Supported byA Survey of Financial Literacy among Students, Young Employees and the Retred in IndiaStudy by: Prof. Sobhesh Kumar AgarwallaProf. Samir Barua Prof. Joshy JacobProf. Jayanth R. VarmaJune 2012Indian Insttute of Management AhmedabadCiti FoundationAcknowledgments Table of contents The authors acknowledge the generous support given by the Cit Foundaton to undertake the survey. We thank Ms.Maneesha Chadha, Head - Corporate Citzenship, Cit South Asia for her support and encouragement throughout the study.We thank Mr.Abhinav Jha, Research Associate at IIM Ahmedabad for his metcu-lous and dedicated research support for the study. We also acknowledge the administratve support ofered by several IIM Ahmedabad staf members.We thank ACNielsen ORG-MARG Private Ltd. and DEXTER Consultancy Ltd. for conductng the survey related to the study.Introducton1Sample characteristcs2Financial Knowledge4Financial knowledge of employees and retred 4Financial knowledge of students 8Financial behaviour13Financial attude 16Financial knowledge, behaviour and attude: Inter-linkages18Financial literacy 19Self-reported measure of fnancial literacy 22Conclusions on fnancial knowledge, behaviour and attude23Awareness of fnancial products and choice of investment advice 24Retrement fnancial planning26Tentatve conclusions and future directons 311Introducton1Theroleplayedbygovernmentsandemployersinmanaginginvestmentsonbehalfofindividualshas shrunk signifcantly in the recent past. This is mostly due to the reforms in the fnancial markets and chang-es in the social support structure across the world. The reduced role of the government and employers has heightened individuals responsibility in managing their own fnances and securing their fnancial future. Market forces contnue to increase the range and complexity of fnancial products presented to the inves-tors. Individuals are given an increased role in managing their fnances on the assumpton that they are capable of a nuanced understanding of the risk-return characteristcs of the investment opportunites and areabletooptmallychoosefromamongthem.Theseabilitesarecollectvelyreferredtoasfnancial literacy around the world. In this context of increasing role and complexity, any lack of awareness about the available choices and their characteristcs and the consequent inability to choose products optmally, could signifcantly afect individualsfnancialoutcomes.Researchfromdiferentcountrieshasdocumentedacertaindegreeof associaton between fnancial literacy and outcomes which could adversely infuence the household well-being. For instance, the fnancially less literate are found to be associated with high interest rate borrow-ing, less partcipaton in fnancial markets, and poor retrement planning.2Evidence from around the world presents alarming and widespread defciencies in fnancial literacy. This evidence has led to the launch of fnancial literacy programs in many countries. Largely, these are targeted to raise the understanding about the principles and conventons of savings and money and to enable indi-viduals to take optmal fnancial decisions consistent with their goals. The programmes vary widely in their scope and approach across countries. Several studies have atempted to examine the level of fnancial literacy in India. Most of them report that the level of fnancial literacy in India is poor. For instance, the VISA (2012) study ranks India at the 23-rd positon among the 28 countries surveyed.3 Their study found that the children and the young have signif-cantly lower level of literacy compared to adults. The wide cultural and socio-economic diversites in India make it difcult to evolve a unifed view about theprevailingleveloffnancialliteracyinthecountry.Anatonwideandcomprehensiveresearchonf-nancialliteracyanditsrelatedaspectscouldprovideamuchdeeperunderstandingforefectvepolicy formulaton. This study is a modest atempt in that directon. The study adopts the questonnaire developed by the Organisaton for Economic Cooperaton and Devel-opment (OECD) to facilitate internatonal benchmarking.4 The OECD approach is more comprehensive as it atempts to measure the most probable dimensions of fnancial literacy fnancial knowledge, fnan-cial behaviour and fnancial attude. Insights about these individual dimensions could potentally provide valuable insights beyond those provided by fnancial literacy alone.1 The results of the study are only preliminary. Please do not cite without prior permission. The corresponding author isProf. Joshy Jacob (joshyjacob@iimahd.ernet.in)2For more details read, Van Rooij, M., Lusardi, A., & Alessie, R. (2007). Financial literacy and stock market partcipaton. Natonal Bureau of Economic Research. Downloaded from .3 VISA