We can easily blame our government for such dismal progress. Many corporates and wealthy citizens think that it is government's responsibility to cure all the ills, kill all the devils, pay all the bills for social work and give out all the licences for profitable ventures. The government has its limitations in terms of resources. I believe it is no excuse for me as a citizen or my company IIFL as a corporate citizen to do little. All of us who have been fortunate to build a fortune, should extend a helping hand to the less fortunate ones.

Financial literacy agenda is much wider than just increasing the number of people with bank accounts. Even the banked population has very limited understanding or awareness of all financial services products available and how to make the best use of them. Not many are aware as to how to invest savings, keeping in mind risk and liquidity requirements.

Despite majority of people being homeless and some living in kuccha houses, mortgages as a percentage of GDP is just about 8%, compared to 50-90% in developed countries. Ditto is the story in mutual funds, insurance etc.

Penetration of equities is also very low accounts for less than 4% of household assets. Most people dread equities and think of them as equivalent to a casino or gambling den. I would like to clear this myth with macro argument for equities. If the Indian GDP grows at 8-9% in real terms, i.e. 13-14% in monetary or nominal terms and given agriculture's slow growth with limiting factor of land, then you can expect industries and services to grow at 18 p.a. This is mirrored in expected returns from equities at 18-20%, which would have tax free dividends and tax free capital gains as well if hold for a year or more, compared to 9-10% taxable interest return in bank deposits where bulk of household savings in invested. I strongly believe that equity investments will be the primary source of wealth creation. Of course, it's a skilled job and requires expert help to build the right portfolio and hold it for a long term. What better example than HDFC. In 1993/94, if my recollection is right, its market cap was just about 500 crores, and now it is Rs1 lac crores, a staggering 200 times growth. But the flip side of this great performance is that in 1995 it was owned almost entirely by Indians and now is 74% owned by foreigners. This is a company with an outstanding Indian leader, an excellent Indian management team and has delivered excellent products and services to Indian market and created enormous wealth for shareholders but most of it is now owned by foreigners. That's just one example of the price that the retail and small Indian investors have paid for being financially illiterate.

In India, given its size and complexity, any task is daunting, be it taming inflation or teaching illiterates. That will not discourage us from our agenda of dispelling darkness of financial illiteracy. My senior colleagues of IIFL and a separate dedicated team have pledged their support along with me for FLAME. We shall leverage our network of locations, employees and over a million customers across the country to reach out to small towns as well as under-privileged sections of society as well.

Some may think it is audacious for a small company like IIFL with just 10-15 years history to boast of such tall claims. I may describe our endeavor in beautiful small poem of Rabindranath Tagore:

Ke loibe mor karjo, kohe shondha robi; Shuniya jogot rohe, niruttor chobi
Matir prodip chilo, she kohilo, shamy; Aamaar je tuku shaddho, koribo ta aami.

Translated, it means,
The setting sun asks the world, who will take over my job? The world is speechless and dumbfounded. A small earthen lamp (with its tiny little flame) responds "I'll do my best, Sir!" In the same spirit, I would like to say we will do our best to remove the darkness of financial illiteracy.

