Financially 'Illiterate' But Money Wise

Published: 23rd December 2015 06:00 AM  |   Last Updated: 22nd December 2015 11:13 PM   |  A+A-

A recent Standard & Poor (S&P) Ratings Services Global Financial Literacy Survey said that about 76 per cent of Indian adults do not adequately understand key financial concepts, including risk diversification, inflation and compound interest. This is lower than the worldwide average of financial literacy, but roughly in line with other BRICS and South Asian nations. More than 1,50,000 adults across over 140 countries were interviewed and tested on their knowledge of four basic financial concepts: numeracy, risk diversification, inflation and compound interest (saving and debt).

The findings are interesting. For instance, in India, 26 per cent of adults in the richest 60 per cent of households are financially literate, compared to 20 per cent of adults in the poorest 40 per cent of households. In contrast, globally, 36 per cent of adults in relatively richer households and 27 per cent of adults in relatively poorer households are financially literate. Further, only 14 per cent of Indian adults correctly answered the question on risk diversification. Conversely, 56 per cent answered the inflation question correctly. About 39 per cent of adults who have a formal loan are financially literate, while 27 per cent of formal borrowers were found to be not financially literate. Moreover, just 51 per cent of the respondents understood what is compound interest.

While the survey’s findings are broadly valid, it has to be seen in the larger context of general literacy in India — 86 per cent in urban areas and 71 in rural areas — which needs to be factored in. Add to that a culture unique to India and the Asian region of saving and a general aversion to risk which is almost part of the DNA of the population. Even today, for a majority of Indians, venturing into complex modern financial products is tantamount to speculation, which they shun. For them, the safest bet on saving — most often for financing their children’s higher education and weddings — is gold, which they understand very well. So, to say that a majority of Indians are financially illiterate is only stating part of the truth. In fact, they are money-wise and know well which side of their bread is buttered. The country’s large savings corpus is proof of that.

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