financial literacy, savings and investment pattern in...

Financial Literacy, Savings and

Investment Pattern in India

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CHAPTER III

FINANCIAL LITERACY,

SAVINGS AND INVESTMENT PATTERN IN INDIA

This chapter draws a theoretical discussion on the concept of financial

literacy, need of financial literacy to India, the factors that motivate individuals

and households to save or investment their hard earn money.

3.1 Overview on Financial Literacy

Financial Literacy as a combination of financial awareness, knowledge,

skills, attitude and behaviors‟ necessary to make sound financial decisions and

ultimately achieve individual financial wellbeing1. Financial literacy is expected to

impart the knowledge to make ordinary individuals into informed and questioning

users of financial services. It is not just about markets and investing, but also about

saving, budgeting, financial planning, basics of banking and most importantly,

about being Financially Smart. Financial literacy is a complex concept, and it is

important to understand its full import. In fact, as a society, we are yet to fully

recognize the need and potential of financial literacy.

Financial illiteracy permeates across all levels of society and economic

strata. The nature of illiteracy and its manifestations may vary, but it gets reflected

in the everyday financial choices that many of us make. The lack of basic

knowledge about financial products and services and their risk-return framework

is one common instance of financial illiteracy that is widely observed. The greed

for higher returns eventually culminates into a crisis involving larger number of retail

investors. This basic lesson holds true not just for an individual investing his hard

earned savings in financial products, but also for a bank or financial institution that

manages public funds and channels them, either as investments or loans.

Thus, appreciation of various aspects of financial literacy and how it impacts

our lives holds the key to prudent financial planning and welfare maximization,

both- at the individual level and for the society as a whole2.


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3.2 Steps Taken to Increase Financial Literacy in India

India has large sections of persons who are resource poor and who operate

on the margin. These groups are really vulnerable towards persistent downward

financial pressures3. Moreover with no established banking relationships, the poor

sections are pushed towards expensive alternatives. Challenges in the areas of

household management, could be accentuated by the lack of skills or knowledge

that make well informed financial decisions. Financial literacy can help them

prepare ahead of time for life needs as well as to deal with unexpected

contingencies without assuming unnecessary debt4.

In India a variety of steps has been taken by various agencies in the area of

enhancing financial literacy, these steps includes:

Initiatives taken by the Reserve bank of India

The Reserve bank of India, which is the central bank, has been actively

participating in the field of eradicating financial literacy in the country. In this

context a project called “Project financial literacy “has already been implemented.

The main objective of this project is to disseminate information regarding the

central bank and general banking concepts to the various target groups including

school and college going children, women, rural folk, rural and urban poor,

defense personnel and senior citizens. Information is distributed to the target

audience through presentations, pamphlets, brochures, films, websites etc. for

doing this the Reserve bank has actively engaged other agencies like commercial

banks, government machinery, NGO‟s, schools, colleges etc.

It has launched a financial education site from November 2007 commemorating

children‟s day. The site was mainly created to teach the basics of banking, finance

and central banking to children in different age groups. The site also has other

valuable information to other target groups like women, rural and urban poor,


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defense personnel and senior citizens. It contains films on security of currency

notes and also has a games section. This is to familiarize school children with

India‟s various currency notes.

Other than this the Reserve bank has been conducting essay competitions to

promote financial awareness among school children on topics related to banking

and finance. The bank is also actively engaged in conducting exhibitions in

different parts of the country. Recently the bank launched the “RBI young

scholars‟ award” scheme for outstanding students in order to generate interest in

creating awareness of banking sector of the country (Academic Foundation's

continuing series, 1998).

The other measures implemented by Reserve bank of India in this regard

include:

The Reserve bank has asked the lead banks in each district to draw a road

map for ensuring that all villages having a population of more than 2000 will have

access to the financial services through a banking outlet and this outlet need not be

a banking branch. Secondly all commercial banks inclusive of public sector banks,

private banks, and foreign banks should come forward with their specific board

approved plans for financial literacy by 2010 with an intention to roll out these

plans during the next three years. In this context the reserve bank has refrained

itself from deliberately imposing a uniform model on the banks, the Reserve bank

wants each bank to build its own strategy in line with its business model and

comparative advantage. This would ensure better ownership. In this regard the

Reserve bank has also consulted the Indian banks association. The Reserve bank is

also insisting to include the criteria of financial education in performance

evaluation of all bank staff.