Inc., (2012), VISA Internatonal Financial Literacy Barometer 2012 downloaded from .4 Writen consent was received from the OECD, for using the OECD-INFE Core Questonnaire and Guidance Notes, on April 2, 2012. The two questonnaires which are part of the OCED fnancial literacy survey approach are:a.OECD INFE (2011) Measuring Financial Literacy: Core Questonnaire in Measuring Financial Literacy: Questonnaire and Guidance Notes for Conductng an Internatonally Comparable Survey of Financial Literacy. Paris: OECD. Downloaded from .b.OECD INFE (2012) Supplementary Questons: Optonal Survey Questons for the OECD-INFE Financial Literacy Core Questonnaire. Paris: OECD downloaded from< htp://www.oecd.org/dataoecd/43/61/49878153.pdf>.2Thestudyatemptstomapthefnancialliteracylevelofthreeimportantdemographicgroups,young working adults, retred and students. The study also atempts to understand the investment behaviour of both the retred and the working adults.Thestudyamongtheemployedandtheretredcouldprovideinsightstoformulateefectvefnancial educatoninterventonsatthebeginningandattheendoftheemploymentperiod.Insightsaboutthe fnancialliteracyofstudentscouldhelptoformulateefectveinitatvestobuildfnancialliteracyata very early age. Survey on the retred also could provide admitedly limited insights about the infuence of knowledge on fnancial outcomes.Whileseveralwidelyuseddefnitonsexistforfnancialliteracy,allofthemgenerallyimplytheability ofindividualstoobtain,understandandevaluateinformaton,whichisrequiredtomakedecisionsto securethefnancialfutureoftheindividual.WeadopttheOECDdefnitonoffnancialliteracy,which defnes it as A combinaton of awareness, knowledge, skill, attude and behaviour necessary to make soundfnancialdecisionsandultmatelyachieveindividualfnancialwellbeing.(OECDINFE,2011).Sample characteristcsRespondent Category Students Employees RetredSample Size 1001 983 983Educaton Levels First year of graduate or Diploma programmeGraduatesandPost-Gradu-ates comprise about 89%47% have educaton of gradu-aton or above, 16%havepassedhighersec-ondary,23%arematriculates, theremainingareeducated only up to primary or lowerWork-Experience None Lessthan5yearsofworkex-perience(42%haveabout two years work experience)Retredafer20to40years ofwork-experienceinformal employment. Only about 10% areeitheremployedorself-employed afer retrementAge Between 17 and 22 yearsBetween20and40(about 94%fallwithinthe20-30age bracket)Between 40 and 95 years (72% fall in the 55-70 age bracket)GenderMore than two-thirds maleMales 78%, females 22% Males 83%, females 17%Marital statusMostly singleSingles about 75%Married 91%, widowed 7%, Domicile Nearly two-thirds from towns and cites99%fromtownsandcites, 1% from villages 93% from towns and cites, 7% from villagesIncome characteristcs of sample (groups based on monthly ` Income) is given below.3Thesampleforallthethreegroupsaredrawnfromalltheoverthecountry.Itmoreorlessrepresents the above average income group in the country. Only less than 5% of the respondents have income levels below the natonal per capita income.The sample largely represents urban groups. Most of the respondents are of urban origin across the dif-ferent groups. Only among students there is a sizeable representaton from the rural regions. Most of the urban respondents are from the largest cites in India.The respondents in the sample by and large are educated groups compared to the general level of educa-ton in the country. Most among the employees have educaton of graduaton or above. Nearly half of the retrees are graduates. All the students are in the frst year of either graduate or diploma programmes.The groups are dominated by males. Most of the retred and nearly one-fourth of the employees are mar-ried. Most of the students are single. All the employees have work-experience below fve years and could be considered at the start of their career. 4Financial KnowledgeThe level of fnancial knowledge of the employed and retred is measured with a set of eight questons to capture their understanding of interest calculatons, relatonship between infaton and return, infaton and prices, risk and return, and the role of diversifcaton in risk reducton. The correct answer for each queston is given a score of one and respondents with score of 6 or above are considered as highly knowl-edgeable to handle the challenges in personal fnancial maters.5 Scores in the range of 4 -5 are considered as moderate fnancial knowledge and 3 or below are regarded as poor fnancial knowledge.The fnancial knowledge of the students is assessed by examining their understanding of the basic prin-ciples underlying savings and debt such as simple and compound interest, tme value of money, impact of infaton on investment returns (referred