Supported by
Citi Foundation
Indian Institute of Management Ahmedabad
A Survey of Financial Literacy among Students,
Young Employees and the Retired in India
Executive Summary*
Study by:
Prof. Sobhesh Kumar Agarwalla
Prof. Samir Barua
Prof. Joshy Jacob
Prof. Jayanth R. Varma
June 2012
*These are preliminary results from an ongoing research. Please do not cite without prior permission.
Acknowledgments
The authors acknowledge the generous support given by the Citi Foundation
to undertake the survey. We thank Ms.Maneesha Chadha, Head - Corporate
Citizenship, Citi South Asia for her support and encouragement throughout the
study.
We thank Mr.Abhinav Jha, Research Associate at IIM Ahmedabad for his
meticulous and dedicated research support for the study. We also acknowledge
the administrative support offered by several IIM Ahmedabad staff members.
We thank ACNielsen ORG-MARG Private Ltd. and DEXTER Consultancy Ltd. for
conducting the survey related to the study.
Introduction
Financial literacy around the world is found to be low as measured by various studies including the OECD1 survey
study carried out across 13 countries. In India, the levels of financial literacy are poor even by the low global
standards, according to some studies such as the VISA International Financial Literacy Barometer 2012.
There is therefore a need for comprehensive research on financial literacy in India. This study is a modest
beginning in this direction:
•
The survey is based on the globally recognized OECD questionnaire to provide international benchmarking.
•
The OECD approach has the additional benefit of measuring all the important components of financial
literacy – financial knowledge, financial behaviour and financial attitude.
•
The study also provides results about three key demographic groups – students, young employees and
retired persons. By studying different target groups such as the students who are yet to start their career,
young employees who are at an early stage of their career, and the retired who have concluded their career,
we obtain a holistic picture of financial literacy in our country.
•
The survey of retired persons also provides a limited assessment of the link between financial literacy and
financial outcomes.
•
This study is exploratory and descriptive by design and provides the basis for formulating hypotheses that
can be tested in future studies.
Importance of Financial Literacy
•
Well-functioning financial markets depend on participants making informed decisions.
•
Financial sector reforms transfer the responsibility of financial decision making to individuals:
Defined contribution pension plans
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Shift from merit based to disclosure based regulation
<
End of financial repression and the consequent proliferation of choice in financial products
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•
While consumer protection laws do depart from the caveat emptor (“buyer beware”) maxim of general law,
even these pro-consumer laws depend on alert and well informed consumers.
Financial Literacy Survey Design
The OECD defines financial literacy as –“A combination of awareness, knowledge, skill, attitude and behaviour
necessary to make sound financial decisions and ultimately achieve individual financial well being.” The OECD
survey uses series of questions to measure knowledge, behaviour and attitude and then defines financial literacy
to be the sum of the scores on these three dimensions. Though awareness is part of the OECD’s conceptual
definition of financial literacy, awareness of financial products does not appear to form part of their operational
definition of financial literacy.
We follow the OECD’s operational definition of financial literacy (knowledge, behaviour and attitude), but we use
supplemental sections of our survey to measure awareness of financial products more effectively and to assess
financial outcomes more directly.
The survey among students is limited only to understand their basic financial knowledge. We do not examine
and measure financial behaviour and financial attitude among students because the limited direct exposure of
students to financial decisions could leave such measures very unreliable.
Organisation for Economic Co-operation and Development
1
1
Students
Limited Survey
Covers Only financial knowledge
Employees
Comprehensive survey
Covers financial literacy
Retired
Comprehensive Survey
Covers financial literacy
(knowledge, behaviour and
(knowledge, behaviour and
attitude) and awareness
attitude) and awareness as
well as retirement financial
planning (financial outcomes)
Sample characteristics
Respondent
Category
Sample Size
Education Levels
Students
Employees
Retired
1001
First year of graduate or
Diploma programme
983
Graduates and PostGraduates comprise about
89%
983
47% have education of
graduation or above,
Current Salary ` p.m.
Last Drawn Salary ` p.m.
Work-Experience
None
Age
Between 17 and 22 years
Gender
Marital status
More than two-thirds male
Mostly single
Domicile
Nearly two-thirds from
towns and cities
Family Income ` p.m.
Income
2
16% have passed higher
secondary, 23% are
matriculates, the remaining
are educated only up to
primary or lower
Less than 5 years of Work
Retired after 20 to 40 years
Experience (42% have about of work-experience in formal
two years work experience) employment. Only about
10% are either employed
or self-employed after
retirement
Between 20 and 40 (about
Between 40 and 95 years
94% fall within the 20-30 age (72% fall in the 55-70 age
bracket)
bracket)
Males 78%, females 22%
Males 83%, females 17%
Singles about 75%
Married are 91%, widowed
are 7%
99% from towns and cities,
93% from towns and cities,
1% from villages
7% from villages
Financial Knowledge
Financial knowledge component measures understanding of interest calculations, relationship between inflation
and return, inflation and prices, risk and return, and the role of diversification in risk reduction.