1. Financial literacy is a not a new term to all of us present here. We have heard a number of definitions of financial literacy, which describe it as the ability to manage personal finances and to make informed choices with due knowledge about financial products in order to maximize one's welfare as well as to seek grievance redressal. Financial literacy is expected to impart knowledge, aptitude and skills to make ordinary individuals into informed and questioning users of financial services and so on. In my opinion, each of these definitions captures only a part of financial literacy.
   Financial literacy, according to me, is a much broader concept of a multidimensional nature and involves not just users but also providers of financial services.
2. In my address today, I shall answer four basic questions about financial literacy:
   • What is implied by the concept of financial literacy?
   • Why is financial literacy necessary?
   • Who all need to be made financially literate and in what aspects?
   • And finally, how to spread financial literacy?
3. Let me begin by answering the first question. Financial literacy is a complex concept, and is relatively difficult to impart. This becomes even more acute in a society, which is plagued by enormously high levels of illiteracy. In fact, as a society, we are yet to fully recognise the need and potential for financial literacy. Financial literacy is associated with market risks, and thus directly impacts the welfare of all those involved. Financial literacy, according to me, is primarily the knowledge about financial products and services and their risk-return framework. The basic lesson that must be learned is that higher returns mean higher risks. The greed for higher returns eventually culminates into a crises involving larger number of retail investors. This basic lesson holds true not just for an investor putting in funds into the market but also for a bank or financial institution that manages public funds to channel them either as investments or loans. This knowledge holds the key to prudent participation in the market and welfare maximisation within the given constraints for every player.
4. Why is financial literacy necessary? Financial literacy is integral to achieving financial inclusion, financial stability and consumer protection. We have defined financial inclusion as the access to appropriate financial products and services needed by vulnerable groups, such as weaker sections and low income groups, at an affordable cost, in a fair and transparent manner by mainstream institutional players. So, from the financial literacy perspective, it essentially involves two elements, one of access and the other of literacy. It is a global issue, the extent and nature of which differs from country to country. For developed countries, the access of financial products/ services is fairly widespread. Hence, it is more of a literacy issue in that market players/consumers are required to be educated more about the characteristics of the financial products/services including their risks and returns. In developing countries like India, the access to products itself is lacking. Therefore, only with a widespread access and increased knowledge about the characteristics of financial products, viz., risks and returns, can we expand the outreach and inclusiveness of the financial system. But improving access assumes a greater priority. Financial literacy is a component of financial inclusion and a necessary condition for bringing a large proportion of the excluded population into the fold of the financial sector. We can go a step further and even argue that financial inclusion itself helps in further expanding financial literacy thereby creating a virtuous cycle.
5. Financial stability, as we all know, in simple terms, is the absence of instability in the financial system. As a policy objective, it refers to the avoidance of financial crises as also to the ability of the financial system to limit, contain, and deal with the emergence of imbalances before they constitute a threat to the economic processes. As already noted, financial literacy involves imparting the required knowledge of risks and returns of financial products to the users and suppliers of these products. It is this knowledge that helps in controlling risks in the financial system and maintaining stability in the system. I would like to argue that with knowledge, financial market players are expected to control their avarice for higher returns keeping in view their inherent risk taking abilities. In the context of the recent global financial crisis, Ben Bernanke has remarked that "In light of the problems that have arisen in the subprime mortgage market, we are reminded of how critically important it is for individuals to become financially literate at an early age so that they are better prepared to make decisions and navigate an increasingly complex financial marketplace". This adequately illustrates the link between financial literacy and stability.
6. Financial literacy is also an integral component of consumer protection. The current levels of transparency and the consequent difficulty of consumers in identifying and understanding the fine print from a large volume of information leads to an information asymmetry between the financial intermediary and the customer. For example, customers are often penalized for minor violations in repayments, although they have limited redressal mechanisms to rectify deficiencies in service by banks. In this context, financial education can greatly help the consumers to narrow this information divide.
7. This brings me to the third question of who needs to be financially literate and why. I shall argue here that everyone in the economy needs to be financially literate viz., users and providers. In the Indian context, the users can be broadly categorized as, the financially excluded resource-poor, the lower and middle income groups and high net worth individuals.
8. For the resource-poor population, which operates at the margin, vulnerability can be acute due to constant financial pressures. Household cash management can be daunting under difficult circumstances with few resources to fall back upon. Financial literacy in the case of such population is essentially required to manage short term volatility in incomes and meet unexpected emergencies without getting trapped in unnecessary debt. Just to cite one example, a recent study by NCAER and Max New York Life has shown that in India, around 60 per cent of labourers surveyed, stored cash at home, while borrowing from moneylenders at high interest rates; a pattern of saving money that is bound to aggravate financial vulnerability of these labourers. The process of educating the excluded sections may invariably involve addressing deep entrenched behavioural and psychological factors that are major barriers to participating in the financial system. They need to be told about why to have a bank account and why to save? While financial literacy is useful at the individual level, it has major macro-economic benefits as well. If we can bring the excluded population into the purview of banking services, we could raise household and overall domestic savings further, and can thus fulfill one of the necessary conditions for achieving double-digit growth.
9. For the middle and lower-middle income groups that are participating in financial markets as either savers or borrowers or both, i.e. the financially included, financial literacy is meant for enhancing their knowledge about the market and various new products/ services. They require fair and appropriate products. There is a large section of our population that have a bank account and are seemingly literate but refrain from participating in the capital market on account of lack of knowledge. As an illustration, it is important for all such individuals to know about how the equity market functions. The equity market provides relatively high returns over a longer time horizon as compared with other kinds of investments. But, how many people invest in equities? People need to be educated that to lead a dignified retired life, some part of your saving need to be invested in equities.
10. For high net worth individuals, there is no denying that greater knowledge about the financial markets, its new and innovative products and instruments, is always helpful. This knowledge is useful to fetch greater returns from their investments in the market and to avail credit at relatively cheaper rates. But whether saving or investing, the basic lesson that a higher return implies higher risks cannot be lost sight of.