Moreover the Reserve bank‟s outreach program aimed for Indian villages

aims at connecting senior staff of the Reserve bank to the villages in India. Given

the state that India has nearly six lakh villages; the Reserve bank staff has been


46

able to visit all these villages as part of imparting financial education. In another

great development, the Reserve bank has tied up with the government of

Karnataka to include financial literacy in the syllabus for classes 5, 7, 8 and 9.

The new revised syllabus has already been implemented from 2010-11 (RBI‟s

several policies to improve financial literacy 2011).

Credit Counseling Initiatives

Credit counseling is a process in which the consumers are educated about

how to avoid incurring debts that cannot be repaid. It normally involves

negotiating with creditors to establish a debt management plan for the consumer.

In India due to the recent transformations in the retail banking sector, the need for

credit among the ordinary consumers‟ has increased drastically.

There has been rapid growth in the areas of consumer loans, housing loans,

credit cards, personal loans etc. This had lead to the emergence of credit

counseling in the country. In this scenario a few banks working in the public and

private sector has taken initiative in this regard. The “ABHAY” counseling center

in various parts of the state of Maharashtra was started by the Bank of India.

The “Disha trust” another organization initiated by the ICICI bank and “Grameen

paramarsh kendras” started by the Bank of Baroda are already in operation. These

counseling centers assist people on face to face basis as well as on telephone,

email, or through letters.

Consumers facing problems related to credit cards, personal loans, housing

loans approach these centers to get efficient advice to solve their problems. Major

features of such centers is that the services are provided free of cost and the

centers are manned by retired bank personnel who are experts in this area.

Training and awareness camps are organized by such centers to educate people

with need to save as well as to familiarize them with the concept of credit cards,

impact of minimum charges etc (Academic Foundation's continuing series, 1998).


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Other Measures

Other than the Reserve bank and other commercial banks, various NGO‟s

in the country are also entrusted with the task of spreading financial literacy in the

country. Prominent among them is the NGO named „Sanchayan‟ which is

dedicated exclusively in spreading financial literacy and awareness among the

youth and adults who come from low income background. For this the NGO

conducts free workshops on topics ranging from the basics of banking, credit

cards, and PAN cards. Moreover they also cover investment decisions in shares

and mutual funds. The main objectives of these workshops is to enable these youth

and adults to become aware and become part of mainstream banking and financial

services industry. The main mission of „Sanchayan‟ is to create a financial literate

India. The NGO has been launching very useful programmes with this objective.

The Financial literary and counseling programme for urban poor like maids,

rickshaw wallahs, auto drivers etc was the first of this kind. The organization has

also tied up with the National stock exchange for introducing literacy programmes

in stock market knowledge. It has also developed the financial literacy program

for young adults named „FUN‟ in increasing financial awareness among them.

It has also helped many youths to open bank accounts in public sector commercial

banks (Sanchayan annual report 2009-10).

Another NGO named Citi India (A branch of the Citi group international)

has been on the arena of spreading financial awareness among Indian masses.

The group has launched a pilot program on women empowerment through

financial literacy in participation with the SEWA (Self- Employed Women‟s

Association) bank. This program was developed to teach the women how to

employ the money they have borrowed and how to use the profits earned by them.

The program aims to advice the women how to invest these funds in insurance or

pension schemes. The Citi center of financial literacy a key department within the

organization focuses on imparting training programs for the trainers of financial


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literacy and for the field workers. Moreover the group has also partnered with the

Indian school of business a premier business school in Hyderabad for doing

comprehensive research in eradicating financial literacy. The group has also

partnered with another NGO „Meljol‟ in implementing financial education

programs titled „Aflatoon‟ among school children across India (Citi India

community support program).