Financial knowledge of students, young employed youth and retired respondents is low by international standards.
Since our survey questions are similar to those in the OECD survey and the answers are scored in a similar way,
we can compare our results with the OECD pilot study of 13 countries.
Proportion of respondents scoring high on financial knowledge
India
Less than one-fourth
OECD Average
Worst OECD Country
13 countries
South Africa
More than half
About one-third
Variation in financial knowledge by demographic and socio-economic subgroups2
Gender
Females score less
than males but this is
in line with
international
experience.
Domicile
Employees with rural
background perform
worse than those with
urban background.
For retirees, there is a
similar pattern in
terms of towns versus
cities.
Education
Among the young
employed, financial
knowledge is better
among graduates and
post-graduates. This
is not so for the
retired.
Income
Respondents in the
higher income groups
appear to have
greater financial
knowledge.
Financial Behaviour
The financial behaviour scale assesses the way respondents deal with money in their daily lives through:
•
Assessment of affordability of products and expenditures
•
Timely payment of bills
•
Planning and monitoring of the household budget
•
Active saving habits
•
Propensity to borrow
Responses are mapped on a desirability scale that measures financial self-discipline and responsible behaviour.
Indian respondents score high on financial behaviour:
•
68% of the employed and 75% of the retired score high on financial behaviour.
•
In terms of the OECD survey, this is comparable with Germany, Norway, Ireland, Malaysia and Peru where
around 60% score high on financial behaviour.
•
About 90% of the employed and 86% of the retired report that they are strongly inclined to assess the
affordability of items. Compared to the OECD sample, Indians appear to be one among the best in their
propensity to assess affordability.
•
Most respondents, about 68% of the employed and 70% of the retired, report that they have avoided
borrowing by depending on their savings or assets during periods of financial difficulty.
•
The practice of financial goal setting among Indians also appears to be within the range of the OECD survey,
but young Indians are not among the best on this dimension.
In this table, we present results only for young employees and retirees. The subgroup analysis for students is omitted for the sake of
brevity. These results are available in the full report.
2
3
The relatively high level of financial discipline shown by the Indians could perhaps be due to their relatively low
level of per capita income and the lack of general social support systems.
Variation in financial behaviour by demographic and socio-economic subgroups:
Young Employees
• Subgroups showing more positive behaviour are:
Males
Married respondents
Respondents from urban background
Graduates and post graduates
• Income is not very important
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Retirees
• Financial behaviour does not appear to vary
across gender, marital status (other than
divorced), domicile and education.
• Respondents with higher income levels exhibit
positive behaviour, except for the highest income
group.
• The divorced exhibit less positive financial
behaviour.
Financial Attitude
Based on the belief that attitude influences behaviour, the OECD has developed a scale to measure the financial
attitude. Following the OECD, our survey also measures financial attitude in terms of agreement or disagreement
towards statements about:
•
the extent of belief in planning
•
propensity to save, and
•
propensity to consume
Close to half of the young employees and retirees have a highly positive attitude towards financial planning and
do not seem to show a very high propensity for consumption. This is comparable to the levels observed in the
OECD survey in developed countries like Estonia and United Kingdom, but is significantly lower than many other
emerging European economies like the Czech Republic, Hungary and Albania.
Variation in financial attitude by demographic and socio-economic subgroups:
Young Employees
• Subgroups showing more positive attitude are:
Females
Retirees
• Financial attitude does not appear to vary across
gender, marital status, domicile and education
Married respondents
•
Those with higher levels of income
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•
Respondents with higher income levels exhibit
more positive attitude
Education and domicile are not very important
Financial Knowledge, Behaviour and Attitude:
Inter-linkages
On the basis of prior literature in the field, we expect positive relationships between Financial Knowledge,
Behaviour and Attitude. Our survey results suggest that the financial behaviour is influenced by financial
knowledge, but do not provide evidence for the other linkages. This requires further research.
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Expected relationship (prior literature)
Tentative results from the survey
Knowledge
Knowledge
Behaviour
ve
iti
Po
s
No
ne
?
Attitude
ve
ve
Positive
siti
Po
siti
Po
Attitude
None?
Behaviour
Financial Literacy
The financial literacy score is obtained by adding the scores of the three different dimensions – financial
knowledge, financial attitude, and financial behaviour. The maximum possible score for the financial literacy
measure is 21 (8 for financial behaviour, 8 for financial knowledge, and 5 for financial attitude).
