RBI’s several policies to improve financial literacy and financial inclusion

RBI is doing many things on these two key policy areas.

Both these issues of financial inclusion and financial literacy are used interchangeably but are very different. RBI Governor D. Subbarao explains these ideas in a recent speech on financial education. The speech was given in a RBI-OECD workshop on the same issues.

Governor explains:

In the Reserve Bank, we treat financial inclusion and financial literacy as twin pillars. Financial literacy stimulates the demand side – making people aware of what they can and should demand. Financial inclusion acts from the supply side – providing in the financial market what people demand. While we have traditionally focused more on addressing financial exclusion through many supply-side measures so as to help “connect people” with the banking system, we have come to recognize the demand side imperative also – that financial literacy and education should be developed hand in hand with improving access to financial services.

We have taken a number of measures over the last few years to further financial inclusion and financial literacy. We have intensified these efforts in the last one year. I do not want to go into them as you will have opportunity to discuss, and I hope critique, these measures in the course of this workshop. But I do want to highlight what the Reserve Bank and commercial banks have agreed upon.

Specifically, we agreed upon three things.

First, the lead bank in each district has been asked to draw a roadmap by the end of this month (March 2010) for ensuring that all villages with a population of over 2,000 will have access to financial services through a banking outlet, not necessarily a bank branch, by March 2012. There will be an intermediate target to be achieved by March 2011. Banks will have to harness technology and innovate low cost business models to accomplish this.

Second, all domestic public and private sector commercial banks have agreed to come up with their specific, Board approved Financial Inclusion Plans (FIPs) by March 2010 to be rolled out over the next three years. These Plans will have both qualitative indicators and quantitative milestones.

Third, we have urged all banks to include criteria regarding financial literacy and financial inclusion in the performance evaluation of their field staff.

Subbarao in an earlier speech had indicated that banks would be asked to prepare individual FIPs. This seems to have been agreed upon. He said in Dec 2009:

On the way forward, the Reserve Bank will push three targets. First, the lead bank in each district has been asked to draw a roadmap by March 2010 for ensuring that all villages with a population of over 2,000 will have access to financial services through a banking outlet, not necessarily a bank branch, by March 2011. As an aside, let me also tell you that many consumer goods companies have unveiled specific strategies that target villages with a population of less than 5,000 as micro-markets. It seems to me that as bankers, you can also follow your clients to their markets.

Second, all commercial banks – public sector banks, private banks and foreign banks – are going to be asked to come up with their specific Board approved plans for financial inclusion by March 2010. These plans are intended to be rolled out over the next three years. We, in the Reserve Bank, have refrained from deliberately imposing a uniform model on the banks because we wanted each bank to build its own strategy in line with its business model and comparative advantage. This will hopefully ensure better ownership. The Reserve Bank is consulting the Indian Banks Association in this regard.

Third, we learnt from the frontline managers in the Pune workshop that top managements of banks do not sufficiently emphasize, much less reward, efforts at financial inclusion. To remedy this, we are going to ask all banks to include criteria on financial inclusion in the performance evaluation of their field staff.

So all three plans have been put on implementation.

Subbarao also talks about RBI’s recent outreach program. The program aims to connect senior RBI staff to the villages in India.

I am happy to claim, with a deep sense of fulfillment of course, that between all of us in the top management of the Reserve Bank, we have visited at least one village in every state and most union territories.  Given that India has over 600,000 villages, our coverage was, by all accounts, miniscule.  Even so, it has been an enormously rewarding experience for us as individuals and for the RBI as an institution.  We learnt more this way than what we could have by reading hundreds of reports and attending scores of meetings and conferences. And what is more, it was a lot more fun than sitting in air-conditioned offices in skyscrapers. If I were to single out one important lesson from these visits, it is about the growing aspirations and the rising awareness of rural people.  We were all struck by how much rural women knew about saving and investment and struck even more by how eager they were to learn more about saving and investment.

It is axiomatic that when income levels rise, the time horizons of households become longer. From thinking about the next agriculture season, they start thinking about the next five years, and then about their children’s future and their own old age. These are healthy concerns on which we must capitalize.  This realization sensitized all of us in the Reserve Bank that we will be failing in our mandate if we do not address the challenge and the opportunity of financial literacy head on. That is the reason why learning from this workshop on furthering financial literacy is important and valuable to us in the Reserve Bank.