The Indian school of microfinance for women started in 2003 for

empowering the lives of women is also undertaking efforts in increasing financial

literacy in the country. It has taken initiative to celebrate October 14 as financial

literacy day every year. The institution through its „Citi‟ center of financial literacy

has formed a network of partner organizations named National alliance for financial

literacy to take up financial literacy as a mass movement across the country.

The national financial literary drive was launched in 2008 aimed to reach

one million women in the year 2009. The event proved to be grand success. It is

also engaged in knowledge sharing network on financial literacy at the national

level. It is also proposed to set up coordinating centers at the state level as well as

district level. Moreover the group is also organizing financial counseling centers,

financial camps, portals and certified courses on the topic (Indian school of

microfinance for women Annual report. 2008-09).

CRY (Child Rights and You) is an NGO working for the underprivileged

children of India. It partnered with the Citi group to promote economic

empowerment in India during 2011(Citi India partners 12 NGOs, 2011).

In India studies conducted by Ajay Tankha, Development consultant of

Sa-dhan, a self-help group in regard to financial literacy has indicated that nearly

96per cent of the population across the country felt that they would not survive for

more than one year if there is a loss of income. More than half of the population of

the country prefers banks to keep their surplus. More than one third prefer to keep

their surplus at home and only 5per cent keep their surplus at post office schemes.


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Higher income earners save up to44per cent of their income whereas the bottom

20per cent borrows up to 33per cent. To meet ends, 40per cent of rural households

borrow from local money lenders to meet important expenditures. These data clearly

points out that Indian household do have the habit of making savings out of the

household income but most of their current income is insufficient to meet their needs.

Access to finance by the poor sections of the society living in the country

depends on the degree of financial literacy available for them. For reduction of

poverty and social; cohesion, such groups should be financially educated and

brought to the mainstream financial climates. In a NABARD report published in

2008, data reveal that 45.9 million farmer households in the country do not have

access to credit either from institutional or non-institutional sources. This represents

around 51.4 per cent out of the total percentage of households. Moreover despite

the large and vast network of bank branches, only 27 per cent of the total

households in the rural sector have access to bank financial schemes. Rural

households not accessing credit from formal sources as a proportion of total

households‟ accounts for a whopping 95.91 per cent, 81.26per cent and 77.59 per cent

in the north, north eastern and central regions of the country. The report strictly

highlighted the importance of SHG‟s in the area of improving financial literacy

which could overcome this adverse situation. In this regard the SHG- bank

financial link was proposed. This came to be known as the SHG- bank linkage

programme. This programme is now more than 18 years old (Report of the

committee on financial inclusion, 2008)5.

3.3 Necessity of Financially Literacy in India

The Organization for Economic Co-operation and Development(OECD)

has defined financial education as “the process by which financial

consumers/Investors improve their understanding of financial products, concepts

and risks, and through information, instruction and/or objective advice, develop


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the skills and confidence to become more aware of the financial risks and

opportunities to make informed choices to know where to go for help and to take

other effective actions to improve their financial wellbeing”6.

Thus, it can be rightly stated that Financial literacy enhance an individual‟s

ability to know, monitor, and effectively use financial resources to enhance the

well-being and economic security of one self, one‟s family and one‟s business7.

Financial literacy enhance households ability to make informed judgments and to

take effective decisions regarding the use and management of money.

Thus, financial literacy place emphasis on the skills and area of knowledge that is

likely to be necessary for informed judgments8. The needs to be financially literate

are briefly discussed in this section of study

EXHIBIT: 3.1

NECESSITY OF FINANCIAL LITERACY

Increase in Individual

Responsibility

Increase in

life

Expectancy

Technological

changes and

Market

Innovations

Increase in

Financial Products

and Services Multifaceted

Features of

Financial

Products

Increase in

Financial

Firms


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Increase in the Life Expectancy

