Newsletter Article – Making the Case for Financial Literacy – Why is FE Critical for the Vulnerable Clients in India – Opinions from the Field

By LEAD Research Team

According to National Sample Survey Organization (NSSO) (59th Round) data, nearly 51% of the farmer families in India are excluded from both formal and informal sources of finance. Exclusion is most acute in Central, Eastern and North-Eastern regions. Among non-cultivating households nearly 80% do not have credit access from any source. Only 36% of Scheduled Tribe (ST) and 49% of the Scheduled Castes (SC) and Backward farmer households have access credit and that too mostly informal.

To address this issue, the Reserve Bank of India (RBI) initiated the ‘National Pilot Project for Financial Inclusion Plan’ (NPPFI) in 2005 and recommended that 25% of all the new bank accounts must be opened in currently unbanked areas in a year, and provide financial services and products to at least 50% of the financially excluded households. The RBI invited private banks to work with Non-Governmental Institutions (NGOs) and SHGs, and also public banks, to provide at least No-Frills Accounts (NFAs), and use solutions like the Banking Correspondents (BC) and mobile banking to increase their coverage. Yet, reaching these customers has been difficult for banks – customers in unbanked areas are hard to reach physically, and have limited collateral or savings to open bank accounts. Low levels of literacy and financial awareness are further impediments to NPFFI goals. Therefore, RBI initiated ‘Project Financial Literacy’ to disseminate information about financial services and products to groups including rural and urban poor. Financial Literacy Education (FE) was undertaken by many institutions, to achieve financial inclusion and financial literacy goals.
CMF is currently working on evaluations of FE programs in Uttar Pradesh in Bihar, and would like to add to existing reasons presented by the government for financial inclusion and financial literacy education (FE). Based on our personal experience, we feel strongly that deep rooted segregation based on caste groups makes the goals of financial inclusion much harder to achieve, and FE a dire necessity.
In India, with nearly 22.5% of the population designated as Scheduled Castes (SC) and Schedule Tribes (ST), it is this segment of the population that has low levels of general literacy at about 42% for SC and 34% for ST, especially in underdeveloped states of Bihar and Uttar Pradesh (Census 2001, India). According to the Human Rights Watch and the Yale Center for Human Rights and Global Justice, nearly 165 million people in India are discriminated against because of their caste (for more the caste system –
NSSO data indicates that the median income for Dalits (SC community) is nearly 38% lower in rural areas, and 70% lower in urban areas, compared to upper castes; nearly 37% of the Dalits under the poverty line compared to only 10.8% of the upper castes. Based on a survey of 348 villages by Untouchability in Rural India, only 18% of the Dalits were able to gain entry into a public health care facility, and 21% were given no entry into private health centers. Blatant discrimination occurred when trying to access services from government agencies such as post offices and banks, or gain entry into schools. According to UN Committee on the Elimination of Racial Discrimination, Dalits are still involved in dangerous, physically and mentally damaging occupations like manual scavenging, bonded labor, child labor and other vicious social arrangements, which are difficult to break due to long standing social norms.
In our experience, nearly all villages we have been to in Bihar and Uttar Pradesh, have clearly demarked areas where people of different castes live. Those from the SC and ST communities often live on the outskirts of the village, in kuccha (non-cemented) huts, with limited financial and household resources, compared to those from the upper castes who live in bigger pucca (cemented) houses with a pucca roof, often with all basic household amenities. We notice similar patterns with land ownership, education attainment, access to financial services and products, access to work opportunities, and other common indicators leading to better life outcomes. Substance addiction, lack of nutritious food, infectious diseases are common problems that plague these communities, further pushing them to take on expensive debt from loan sharks.
Low literacy levels and lack of access to reliable financial services often lead to limited financial awareness; low financial literacy remains to be a significant policy concern because low levels of financial literacy are associated with and often cause adverse financial outcomes (Xu & Zia, 2012). For these groups, having limited access to financial institutions and limited knowledge about financial services and products may further push them into a perpetual cycle of indebtedness and financial ruin, making it harder for them to break discriminatory social barriers.
While FE might seem like an easy answer to the financial awareness problem, it is a time consuming and a potentially expensive exercise. Impact evaluations have shown that while FE is associated with an increase in financial knowledge and awareness, the effect on client’s savings behavior is often unclear. 
CMF recently conducted an impact assessment of FINO’s FE program, which was delivered to it’s clients in Varanasi and Azamgarh districts in Uttar Pradesh. These clients primarily belonged to low-income groups, lived in rural areas, and included many from the SC and ST communities. They had access to banking services through FINO’s BC network – a ‘doorstep’ banking model.
CMF found a positive significant impact on client’s savings over a short-term. As a first of its kind of study in India, the impact of FE with access to savings bank account was being assessed using the administrative data on the usage and balances in client’s NFAs. Clients, who attended the 2 day, 3 hour training session with FINO, had higher transactions and savings amounts on average compared to clients who did not attend the sessions.
Despite this positive result, the high cost and demand on resources are the biggest challenges in delivering the traditional classroom FE. Despite these challenges, FE might provide a viable means to increasing knowledge about financial products and services, potentially increasing savings, and improving the financial well-being of communities in dire need for such help. Therefore, costs, logistics and so on are formidable but fixable challenges, and bowing out of FE due to these challenges is not recommended for institutions already providing or planning on providing FE, especially to these vulnerable communities.