The average financial literacy score of the respondents is about 13.7 for both young employees and retirees – this
is almost the same as the average observed for the countries in the OECD survey (the individual country averages
in the OECD range from 12.4 to 15).
This is nothing to be proud about because financial literacy across the world is regarded as poor; but it does imply
that the financial literacy level of Indians is not exceedingly poor.
The Indian financial literacy score matches the OECD average through a combination of three factors:
•
Poor performance in financial knowledge.
•
Relatively better score in financial behaviour.
•
Almost at par score on financial attitude.
Variation in financial literacy by demographic and socio-economic subgroups:
Gender
No significant
difference. Lower
female score in
knowledge offset
by better
behaviour and
attitude scores.
Marital status
Married
outperform
singles (better
behaviour and
attitude)
Domicile
Urban
background is
associated with
higher literacy
(mainly
knowledge)
Education
Among the
young employed,
financial literacy
(knowledge) is
better among
graduates and
post-graduates.
This is not so for
the retired.
Income
Higher income is
associated with
better financial
literacy (mainly
financial
knowledge).
Self perception of financial literacy
Our survey measured the self-perception of the respondents about their financial literacy in terms of perceived
level of preparedness to manage expenses and savings, including knowledge about financial products.
Interesting conclusions from this part of the survey include:
•
Overconfidence: Nearly 48% of the employed and 60% of the retired respondents report that they are either
equipped or completely equipped to deal with the challenges involved in managing their personal finance.
These are also the percentages of respondents scoring above the OECD average (which is a low level of
financial literacy in an absolute sense). As such, these numbers indicate a marginally positively bias in line
with the well known phenomenon of overconfidence in the behavioural finance literature
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•
The financially less literate are more overconfident: Though about a third of respondents have low financial
literacy, only 15% admit that they are either unequipped or completely unequipped to manage their finances.
•
Positive correlation: The overall relationship between perceived financial literacy and measured financial
literacy is positive
Variation in overconfidence by demographic and socio-economic subgroups:
Gender
Males more
overconfident than
females
Marital status
Not significant
Domicile
Respondents of urban
origin have a
relatively low level of
overconfidence
Income
High income is
associated with higher
literacy (both
perceived and
measured)
Awareness of Financial Products and Choice of
Investment Advice
Financial knowledge, behaviour and attitude are necessary but not sufficient for a person to make sound financial
choices. A good financial choice also requires an awareness of the different products and services that are
available. The survey results show relatively low levels of awareness about commonly available saving, insurance,
and credit related products:
•
Only about 7% among the employees (and 9% among the retired) have heard of all the commonly available
products.
•
Awareness about even fixed deposits, a very common product available with the banks, is not universal.
•
More than half of the young employees are not aware of employee specific vehicles for long-term wealth
creation like PPF and pension-fund.
•
Awareness about many of the financial market saving vehicles, like shares, bonds, and mutual funds is not
very high.
•
About one-fourth of the employees seem to be aware of only three products, which include savings account,
fixed deposits, and insurance.
The lack of awareness has implications both for households and for the broader economy:
•
Low awareness leads to poor diversification of risk across products and suboptimal investment of savings for
the household.
•
Low awareness could lead to inefficient allocation of capital in the economy.
The survey results also show a high level of dependence on informal sources of financial advice:
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•
The most frequently used advice in the choice of financial products by the retired is sought from friends and
relatives who are not associated with the financial industry.
•
Less than a quarter of the respondents depend on independent financial advisers and advertisements.
•
The employer’s advice does not figure prominently among the sources relied on for investment advice.
•
As one would expect, the young employees appears to rely more on the internet than the retired as a
resource of information. They also seem to rely relatively more on their own experience.
Retirement Financial Planning
The survey of retired persons provides an opportunity to measure financial outcomes in a limited way. In this
survey, therefore, there was an additional section on retirement financial planning besides the sections on
financial knowledge, behaviour, attitude and awareness. The following are the important results from this section
of the survey.
Pre-retirement Planning
Only about 10% of the retired respondents depend on their children/spouse/relatives for their income. About
68% depend on the pension. The other major sources of income depended on are interest and income from
house property. This indicates that the majority of this generation has achieved a modest degree of success in
their financial planning. But a few caveats must be kept in mind:
•
This generation has had the benefit of defined benefit pension plans
•
Most of the retirees fall in the 55–70 age bracket where the full impact of erosion of retirement income
through inflation and rising longevity is yet to be felt.
•
Most of them have probably had the benefit of stable jobs and income
This relatively benign outcome is due to positive financial behavior
•
Nearly 60% of retirees reported that they have attempted to estimate the saving needs which could support
their post-retirement expenses. Many of the rest might also have had the benefit of defined benefit pension
plans. Only about 17% reported that they had no major savings during their service life.