Increase in the life expectancy means the possibility of more time spent in

retirement and thus a greater need of financial planning, expanded insurance and

provisions of health care related expenses to cover unpredictable eventualities

.Coupled with major trend in the country, the shift from defined benefit plan to

defined Contribution Plan, known as New Pension Scheme (NPS). Since the last

decade, there has been widespread transfer of risk from both Governments and

employers to Individuals. The Governments started to reduce the state supported

pensions and some are reducing health care benefits. The defined Contribution

pension plans are quickly replacing defined pension plans, shifting onto workers

the responsibility to save their own financial security after retirement. Most

surveys shows that a majority of workers are unaware of the risks they now have

to face, and do not have sufficient knowledge and skill to manage such risks

adequately even if they are aware of them. The implementation of New Pension

Plan asks the workers to make the various decisions regarding contribution to

plan. As government will not be longer enough to provide social security,

increasing responsibility come on the shoulders of an individuals. Thus individuals

need to consider not only investment risk and return trade off, but also uncertainty

regarding their life expectancy, attitude towards risk, current and future earning

potential and likely changes in the personal and social circumstances.

Increase in an individual’s responsibility

Nuclear family structure asks an Individual to make number of financial

decisions related to spending, saving, investments, credit, etc., not only for him but

also for his family. People also need to assume more responsibility for funding

personal or family healthcare needs. Moreover increasing education costs make it

important for parents to plan and invest adequately for their children‟s education.


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Increase in financial products and service

Growing number of consumers have access to a wide range of financial

products and services, from a variety of providers and delivered through various

channels. Deregulations and liberalization have brought the many newer financial

products and services tailored to meet very specific market needs. These financial

product and services innovations provide consumers with more choices to park

their savings. The understanding of these innovations is crucial on the part of

consumers and as a result these innovations do not only provide more choices to

consumers but also challenges to understand the benefit of innovations.

Increase of financial firms

Globalization and privatization have played an important role to develop

the domestic financial markets. Post 1991 period, the many important sectors of

financial services industry kept open for private players to gain wider access to

consumers. As a result not only the giant non-financial domestic companies made

their entry in the financial services industry but also foreign companies entered

into the Indian financial systems. As conservative investments do not allow the

investors to bring the expected rate of return and to cope up with the inflation,

companies have started to provide generalized and customized financial solutions

to consumers, made the credit easier to obtain and compete strongly to gain the

market share.

Multifaceted features of financial products

Due to increased complexity of financial products and services, financial

decisions are mostly annoying to many of today‟s individuals. Perhaps the

confusion has been arisen not only because of the speed at which financial

markets and new financial instruments have emerged or more number of

institutions providing the more complex financial products ,but also because of

the inability to understand basic financial concepts.


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The financial services are divided mainly into two categories: Savings

/Investment services can be viewed as the instruments for financing future

consumptions based on current earnings and credit services i.e. loans/liabilities

are the instruments for financing current consumptions based upon the future

earnings. Later is dependent on individuals financial needs (or objectives) and

abilities (resources) to acquire these financial assets and liabilities. The combination

of financial need priorities and resource availability at different stages of

households‟ life cycle influences the sequence in which financial services are

acquired by the household. But nowadays consumers are faced with the various

financial instruments offering the range of benefits and options with respect to

fees, interest rates, length of contact, exposure to risk etc.resulting into greater

perceived risk, the greater information search to make comparison across a

number of factors, more decision making complexity and ask more decision

making involvement and subsequent delay in making purchase decision making.

Technological Changes and Market Innovations

Developments in the technology advances have transformed every aspect of

processing, marketing and delivery of financial products and services. The use of

Internet as a mean of communication and delivery of financial services and/or

products in the efficient way is a boon for financial services providers and it has

also removed the limitation of geographical boundaries for consumers. These

technological advances and market innovations ask for the individuals not only to

identify appropriate providers and delivery channels from the vast array of

possibilities but also to use these innovations for saving time and make the

financial transactions speedier9.

The role of savings and investment in promoting economic growth of India

has been given paramount importance since independence. Savings and

investment have been considered as two critical macro-economic variables with

microeconomic foundations for achieving price stability and promoting


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employment opportunities thereby contributing to sustainable economic growth.

