thus, financial literacy has a role to play in building the capacity, using available information to effectively utilise financial services.
 Steps taken by RBI
Taking a cue from the above situation, Reserve Bank of India (RBI) has taken a number of measures for increasing financial literacy. It includes setting up of Banking Codes and Standards Board of India (BCSBI), advising banks to set up Financial Education cells, etc. One such other measure is the multilingual website in 13 Indian languages launched by RBI on June 18, 2007, on all matters concerning banking and the common person. RBI’s website at www.rbi.org.in hosts separate columns for ‘Financial Education’ and ‘For Common Person’ on its homepage. ‘Financial Education’ hosts different slots for ‘For School Kids’, ‘Films’, ‘Games’ etc. in different languages. Educative books are being prepared for different target groups such as rural households, urban poor, defence personnel, women and small entrepreneurs. Financial literacy programmes are being launched in each state with the active involvement of the state government and the SLBC (State Level Bankers’ Committee).
Credit Counselling
Credit Counselling is a process offering education to consumers about how to avoid incurring debts that cannot be repaid. This process is actually more debt counselling than a function of credit education.
Genesis
The first well-known credit counselling agencies were created in 1951 in the United States when credit grantors created the National Foundation for Credit Counseling (NFCC). Their stated objective was to promote financial literacy and help consumers to avoid bankruptcy. Credit counselling, however, came into its own as a result of the passing of the Housing and Urban Development Act in 1968. Under this Act, the US Department of Housing and Urban Development was allowed to authorise public and private organisations to provide counselling to mortgagors. The resulting services and infrastructure to provide them led to the development of the credit counselling industry.
Need for credit counselling

• There is rapid growth in credit cards, personal loans, home loans etc.
• Need based lending of commercial banks changed to broad based lending
• Paradigm shift in lifestyles and aspirations of middle class

All these are resulting in huge indebtedness due to lack of financial knowledge.
With regard to rural areas, issues such as rain-fed agriculture in many places, lack of alternative opportunities, vagaries of monsoon, hardening interest rates and resorting to money lenders due to easy access, are contributing to rural indebtedness.
Credit counselling often involves negotiating with creditors to establish a debt management plan (DMP) for a borrower. A DMP may help the debtor repay his or her debt by working out a repayment plan with the creditor. DMPs, set up by credit counsellors, usually offer reduced payments, fees and interest rates to the client.
Financial counselling is often seen as curative medicine, while financial education is preventive medicine.
The Working Group to Examine the Procedures and Processes of Agricultural Loans recommended that the banks should actively consider opening of counselling centres, either individually or with pooled resources, for credit and technological counselling. This helps the farmers become aware of their rights and responsibilities to a great extent. The bank branches should also display as much information as possible for the benefit of the farmers. The counselling centres should have on-line submission of applications, which may be forwarded to the branches.
An earlier working group constituted by RBI to suggest measures for assisting distressed farmers had also suggested that financial and livelihood counselling are important for increasing viability of credit. Based on the recommendations of the above working groups, and as announced in the Annual Policy Statement for the year 2007-08, RBI advised the SLBC convenor banks on May 10, 2007, to set up a Financial Literacy and Credit Counselling Centre (FLCC) on a pilot basis in any one district in the State/Union Territory coming under their jurisdiction and, based on the experience gained, lead banks may set up counselling centres in other districts.
Based on these suggestions, some banks have set up credit counselling centres like Credit Counselling Service (ABHAY) of Bank of India, ‘Disha Financial Counselling’ of ICICI bank, and ‘Grameen Paramarsh Kendras’ of Bank of Baroda.
However, the feedback received by RBI on their functioning is not upto the mark. In this background, RBI has clarified the instructions on ‘Financial Literacy and Credit Counselling Centres’ (FLCCs) and circulated a model scheme in February 2009 to all the banks.
Objectives
The specific objectives of the FLCCs would be:
i. To provide financial counselling services through face-to-face interaction as well as through other available media like e-mail, fax, mobile, etc. as per convenience of the interested persons, including education on responsible borrowing, proactive and early savings, and offering debt counselling to individuals who are indebted to formal and/or informal financial sectors
ii. To educate the people in rural and urban areas with regard to various financial products and services available from the formal financial sector
iii. To make the people aware of the advantages of being connected with the formal financial sector
iv. To formulate debt restructuring plans for borrowers in distress and recommend the same to formal financial institutions, including cooperatives, for consideration
v. To take up any such activity that promotes financial literacy, awareness of the banking services, financial planning and amelioration of debt-related distress of an individual
However, FLCCs should not act as investment advice centres/marketing centres for products of any particular bank/banks.
Monitoring
The functioning of the FLCCs in each state may be monitored by a Committee headed by the regional director of the RBI and feedback provided to the banks on a regular basis.
Summary
Financial Literacy and Credit Counselling are necessary in any person’s life. Even a highly qualified person may not have the necessary financial literacy and may end up in huge debts thus requiring credit counselling. A poor villager with no literacy may also end up in debts because of inadequate resources and usurious rates of interest thus requiring financial literacy. Thus, the concept of financial literacy and credit counselling are universal requirements to one and all. The success of FLCCs depends on the way the banks publicise about these centres, their effective, purpose-oriented functioning and proper utilisation by the public.
Let us hope that financial literacy will scale heights in our country in the coming days.

The author is a seasoned banker having more than 19 years of banking experience in various capacities and is presently doing research related to banking activities.

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