to as infaton and interest and the infuence of infaton on price levels (referred to as infaton and prices). The fve related questons included do not require any difcult computatonal efort, and hence a correct response could be reliably regarded as understanding of the underlying principle. These questons are widely used all over the world to understand the basic numeracyamongstudentsandadults.6Thesequestonsarealsopartoftheitemsusedtocapturethe fnancial knowledge of adults.We do not examine and measure fnancial behaviour and fnancial attude among the students. We feel that their limited direct exposure to fnancial decisions might lead to unreliable results. Financial knowledge of employees and retredThe proporton of employed young and retred Indians who score 6 or above is only about 22% and 23% respectvely. This is a relatvely low score compared to the OECD survey across the 13 countries7, where on average, more than half of the respondents score very high on fnancial knowledge. The lowest scoring country in the OCED survey, South Africa, has about one-third respondents who have scored 6 or above. Rest of the countries in the OCED survey have more than 40% of respondents with high fnancial knowl-edge.The performance on diferent dimensions suggests the real lack of understanding of the basic principles relatedtomoneyineverydaylife.Nearlyone-thirdoftheemployedadultrespondentsareunableto 5 The fnancial knowledge scoring adopted by us follows the approach recommended by the OECD.6 For instance, Van Rooij, M., Lusardi, A., & Alessie, R. (2007). Financial literacy and stock market partcipaton. Natonal Bureau of Economic Research. Available for download from . 7 Atkinson, A. and F. Messy (2012), Measuring Financial Literacy: Results of the OECD / Internatonal Network on Financial Educaton (INFE) Pilot Study, OECD Working Papers on Finance, Insurance and Private Pensions, No. 15, OECD Publishing.5perform the simple numerical task involving division. On this simple numerical task, the performance of the retred respondents is not signifcantly diferent. Further, meaningful understanding of infaton is not widespread. Only about 17% of the young correctly understand the impact of infaton on the rate of re-turn. Even on the other dimensions of fnancial knowledge, the young Indians do not fare very high. These scores are relatvely low compared to the countries surveyed by the OECD. The performance of the retred is not signifcantly diferent in most dimensions, except in their understanding of infaton. E-employees, R-retred* The fgures for India represent the employed respondents.6Variaton in fnancial knowledge across sub-groupsAs reported from other countries, the level of fnancial knowledge appears to be relatvely poor among women compared to men. Partcularly, the proporton of women with low fnancial knowledge is found to be greater than that of men. However, the fnancial knowledge gap between men and women in India is not signifcantly greater compared to that reported in the OCED survey. For instance, among the employed and retred Indians about 5% and 10% more men respectvely score high on fnancial knowledge compared to women.It is far greater in most of the countries surveyed by the OECD, except in Hungary, Malaysia and South Africa. The fnancial knowledge gap in India also needs to be viewed against the backdrop of the typical Indian household where the fnancial responsibility is most ofen assumed by men than women. Among the employed, the proporton of respondents from villages with high fnancial knowledge seems to be lower compared to those from cites and towns. A similar patern is found among the retred, between the towns and the cites. Our sample size for village origin respondents among the retred is very small and the observatons are not reliable.7Theeducatonlevelappearstobeasignifcantfactorinexplainingtheleveloffnancialknowledgeof the young employed. The highly educated, graduates and post-graduates seem to have greater levels of fnancialknowledge.Thisdiference doesnotappeartoholdinthecaseoftheretred.Theratherlong exposure of the retred to personal and household fnancial maters might be making them more aware and knowledgeable.Respondents in the higher income groups appear to have greater fnancial knowledge. Respondents from categoriesbelowtheIndianpercapitaincomescorepoorlyonfnancialknowledge.Thisobservatonis true for both the categories of respondents. Similar observaton is made in other countries, including the developed countries in a number of studies. While one may argue that knowledge must be independent of the income level, the income level itself could proxy for a number of factors such as educaton. Or it could be that greater disposable income de-mands more atenton to actve saving and planning and hence builds fuency in these maters among the high-income group. At this stage, it would be very difcult to conclude that poor fnancial knowledge leads to lower income. 