Over the last three decades, Indian economy has emerged as one of the fastest

growing economies of the world. Apart from registering impressive growth rate,

India‟s growth process has been almost stable. The role of savings and investment

in proving the fundamental growth impulses in the economy is one major factor

for the progress of the country10

. Savings and investment have been considered as

two critical macro-economic variables with microeconomic foundations for

achieving price stability and promoting employment opportunities thereby

contributing to sustainable economic growth. Over the last three decades, Indian

economy has emerged as one of the fastest growing economies of the world. Apart

from registering impressive growth rate, India‟s growth process has been almost

stable. The role of savings and investment in proving the fundamental growth

impulses in the economy is one major factor for the progress of the country11

.

3.4 Savings and Investment in India

The role of domestic savings and Investment is very dynamic in promoting

economic growth of India. In India domestic savings originate from three principal

sectors namely (i) household sector (ii) the private corporate sector (iii) Public sector.

The Household savings constitutes the biggest segment of aggregate savings in India.

The household savings that involve non corporate entities are categorized into two

types, savings in financial assets and physical properties. Household savings comprises

life insurance policies, pension funds and provident funds, deposits with banks and

non-banking financial institutions and other types of financial service providers12

.

3.5 Influences on Household Saving Rates

The understanding of influences on the household saving rate gives a

context for national financial education and awareness programmes, and other

initiatives intended to influence saving. It can help explain why initiatives may

not work, or may not be transferable between countries. Equally, policy makers

need to understand the impact of savings initiatives on macroeconomic variables.


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EXHIBIT: 3.2

FACTORS INFLUENCING HOUSEHOLD SAVINGS

Overall, many factors can explain variations in saving rates across countries and

over time including:

Extent of Welfare Provision

A welfare safety net, free or cheap healthcare, and state or employer pensions

reduce the need to build up precautionary savings, including for retirement. Means-

tested welfare benefits further reduce the incentive to save for those close to the

threshold. The high personal tax rates often associated with high levels of social welfare

also reduce the amount of money, households have available for savings.

Economic Stability

Instability increases uncertainty, so saving rates tends to be countercyclical:

people build precautionary savings when the future looks uncertain and spend

more in a boom, when they have job security and are optimistic about the future. It

may also be the case that greater uncertainty leads to demands for greater returns.

Extent of Welfare

provision

Economic stability

Level and rate of

growth of per capita

income

Age structure

of the

population

Availability of

Credit

Interest rates and

Inflation


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Level and rate of growth of per capita income

High levels of income and growth appear to be associated with higher

levels of saving. Moreover, the influence of income tends to be larger in

developing countries than in developed ones.

Interest Rates and Inflation

If real interest rates of the banking &financial institutions in country are

very low this will tend to lead to reduced saving, high real interest rates make

saving more attractive. The effect of inflation depends on the type of inflation and

the level of uncertainty associated with it. When prices are rising more rapidly

than incomes, people may change their consumption habits, and will tend to

disserve. If inflation is outstripping interest rates, individuals are likely to buy

large ticket goods, such as vehicles or furniture, rather than put money into

savings even if this means accessing additional credit to do so. If inflation is

driven by price inelastic goods such as fuel or food, the impact is likely to be an

increase in consumption costs and thus reduced ability to save.

Availability of Credit

Evidence from developed countries suggests that consumption increases when

credit is more freely available. One study of developing countries in Asia found that a

more developed financial system increases saving up to a point, after which the

availability of credit reduces it. This suggests that the advantages of a formal financial

system in providing a safe and efficient means of saving are at some point outweighed

by the advantages of credit as a way of smoothing consumption.

Age Structure of The Population

According to the life-cycle theory, individuals save during their working

years to provide for their needs in retirement. Consistent with this, countries with

higher shares of „dependent‟ population (younger and older than working age)

tend to display lower private saving rates.


