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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45
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
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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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49
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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58
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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61
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.
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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.
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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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