11. While financial literacy for the users of financial services/products is of paramount importance, I would like to point out that literacy is also a must for financial service providers. Banks, financial institutions and other market players too need to be literate about their risks and returns framework. Every bank, in order to expand its customer base, needs to understand the requirements of their customers, the market, credit and operational risks involved and returns to be achieved. They need to understand that for his business to survive, his customers must survive and for that they need to understand the appropriateness of the products themselves to be able to explain it to their customers.
12. Finally, for policy makers, including the Reserve Bank and other financial sector regulators, literacy is a must to gauge the needs of the population and financial institutions, such that financial resources can translate themselves into higher economic growth while minimizing the financial stability risks.
13. To summarize, I have explained why different stakeholders need to be made financially literate. There is widespread financially illiteracy, both from users side and providers side. Again, as an example, let me now ask you the difference between two simple terms that we hear every day, "money" and "credit", and which some people wrongly even use inter-changeably. Are we really aware about the basic difference between these two terms? While money refers to the currency which we use, credit refers to money taken on interest, but which needs to be self-liquidating. If credit is not self-liquidating and cannot be paid back from the stream of future incomes, it is bound to result in a debt burden and possibly a vicious cycle of debt trap. The borrower in this case could be an individual or even a financial institution. After all, the excessive leverage on the financial institutions, as we all know, was the key factor behind the recent global financial meltdown. Thus, as soon as money enters the financial markets and starts changing hands with an interest cost attached to it, all players involved in this process need to be aware of their own repayment capacity as well as the repayment capacity of those borrowing from them. Moreover, even the regulator needs to be literate of the macro-economic implications of credit risks, while ensuring greater value addition for the real economy through efficient resource allocation. There are any number of such examples of terms which are mis-understood like " expenses" and investments".
14. Let me now turn to my final question about how to bring about financial literacy and who should spearhead the process. As I have already argued, financial literacy is required for each player in the economy, albeit in different degrees, forms and modules.
15. Let us begin by discussing initiatives for financial literacy for the public at large. As I have already noted, the enormity and complexity of the task of financial literacy differs from country to country. Unlike developed countries, developing countries having relatively less developed financial markets and lower levels of general literacy, the task of financially educating the masses is often far more complex. For a developing country like India, where masses are still out of the purview of formal financial sector, the task is indeed enormous. So, first, we have to concentrate on improving access.
16. World over, countries have targeted programmes for schoolchildren, teachers, research institutions, among others. Further, they also have launched mass media campaigns/websites providing simplified information often in vernacular mediums, which can be used by the public to learn about the monetary and banking system. A global problem requires a global approach. Realizing this, the Organisation for Economic Cooperation and Development (OECD) created the International Network on Financial Education (INFE) in 2008 to promote and facilitate international co-operation between policy makers and other stakeholders on financial education issues worldwide. Currently, more than 130 institutions from 60 countries have joined the OECD INFE.
17. The experience of various countries also shows that among various financial regulators, it is often the central banks, as banking regulators, that have spearheaded the process of spreading financial literacy among the public. I have summarised in Annex Tables 1 and 2, the exact target groups for financial literacy and the initiatives taken by central banks in varied forms, across various countries.
18. As you can see from the tables, India figures prominently as a country where financial literacy programmes have been targeted at various segments of the general public. Further, the Reserve Bank maintains a money museum to impart knowledge about money and banking to the general public apart from organising outreach programmes for financial literacy and inclusion. The Reserve Bank also operates a website for the common man to disseminate information in thirteen languages about the Reserve Bank itself and the banking system as a whole.
19. The Reserve Bank, as part of its Platinum Jubilee Celebrations, organised an international Conference on Financial Literacy in collaboration with OECD. It has instituted Young Scholars Scheme, wherein, around 150 graduate students are selected each year from across the country, who are provided summer internship in various offices of the Reserve Bank and are expected submit small project reports relevant to the Bank's functioning. Moreover, these young scholars are required to visit some schools in their region and explain their project to school students, so as to create greater awareness among the school students regarding the functioning of the Reserve Bank. The Reserve Bank has also instituted RBI Chair professors in 17 universities/ research institutes across the country with an objective of promoting research related to areas of interest to the Bank.
20. Apart from these, the Top Management of the Reserve Bank have been undertaking outreach programme. All the Top Management, including Governor, Deputy Governors and Executive Directors among us, have visited at least one village in each of the States of the country and most of the Union Territories.
21. For all users of financial services, an important component of financial literacy is the provision of a grievance redressal mechanism, which they can access in cases of complaints and frauds by/against financial service providers. For cost-effective, quick grievance redressal related to banking sector, the Reserve Bank has instituted Banking Ombudsmen in each of our Regional Offices. Other regulators have also setup ombudsman in their areas. In 2006, the Reserve Bank created a Customer Service Department to particularly improve the provision of customer services. However, it is the banks/financial institutions own realization that improved customer awareness and service, and effective grievance redressal at their level which is long-term solution, and this can only substantially reduce the number of complaints going to Ombudsmen.
22. The Reserve Bank has also advised the State Level Bankers' Committees (SLBC) to set up on a pilot basis, financial literacy and credit counseling centres, which are expected to educate prospective borrowers regarding various loan products and different government schemes. Pursuant to this, credit counseling centres have been established in many of the districts by lead banks for those districts.
Conclusion:
23. While a number of measures have and are being taken, given the enormity of the task of financial literacy, a lot of ground still needs to be covered. Apart from the Government, regulatory bodies, there is a need for involving the civil society and all other stakeholders in spreading financial literacy. We still do not have any formalized curriculum in schools, which teaches the school-children the basic principles of money, credit, savings and investments and which introduces them to the way our financial system operates. After all, while one-time, targeted programmes are useful but including financial education into school curriculum in an on-going manner would hold the key to making our future generations financially literate. Finally, I congratulate the FLAME initiative for partnering in the arduous and yet, vital task of spreading financial literacy. I wish them all the success and hope that many more like this stand up for the cause of financial literacy.

