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 Please do not cite without prior permission.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:
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Defined contribution pension plans 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 OECDs 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 OECDs 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.
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Organisation for Economic Co-operation and Development

Students Limited Survey Covers Only financial knowledge

Employees Comprehensive survey Covers financial literacy (knowledge, behaviour and attitude) and awareness

Retired Comprehensive Survey Covers financial literacy (knowledge, behaviour and attitude) and awareness as well as retirement financial planning (financial outcomes)

Sample characteristics
Respondent Category Sample Size Education Levels Students 1001 First year of graduate or Diploma programme Employees 983 Graduates and PostGraduates comprise about 89% Retired 983 47% have education of graduation or above,

Work-Experience

None

Age

Between 17 and 22 years

Gender Marital status Domicile

More than two-thirds male Mostly single Nearly two-thirds from towns and cities

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

Family Income ` p.m.

Current Salary ` p.m.

Last Drawn Salary ` p.m.

Income

Financial Knowledge
Financial knowledge component measures understanding of interest calculations, relationship between ination and return, ination 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 13 countries More than half Worst OECD Country South Africa 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 diculty. 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.
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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 inuences 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:
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Females Married respondents Those with higher levels of income

Retirees Financial attitude does not appear to vary across gender, marital status, domicile and education Respondents with higher income levels exhibit more positive attitude

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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 inuenced by financial knowledge, but do not provide evidence for the other linkages. This requires further research.

Expected relationship (prior literature) Knowledge

Tentative results from the survey Knowledge

siti Po

siti Po

ve

No ne ?

Po s

iti

ve
Positive

ve
None?

Attitude

Behaviour

Attitude

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: Overcondence: 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 5

The nancially less literate are more overcondent: 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 sucient 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. Low awareness leads to poor diversification of risk across products and suboptimal investment of savings for the household. Low awareness could lead to inecient allocation of capital in the economy. 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 employers 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.

The lack of awareness has implications both for households and for the broader economy:

The survey results also show a high level of dependence on informal sources of financial advice:

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 5570 age bracket where the full impact of erosion of retirement income through ination and rising longevity is yet to be felt. Most of them have probably had the benefit of stable jobs and income 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. While estimating their saving requirements, most respondents do not account for either living expenses or expected ination, the two key factors which could impact their post-retirement well-being.

This relatively benign outcome is due to positive financial behavior

The positive financial behaviour has offset the problems caused by poor financial knowledge:

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 oce/NSC except for land or property.

Highlights from the study

Survey of nearly 3,000 people among three groups:
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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) financial knowledge, financial behaviour and financial attitude. 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 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. 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 inuence on the financial attitude.

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Financial Literacy measured in terms of three components:

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Financial Knowledge
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Financial Behaviour
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Financial Attitude
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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
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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. 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:
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There is need for lot more research on financial literacy in India:

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: s@iimahd.ernet.in