•
Nearly 40% seem to start saving beyond their provident fund contributions before their mid-30s.
•
Only about a quarter of the retirees are found to be not saving for retirement every year. Nearly two-thirds
of the respondents claim that they have saved systematically a certain percentage of salary every month per
year or a certain amount every year for retirement.
The positive financial behaviour has offset the problems caused by poor financial knowledge:
•
While estimating their saving requirements, most respondents do not account for either living expenses or
expected inflation, the two key factors which could impact their post-retirement well-being.
Post-Retirement Investment Behaviour
About two-thirds of the retired commute their pension on retirement. Apart from pension commutation, retirees
may receive significant lump sum payment on retirement in the form of provident fund, gratuity and other
superannuation benefits. Proper investment of these amounts is critical for post retirement income.
Again, the prudent financial behaviour of Indian households is visible in the survey results:
•
It appears that about 62% of the retired have saved a substantial part of the amount received on retirement
with the remaining either repaying liabilities or distributing it among their dependents.
•
Among those who have re-invested the lump sum received on retirement, most of them seem to prefer to
spread the investments across a number of opportunities.
•
More than three-fourth of the savings are parked in relatively less risky opportunities like savings bank, fixed
deposits, post office/NSC except for land or property.
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Highlights from the study
•
Survey of nearly 3,000 people among three groups:
Students (survey covers only financial knowledge)
Employees (survey covers financial knowledge, behaviour and attitude)
Retired (survey covers information on retirement financial planning in addition to financial knowledge,
behaviour and attitude)
<
<
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•
Financial Literacy measured in terms of three components:
financial knowledge, financial behaviour and financial attitude.
<
•
Financial Knowledge
Indians score lower on financial knowledge than all the OECD countries.
Urban population has higher financial knowledge.
People with higher income have better knowledge
Among the employed, people with higher education have better knowledge
<
<
<
<
•
Financial Behaviour
Indians match the best of the OECD sample in their propensity to assess affordability and have high level
of financial discipline.
Most employed and retired borrow less and depend on their savings.
<
<
•
Financial Attitude
Indians are at par with the OECD countries
Females, married and with higher incomes believe in planning, saving and consumption.
Education and urban background have no influence on the financial attitude.
<
<
<
•
Awareness of financial products is low.
•
Less than a quarter of the respondents depend on independent financial advisers and advertisements.
•
Retirement financial planning moderately successful
<
Only about 10% of the retired depend on their relatives for income
Tentative Conclusions and Future Directions
Poor financial knowledge partially offset by good financial behaviour
The striking conclusion of the study is that financial knowledge in India is very poor as compared to the global
standards. A large part of this is due to poor numeracy skills and can be attributed to the poor elementary and
primary education system as documented in other studies.
However, this poor knowledge is offset by prudent financial behaviour and good financial attitude that lead to an
overall score of financial literacy that is at par with admittedly poor global standards.
Relatively benign outcomes so far, but no room for complacency
The result has been a somewhat benign outcome for the current generation of retirees in terms of.
8
•
Adequacy of savings
•
Choice of savings vehicles
It would be a mistake however to extrapolate from this outcome to the current generation of employees for
several reasons:
•
The current generation has to cope with defined contribution plans rather than the defined benefit plans
that the earlier generation enjoyed.
•
Rising longevity and increasing financial market volatility pose threats to retirement savings.
•
The current generation is likely to face greater job insecurity and income uncertainty.
•
Greater access to consumption credit and other liability products could alter financial behaviour over a
period of time.
•
The informal sources of financial advice that served the old generation reasonably well are unlikely to
perform equally well in an age of nuclear and sub nuclear families and an environment of increasing financial
complexity.
The way forward
There is an urgent need for government policy measures to improve financial literacy:
•
Fortunately, knowledge deficits are easier to address than problems in attitude and behaviour. The relatively
positive behaviour and attitude scores of the population provide a strong base to build a financial literacy
programme focused on improving knowledge of different age groups.
•
Equally, it is important to build regulatory frameworks that improve the delivery of financial services and
financial advice to serve the more complex and challenging needs of the present generation.
There is need for lot more research on financial literacy in India:
•
Despite our own study and other recent studies, we know too little about financial literacy in India.
•
India is a vast country with many social and economic disparities.
•
Survey results need to be supplemented with other methodologies:
Focus group interviews
Experiments
Longitudinal studies
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Indian Institute of Management Ahmedabad
Vastrapur, Ahmedabad 380 015
Phone: 079-6632 3456/ 2630 8357 • E-mail: [email protected]