The need for financial literacy cuts across all income spectrums. In India, the irony is that the long-term growth story is so strong and the markets are so attractive, yet financial penetration is abysmally low. On the other hand, look at an advanced economy like the US and one sees that the root of the subprime crisis lay in the mis-selling of complex mortgage products which customers did not understand, but readily lapped up. Both these are different but glaring examples of the need for a more focused and concerted approach towards financial literacy.

Alan Greenspan had said and I quote, "The number one problem in today's generation and economy is the lack of financial literacy." Fine words, but perhaps he should have said this sometime during his 20 odd years as head of the Fed and not after the subprime mess occurred. Unfortunately, we tend to be wiser in hindsight. Nonetheless, there are lessons for all to learn.

I've penned down a few random thoughts, which could serve as five key lessons on financial literacy, which I'd like to share with you:

Financial literacy endeavours needs to have a long-term vision. At a very fundamental level, there is now an established understanding that financial literacy has to first be inculcated in the home environment and reinforced as part of the school curriculum. To provide a good financial role model, you need to 'catch them young', which is why I hope FLAME will soon start targeting the very young as well.

At a broader macro level, however, what is obvious is that India cannot grow at a sustained high rate without greater financial inclusion. Delaying the financial inclusion agenda can leave a permanent irreparable damage. We are already witnessing unrest from those who feel excluded from the India growth story; and this will only increase if there are no immediate concrete measures taken.

The oft-quoted financial exclusion statistics are staggering:

• 144 million excluded households;
• 73% of farmer households have no access to formal credit;
• 5% of India's 600,000 villages have bank branches; and
• 45% of the adult population of India has not accessed financial services from formal financial institutions.

These numbers signify that formal finance options are still few and mostly remain inaccessible to a vast rural population. It is important to create conditions to encourage financial institutions to lend in rural areas. Banks and financial institutions have pointed out that the 'last mile' or exorbitant cost of delivery is the biggest hurdle, but these issues are slowly being overcome.

There are implicit constraints as well, as the poor tend to be intimidated by banks. As formal service providers often find it difficult to establish a rapport with the rural customer, it is imperative that banks explore ways in which they can work together with a variety of channels. For instance, business correspondents should be encouraged to serve as additional credit delivery channels provided there are appropriate safeguard measures. Further, there is a need to design products and services that suit the requirements of the rural population.