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3.6. Impact of the Financial Crisis on Household Savings

Decreasing saving rates in many economies over the decades prior to the

financial crisis are likely to be due to a combination of factors: falling real interest

rates, favourable lending conditions, rising asset prices and greater economic

stability. Net wealth in many countries increased over this period, especially

housing wealth. As people saw the value of their homes rise, they saw less need

for precautionary saving, especially if they were able to borrow against the

increased valuations. In countries like France, where people cannot use their home

as collateral for borrowing, the effect of house prices on the saving rate is much

more muted. Credit was heavily promoted in some countries and, with hindsight at

least, underpriced for the level of risk lenders were actually incurring. The causes

of the financial crisis of 2007-08 are many, but there is little doubt that individuals

and financial institutions failed to understand the risks they were taking in the

credit market.

The financial crisis precipitated a recession in many countries; wealth

declined on average, unemployment increased and general confidence in the

financial system eroded. Access to credit reduced significantly. These changes

created uncertainty, older workers delayed retirement in order to offset their

decline in wealth and the saving rate increased across many countries, despite, in

many cases, persistent low interest rates. There is some evidence that people shift

their investment portfolios into less risky, more liquid, financial assets in times of

instability, although this effect may be muted by low short-term rates of return.

Analysis of the US Survey of Consumer Finances found little difference between

preretirement age groups whose assets had declined in value (by more than six

months of usual income) during the financial crisis and those whose had gained. In

both groups, there was an increase in the proportion of families unwilling to take

financial risk from 2007 to 2009, and an increase in median precautionary savings.

In fact, those who had seen the greatest increase in wealth increased their savings


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the most. This suggests that uncertainty may be a particularly powerful driver of

savings behaviour. As economies recover from the effects of the financial crisis,

saving rates might be expected to decline again. There may, however, be a long-

term impact on the availability of credit if lending conditions are tightened, and

prices more accurately reflect costs and risks, including any costs of tighter

regulatory requirements. With the opportunities to „dissave‟ less attractive or non-

existent, many people will be inclined to save more, all other things being equal. If

there is lingering uncertainty about economic prospects, households may also seek

to pay off debt or build precautionary savings. Low interest rates and rising

inflation may also lead to a move away from traditional savings products, into

riskier investments which offer a higher return, or assets which are seen as being

safe in the long term, such as gold.

3.7. Motives of the Households to Save in India

One model of household saving is based on the „life cycle‟ theory, which

suggests that individuals will attempt to smooth lifetime consumption by building

up their saving whilst they are earning and running down their savings once in

retirement . More sophisticated versions of the life-cycle model take into account

uncertainty about lifespan, earnings, and interest rates as factors that make

consumption smoothing more difficult. While this model can help explain saving

patterns to some extent, saving motivations are, in practice, more complex.

There is an extensive literature on saving motives, which suggests that saving may

be precautionary, for defined goals, or for more abstract reasons like self-esteem,

or the need to feel independent Some of the main reasons are shown below


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EXHIBIT: 3.3

MOTIVES OF THE HOUSEHOLDS TO SAVE/INVEST

The Life-Cycle Motive that is, to provide for anticipated future expenses

during old-age, when individuals will not be able to rely on earnings and

their income is likely to decrease. This includes pension saving, as a

particular type of long-term saving.

The Precautionary (‘Rainy Day’) Motive. This includes money put aside to

cover unforeseen events or to provide a buffer against events like job loss,

illness, relationship breakdown, or accidental damage to household goods.

The Improvement Motive, that is to enjoy a gradually improving lifestyle.

This can include short term saving for consumer durables, holidays, or

gifts, or longer-term saving for, say, a child‟s education or wedding, or the

deposit on a car or house (sometimes called the „down payment‟ motive).

Loan repayment is also a form of „improvement‟ saving: for example,

Motives

Life cycle

motive

Bequest

motive

Enterprise

motive

Improvement

motive

Precautionary

motive


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repaying a mortgage or a loan on assets such as property, livestock or

machinery. Similarly, repayment of a student loan is a form of saving.

In this case, the asset is human capital, which can be used to generate an

income stream.

The Enterprise Motive. This is saving to accumulate enough money to

carry out speculative or business activity, i.e. saving for the purpose of

generating more money.

The Bequest Motive. Some people save with no intention of using the

money in their lifetime – they put money aside, or keep assets, explicitly to

pass on to children or other family members. The bequest motive explains

why people save more in old age than the life-cycle model would predict.