He outlines research agendas:

First, given the significant commitment to financial education by the government and a host of stakeholders, it is important to determine the impact and effectiveness of such programs so as to understand what works and what does not.

Second, financial literacy programs require trained instructors. To be most effective, these instructors or counsellors must be available to clients at the time when they are making important financial decisions. The awareness and timeliness of financial advice, are important to make financial literacy useful and relevant. In this context, it would be useful to study successful experiments from NGOs such as SEWA which started a financial counseling training service for poor self-employed women, including a training for trainers, and identify how we can mainstream those one-off successes in a cost effective way.

How can we best leverage communications and technology in ways to engage and empower people in the area of financial literacy?  Recognizing that people receive, learn and digest information in different ways, it would be useful to survey all possible avenues of communication to determine the best way of capturing people’s attention and interest.  The use technology in the training of trainers could also be explored.

In the same workshop speeches by Finance Minister Pranab Mukherjee and RBI Deputy Governor, K.C. Chakrabarty are also a good read.

In another great initiative, RBI has tied up with Karnataka Government and has developed syllabus on financial literacy for classes V, VII, VIII and IX. This revised syllabus  would apply from academic year 2010-11. VK Sharma, ED RBI explains:

Three important events have been scheduled for this afternoon. These events, which are jointly hosted by the Reserve Bank of India and Government of Karnataka, comprise release of textbooks containing material on Financial Education in school curriculum, distribution of prizes to the winners of the State-wide Quiz Competitions and launching of Electronic Benefits Transfer (EBT) Scheme in Karnataka.

The background to this momentous event  was the decision taken, during the meeting of the respected Governor with Hon’ble Chief Minister of Karnataka, on May 14, 2009 to launch a pilot programme on Financial Literacy in Karnataka in association with the State Government. The programme envisaged introducing financial literacy  in the curriculum of schools and colleges in the State of Karnataka.  Subsequently, at a high Level meeting between Shri Sudhakar Rao, the then Chief Secretary, Government of Karnataka and Smt. Usha Thorat, Deputy Governor, RBI, it was decided that revision of syllabus and content of textbooks for classes V, VII, VIII and IX would be carried out for the academic year 2010-11. Accordingly, the  content for the proposed curriculum change was developed by RBI and formally handed over by the Reserve Bank Governor to the Chief Secretary, Government of Karnataka on September 22, 2009 during the Outreach Programme organized  in Doddabelavangala village in Bengaluru Rural district. I am happy to inform you that the textbooks incorporating the content provided by RBI have since been printed and made available by the Government of Karnataka. 

Another significant decision taken during the meeting of the respected Governor with the Hon’ble Chief Minister of Karnataka on May 14, 2009 was that steps would be taken to make Financial Literacy part of non-formal education. As a follow up to this decision,  State-wide Quiz competitions covering the schools, and PU colleges in all the blocks and districts of the State,  were held  in association with Government of Karnataka, SLBC and the Lead Banks. The literature developed by RBI under ‘Raju and Money Kumar’ series and other material prepared on features of genuine currency notes, etc. were used for conduct of the Quiz competitions in both English and Kannada. RBI, Bangalore, printed around 8.80 lakh booklets for distribution to the targeted schools/colleges through the Lead District Managers and Deputy Directors of the Education Department. The block and district level Quiz competitions culminated in the State Level Quiz Competitions. I am pleased to inform this august  audience that distinguished dignitaries sitting on the dais will give away the prizes to the winners of the State Level Quiz Competition.

Wow. Catching them young.

RBI Governor speaks on the occasion and says experiences from K’taka will lead to more such events:

I want all of your school children and college students to study well, in particular try and understand the world of finance.  I also want to request the Education Department of Government of Karnataka to do an evaluation of the introduction of the finance curriculum after one year.  Based on your feed back, we can improve the lessons and instruction material both here in Karnataka and all other states. 

RBI is on clearly on top gear. There have been some excellent speeches/lectures (one, two, three) , international conferences (one, two and three) transparency and communication initiatives (one, two) and now the several financial inclusion and literacy initiatives.

Great stuff.