India's financial markets are strong in terms of technology, regulation and systems. India also has amongst the highest household savings rate globally, estimated at 24% of GDP. While household savings may be higher in India, the key question is whether the savings are being optimally invested. It is estimated that around 40% of household savings are channeled into physical assets such as real estate and gold, while financial assets are dominated by bank deposits and cash.

One of the challenges impeding the Indian capital markets is the small retail investor base. In India, house-hold savings in shares, including mutual funds is around 7%. In the US, 50% of household savings are in mutual funds and shares. This is one of the factors for low household net worth in India. Markets like Hong Kong, Korea and Taiwan, have retail participation that is much stronger than foreign investors. In India, it is the reverse where the share of retail investors is miniscule in listed companies while FIIs holds way on how markets move. A strong retail base helps lessen wild volatility in the stock markets.

Indians are more risk averse than their global counter-parts, but I believe the problem is more to do with a lack of awareness of the equity markets. I must complement the IIFL authors who have lucidly put together the descriptive snippets on various educative financial themes – I enjoyed reading it and I am sure the aam aadmi will benefit tremendously from this.

Today the financial system is increasingly complex and we all have to learn to navigate through a maze of sophisticated financial products and services. World over, we have seen that many financial service providers have actually profited from financial illiteracy – be it in the form of selling products with hidden costs or enticing customers by not being entirely transparent about products they are selling. For instance, if customers were more financially literate and loan originators more responsible with skin in the game, would there have ever been mortgage products like NINJA loans which resulted in huge defaults? So financial education has a big role to play in promoting responsible lending.

I would also go on to add that financial literacy is equally crucial for regulators as well. Many critics felt that the subprime crisis was an outcome of regulators sleeping at the wheel. But the real problem was that regulators were simply unaware of the extent of leverage and complexity of many financial instruments. For example, few regulatory and supervisory staff are trained to understand complex derivatives or have forensic accounting skills, but these skills are imperative for regulators today.

In any market, there are always punters, casino players or the get-rich-quick players. We have seen enough of examples of rogue traders who have brought the best of financial institutions down to their knees. It can take just one rogue to ruin the reputation of an institution that has been built over decades. Financial literacy drives need to highlight these dangers and emphasise the importance of understanding the products that one is investing in. In good times, many investors tend to get attracted to riskier financial products to earn higher returns. But when the tables turn and investors get jittery, there is almost always a flight to safety and quality. In these times, investors flock to institutions where they have explicit trust in. Normally, banks are the safest institutions in uncertain times. But the subprime crisis saw many of the world's most reputed banks go belly up. In India too, though the subprime crisis virtually bypassed the financial system, during the liquidity crisis it was true that people believed that State Bank of India was the safest bank and as a result the bank was flooded with deposits of over Rs. 1,000 crores on a daily basis. Obviously, in the minds of depositors, State Bank of India was placed on a higher rung compared to even other nationalised banks. Similarly, HDFC is also a trusted household name and we deeply value the fact that depositors have explicit faith in the organisation.

Financial literacy is a challenging task and the government, the central bank and other stakeholders have launched a number of campaigns and programmes for counselling and improving financial literacy. While these initiatives demonstrate a strong commitment to financial education, it is important to determine the impact and effectiveness of such programmes so as to understand what works and what does not. Further, financial literacy programmes require trained instructors, who must be available to clients at the time when they are making important financial decisions. There is no doubt about the importance of the timeliness of financial advice.

On the challenges of imparting financial literacy, Lauren Willis, a US-based professor of financial literacy education aptly said and I quote: "Teaching financial literacy is not like telling people that smoking kills, where the message is straightforward and unchanging. Even if consumers could master the intricacies of money management, the speed of financial innovation means much of what they learn would soon be out of date". Clearly, financial literacy remains an unending task.

To conclude, India's bright future cannot be disputed with a 9% GDP growth, rising disposable incomes, better job opportunities and growing confidence of India's youth. The speed with which India's economy is poised to grow will only intensify. It took 60 years for India's GDP to first touch the one trillion dollar mark in 2007. In another 2 to 3 years from now, India is expected to cross the two trillion dollar mark and by 2025, India should be a four trillion dollar economy.

A successful and sustainable existence of civilized society depends on having the greatest possible number of people who have a stake in society. All this is not possible without fulfilling the financial inclusion and financial literacy agenda. India's success story is directly linked to the prosperity of its people and every endeavor towards financial literacy will bring prosperity faster to our people.

I wish your endeavors all success.