Other issues may also be relevant to the development of financial education

and awareness policies, in particular.

3.8. Other Issues

Besides the above stated factors there are other issues that influence

household saving/ investment:

Motiveless’ Saving. Some people build up savings simply because their

income is consistently greater than their expenditure, and they do not

actively manage the surplus. In this case, people may not be maximising

their financial well-being.

‘Windfalls’. People occasionally get a sum of money unexpectedly, for

example through an inheritance, redundancy payment, or even winning it.

This requires active decision-making and perhaps consideration of products

which have not been used before.

‘Dissaving’. An array of products becomes available when people start to

draw down their wealth in old age. Pension assets and other long-term

savings are generally used to generate an income in retirement. People may


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also have property, which can be used to release cash, either by „trading

down‟, or making use of equity release financial products. Dissimulation

brings people into contact with a different set of products from those which

they have seen before and that require a different set of decision-making

skills, including annuities and reverse mortgages.

3.9. Households Saving /Investment Pattern

The way people save can have a significant impact on the economy.

Too much informal saving, or a preference for saving in property or livestock, for

example, may mean insufficient financial investment for long-term growth.

A reliance on foreign investment or vulnerability to foreign hedge funds seeking a

quick profit can lead to financial market volatility.

In general, people with higher incomes are more likely to save with

financial institutions, and in countries with well-developed capital markets more

likely to buy stocks and shares and make other financial investments. Property is

frequently used as the main non-financial investment. In lower income countries,

people are more likely to invest in livestock, household goods, jewellery or gold.

People on low incomes are much more likely to save informally, most often

keeping cash at home, or with family members. In many low-income countries,

people use mutual savings clubs or self-help groups for example, savings and

credit associations, which build up savers‟ funds to lend to members of the group.

Loans may be long-term, or short-term to cover emergencies. The groups are self-

managed, community-based and democratic.

Saving money informally often means it is not protected, so the risk is

higher and there is no redress. Savings clubs are not regulated and the safety of the

money deposited depends on the members themselves, and in particular the

treasurer. Hamper schemes are also not regulated as, legally, the saving is payment

in advance for goods and services.


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There are also gender differences in saving habits. A study found a „savings

gap‟ between women and men that could not be accounted for by income

differences (West away and McKay, 2007). Women were as likely to save as men,

but they saved less money and were more likely to save for the short term,

whereas men saved for the long term. The same study also found that women‟s

savings patterns were more likely to be disrupted by lifetime events such as having

a child or getting divorced. Men were more likely to save when they became

fathers; women less likely when they became mothers. The gender differences

were much less evident for women without children. Young women (16-24) saved

more than men, and were more likely to enroll in an employer pension scheme.

The consequence of different saving patterns in developed countries is that

women are likely to be less well off in retirement than men, and to rely on state

benefits. Women‟s saving behaviour also differs from men‟s in developing

countries. A World Bank study looked at household panel data for 20 countries

this concluded that income and other sources of women‟s bargaining power,

including education and assets, have a significant impact on household spending

decisions. As in developed countries, women spend more of the money they

control on food for their children and other family needs. This could be seen as an

investment, as healthy children will live to look after their parents in old age.

Women‟s saving behaviour also depends on local culture – e.g. the need to save

for a dowry, or to remit money to parents – and their access to a safe place to keep

their money. For example, other family members may take cash, whereas gold is

regarded as belonging to the woman herself.

3.10 Behavioural Influences on Saving& Investments

People do not always act rationally. Deep-rooted behavioural biases and

external influences can affect both the decision to save and how to save. Typically,

impatient individuals prefer instant gratification (i.e. immediate consumption)

rather than keeping their resources for future enjoyment, leading to lower saving.


