The possible trinity of financial inclusion and the five kinds of financial illiterates..

SS Mundra of RBI speaks on financial inclusion and has some interesting insights.

He says unlike the impossible trinity of macroeconomics, here there is a possible trinity of inclusion:

As Central Bankers, very often, we talk about the impossible trinity, while discussing the larger monetary policy framework. Some of you would know the concept. But for the benefit of others, Impossible Trinity is a concept in macroeconomics which states that it is impossible to simultaneously pursue three goals that of a stable foreign exchange rate, free capital movement and an independent monetary policy. You must be wondering what this has to do with theme of the Conference. I am drawing reference to the “impossible trinity” just to begin talking about an essentially possible and feasible trinity and this “possible trinity” is that of financial inclusion, financial literacy and the consumer protection. Together the three, form a triad that has a vital bearing on the stability of the financial system. That I think should be the overall theme of what we discuss today. 


Further he says for financial inclusion to work, we need to eradicate financial illteracy. There are five kinds of such financial illiterates:

The first form of financial illiteracy, I call “Wise Illiteracy” and people as “Wise Illiterates”. Now you must be wondering that how a person can be called wise and illiterate in the same breath. When I say “wise illiterates”, I am referring to the victims of Madoffs of the world or the people who happily submit to the financial scams – exchange scams, penny stock scams or exotic derivative products. This class does not only include individuals, but also corporates. They have all the resources at their command; they understand risks in all its dimensions and pros and cons of their actions but despite that with an unnerving regularity, keep falling into the trap of mega level of scams. This happens in India as well as elsewhere across the globe. So, these are the “wise illiterates” in my definition.

The second category of financially illiterates I call them “Greed-driven Illiterates”. These are people who are well educated and well understand the risks involved in various financial decisions that they make. But in their case, greed overpowers sanity.

Let me now come to the third category – whom I have named “Information – deprived Illiterates”. There is rapidly growing middle class in the country. In addition, there is rapid urbanization and a large number of people migrate from the rural to urban areas. As the middle class grows, urbanization increases; so do the financial needs of the people – these are lifestyle needs for savings/credit/investments /retirement planning etc….the consumers, the recipients of these services, are not really becoming financial literate in that sense, at the same pace. They do not have access to the level of information that the service providers have which has led to a wide gap, an asymmetry in information and knowledge between the service provider and service receiver. That is why I call this section of people illiterate, “information deprived illiterates”, not in the sense of education, albeit in respect of the financial information they possess.

The fourth category – I have named “Illiterate Illiterates”. These are the people who have just entered the formal financial system or formal banking system. Under the PMJDY, in the last one year almost fifteen crore new accounts have been opened. In three years before that under RBI’s financial inclusion push, another fifteen crore accounts had been opened. Initially villages up to a population of 5000, then 2000, then below 2000, were covered in a phased manner. The sum and substance is that in the last four – five years around thirty crore new people have entered into formal financial/banking system for the first time. We keep on hearing that there are not enough transactions in a large number of these “zero-balance” accounts. These people are the “illiterate illiterates”, – illiterate both in the sense of normal education and more so in respect of financial education.

The fifth category of illiterates, I have named as “Kindergarten Illiterates”. These are the young students and justifiably many of them are financially illiterate. These are school children and it would be sometime before they enter the formal world of finance. But they are another very important target group, which is needed to be brought under the financial literacy drive.

He says we cannot do much about the first two categories and the greedy ones need a rap to recover from their bahavior. However, for the last three, efforts can be made and are being made to bridge the illiteracy. He discusses the several measures being taken to spread literacy to these three types.

He also discusses the demand barriers facing old/new literates:

Challenges exist on the demand side. There are certain barriers to demand side and they are important. Important because the customers who are financially literate would demand information and thereby play an important role in ensuring transparency among the financial institutions. The transparency in the market encourages institutions to compete on the basis of better products and services and at lower cost. That is what the informed customers bring into the market and ultimately it is beneficial because it expands the market and brings more and more new customers.

  • What are these demand side barriers? The first demand side barrier is more on personal level. A large number of people who have come into the financial system now have low or uncertain incomes. For them, any high fee or a stipulation like maintaining a minimum balance in the account it can become a barrier. This is what I call a personal barrier.
  • The second is, of course, the low level of financial literacy. If they don’t have that level of literacy, then they would not know about the availability, neither can they judge the products’ suitability nor can they compare various products. When that does not happen for the new entrants to the financial system, it creates a trust deficiency. It does not break that hesitation to use the banking services. That is the second barrier.
  • The third barrier is low social and technological inclusion. What is social inclusion? I did mention in the early part of my address about the rapid migration of people from rural to urban area. The migratory population coming into the towns or cities find themselves displaced from their roots. They don’t have their ecosystem in place, whereby something like obtaining an address proof or a simple introduction becomes a challenge. So, these are the social inclusion challenges.
  • Similarly on technological side, the hesitation to use ATMs, mobile banking, net banking etc. These are the kind of things which act as a technological barrier. I have seen in the programme schedule there is a session on this also. This should become an important part of the financial literacy drive that we are talking about.
  • And finally the fourth barrier – the linguistic barrier. India is a diverse country. There are so many dialects, so many languages and until and unless players deal with the consumers in respective area in the local language; unless the literature, the material is made available in the local language, the efforts towards connecting these consumers would never succeed.

Effectively, we have so much of supply side infrastructure available and at the same time we do have these demand side barriers. So the challenge before us is how to break the barriers on the demand side and make effective utilization of infrastructure which is created.


Finally he discusses a really simple strategy by Canada to push financial literacy and inclusion.

All these things are fine but I guess financial illiteracy is here to stay. Even in adv countries, it is shocking to see how so called wise-illiteracy is rampant. People can’t just figure finance no matter how educated they are.

This does not mean we should not spread the message. Just that we should not expect too much from it..

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