8Note: Sample size of Retrees with family income more than `1,00,000 is negligible. Financial knowledge of students Only one in every 20 students is able to give correct responses for all the questons. About one-fourth of the students are unable to give correct answers for more than two questons and about 7% students are not able to answer any of the questons correctly. This would imply that a large secton among the stu-dents do not sufciently understand the basic principles underlying personal fnance. A measure of students fnancial knowledge is obtained by summing up the number of correct responses given by each student. As score of 4 or above (out of maximum of 5) is taken as high fnancial knowledge, a score of 3 as moderate fnancial knowledge, and 2 or less as poor fnancial knowledge.Judged by these criteriaonlyabout22%ofthestudentshavehighfnancialknowledgeandalarminglymorethan50% score only a very low.An item-wise analysis ofers valuable insights about the extent of their fnancial knowledge. While about 78% of the students are able to understand and give correct answer to the queston on simple interest, only about 45% give correct response to the queston on compound interest. The lack of understanding about compound interest, which universally underlies the evaluaton of investment opportunites or debt products, does not seem to refect a very high level of fnancial numeracy among the surveyed students.9A certain amount ofered today is not equal to the same amount ofered tomorrow is one of the founda-tonal principles of investments. However, the understanding of tme value of money does appear to be very low. The related queston is correctly answered by only about 37% of the students and nearly half the respondents give a wrong answer.The understanding about infaton also does not appear to be very high. Only about 39% of the students are able to correctly understand how infaton would impact the rate of return on investments and only about 43% correctly understand how infaton afect price levels.As most of the personal and household fnancial decisions involve concepts of compound interest, tme value of money and infaton, the lack of understanding of these principles by the majority of the students is a mater of concern.No signifcant diference is observed in the proporton of male and female students scoring a certain level of fnancial knowledge, which is somewhat contrary to the case of adults, where men outperform women on fnancial knowledge. Perhaps the relatvely greater exposure of adult men to personal and household fnance makes them marginally beter compared to women, which is not the context among students. The students who have their origin in villages do not fare poorly compared to their urban counterparts, instead they appear to perform marginally beter.10It appears that students from families with higher income have a beter understanding of the basic prin-ciples of personal fnance. For instance, students from families with monthly income level above `30, 000 are more likely to be in the high fnancial knowledge category. This is observed almost in every country included in fnancial literacy surveys. Without a deeper examinaton of the associaton, it would be difcult to conjecture whether higher income leads to greater fnancial knowledge or whether income levels proxy for a set of important socio-economic factors such as educaton, which also seem to infuence fnancial knowledge.The survey indicates that students from families which plan for expenditures and savings are more likely to fall into the high fnancial knowledge category. On the contrary, students from families which do not have a family budget are more likely to have lower fnancial knowledge. This seems to suggest students fromfamilieswithamoredisciplinedapproachtowardspersonalandhouseholdfnancebecomemore concerned about the underlying principles of money.11Interestngly, students who have prior exposure to courses related to the questons involved like account-ing or economics do not appear to outperform students from the other streams. If anything, they seem to marginally underperform students from the other streams. Students from the engineering courses seem to outperform students from the other streams. This result could possibly be due to two reasons. Firstly, there is a tendency for students with higher academic merit to join science and engineering streams. Sec-ondly, it could be due to the poor educatonal outcomes themselves.Children of parents who are graduates or above are less likely to be in the low fnancial knowledge catego-ry.However, at the overall level, the fnancial knowledge of the students does not appear to be strongly related to parents educaton level. Students of employed or self-employed parents are also less likely to be in low fnancial knowledge category. Notceably, students from families where father is self-employed seemtohavearelatvelybeterunderstandingoftheprinciplesinvolvedinpersonalfnance.Perhaps, this suggests that the family involvement in businesses make their children more conscious of personal fnancial principles. The likelihood that some of these socio-economic factors could also proxy for income leaves no room for strong conclusions. 