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Not only do many people prefer to live for today at the expense of tomorrow

(i.e. they tend to prefer smaller, immediate payments to larger, more distant ones),

but they often also display inconsistent time preferences. For example, some

people prefer US $10 today rather than US $15 next week, but prefer US $15 in

two weeks‟ time rather than US $10 in ten days‟ time. Those with a high

preference for today are more likely to have credit card debt, even allowing for

variables such as income. They may also naturally prefer „instant access‟ savings

products or, if self-aware, the opposite: to lock up their money to avoid the

temptation to spend Starting to save is often perceived as difficult or time

consuming, and procrastination is a common reason for not saving . People know

they should save, and have the best intentions of doing so but, when faced with

complexity and choice overload, decide to „do it tomorrow‟.

At the same time, people also tend to exhibit a strong „status quo‟ bias.

There is also some evidence that personality traits can affect whether people save

or not. In one study, non-savers saw themselves as relatively less happy and

healthy. They were more likely to feel unable to control their situation in life and

less able to plan ahead. Non-savers claimed they could not afford to save, even

though many had high incomes. In contrast, people who regarded themselves as

happy were more likely to save, perhaps because they had a more positive vision

of the future: seeing retirement as giving them opportunities to spend time on

hobbies, family, or holidays. Unhappy people may have a more negative view,

seeing only decline and ill health in old age. Another driver of apparently

irrational behaviour is „mental accounting‟, or the tendency of people to virtually

put money into different pots. This can explain, for example, why people may

simultaneously save at low interest rates and borrow at high rates. Evidence

suggests that people with a high degree of loss aversion are less likely to invest in

the stock market in general, and, specifically, less likely to buy equities directly

rather than invest in mutual funds13

.


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3.11 Summary

The theoretical discussion made in the above sections of the study clearly

discusses on the relationship between financial literacy and household financial

behaviour. These issues are claimed very important, as individuals are increasingly

being asked to take on responsibility for their financial well-being and their

retirement preparation. However, researchers have found that individuals do not

save enough for meeting financial needs at different stages of life cycle. Moreover,

policy makers of ruling governments in country are interested in understanding

whether financial education affects saving behaviour and what types of

educational programs are most effective. The following Chapter IV aims to

provide an empirical implication of relationship between financial literacy and

household financial behaviour surveyed in Coimbatore city.


References

1. High Level Principles on National strategies for Financial Education,

OECD INFI, August 2012

2. What, Why, Who and how of Financial Literacy (Address by K.C.

Chakraborty, Deputy Governor – Reserve Bank of India at the stakeholders

workshop on financial literacy organized by the UNDP,NABARD and

Micro Save at Mumbai on February 4th

2013).

3. Financial Literacy and Credit Counselling centers, published in RBI

monthly billing on April 2008

4, Nash Dean Roy, Research associate( 2012) Financial Literacy: An Indian

Scenario published in Asian Journal of Banking & Finance ,Volume 2,

Issue 4.

5. Peter John, Dr Joseph James V., Ratheesh, C., (2013) Financial Literacy

Centers towards the construction of a Financial Knowledge ,society of

Kerala Express (Published in IOSR – Journal of Economic and Finance

(IOSR-JEE) Nov – Dec 2013 ,PP.52-58

6. Recommendation on principles and Good Purchase for Financial Education

and Awareness Published in Directorate for financial and Enterprises

affairs, published in July 2005

7. Financial Literacy and Credit Counseling Centre, Published in Reserve

Bank of India Bulletin, 3rd

April 2008

8. Willam G. Gale and Ruth levine (October 2010), Financial Literacy: What

Works? Flow could it be more effective?

9. Harsha Jariwala and Mahendra Sharma (2011) Financial Literacy: A Call

for an attention, conference on Insurance and sustainable Growth, Role of

Industry, Government and society conference Proceedings.


10. Savings and Investments trend in India and its relationship with growth,

Term Paper writing services, Thursday December 6th 2012

11. Bhimisetty Kespa Raju, Samantaraj A.K (2013) Savings, Investments and

Growth: A study on the Economic development of Indian Economy

published in Indian Journal.Com, 30th

May 2013 IndianJournels.com.

12. Brinda Jagirdar (2011), Chanelling Financial Saving to put India on the

Turn pike of Growth.

13. Financial Education, Savings and Investments, published in Financial

Literacy & Education, Russia Trust Fund, OECD /INFE Survey and

Findings June 2013,


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