12AmongthediferentregionsinIndia,morestudentsfromtheWestscorehighonfnancialknowledge than from other regions. It is interestng to note that the proporton of households with partcipaton in the fnancial markets from the West is also one of the highest in India. Perhaps the greater involvement of households in the markets leads to a higher fnancial fuency for the children. On the other hand, more students from North score relatvely poorly on fnancial knowledge among the diferent states. However, these results need to be examined for other omited infuences including family income, before taking any strong and fnal view.The knowledge of the basic principles of personal fnance is not sufciently widespread among students. Family income levels, family fnancial discipline and parents occupaton seems to infuence the fnancial knowledgeofchildren.However,theseassociatonscouldonlyberegardedastentatvebeforedeeper investgatons. As the fnancial knowledge among students is largely dependent on their learning outcomes rather than directexperience,thisfndingalsorefectspoorlyontheacademicoutcomes,relatedtomoneyandf-nance, of a large secton of students. The fnding that students with exposure to fnance and economics curriculum do not fare beter also reinforce the suspected role of poor educatonal outcomes. These results tentatvely suggest that one of the ways to improve fnancial knowledge among the students would be to improve the quality of school educaton itself.13Financial behaviourThe survey atempted to understand the fnancial behaviour of the respondents as refected in the way theydealwithmoneyintheirdailylives.Atotalofeightitemsareemployedtocapturetheimportant dimensions about the respondents handling of personal fnances. These dimensions include, assessment of afordability of products and expenditures, behaviour related to tmely payment of bills, planning and monitoring of the household budget, actve saving habits, and borrowing propensites. The respondents behaviour dimensions are mapped to a scale in terms of their desirability. Respondents scoring 6 out of 8 on the desirability scale are classifed as having positve behaviour towards money and fnance. Those scoring 3 to 5 are classifed as neutral and less than 3 is considered as having negatve fnancial behaviour. The proporton of respondents scoring high on positve behaviour is mostly used in the analysis of fnancial behaviour.Itappearsthatthemajorityoftherespondentsengageindesirablefnancialbehaviourswhendealing with personal money and household fnance. Based on the fnancial behaviour score, about 68% of the employed and 75% of the retred could be classifed as having positve fnancial behaviour. This is compa-rable with the fnancial behaviour reported from Germany, Norway, Ireland, Malaysia and Peru through the OECD survey, where around 60% score high on fnancial behaviour. About 90% of the employed and 86% of the retred report that they are strongly inclined to assess the af-fordability of items. On this dimension, it appears that the Indians are not distnctly diferent from many other countries which had been surveyed by the OECD. In fact, Indians appear to be one among the best in their propensity to assess the afordability. Similarly, on the tmeliness of the payment of bills the Indians score very similarly to the countries in the OECD survey. ThepractceoffnancialgoalsetngamongIndiansalsoappearstobenotdistnctlydiferentfromthe countries included in the OECD survey. The young Indians are not among the best on this dimension. Most Indians, about 68% of the employed and 70% of the retred, report that they have avoided borrowing by depending on their savings or assets during periods of fnancial difculty. All the respondents report that they have saved some money in the past 12 months and more than 80% of the respondents report that they have atempted to carefully evaluate the fnancial products. These high scores reported by both the young employed and retred Indians probably suggest that they are reasonably self-disciplined in their dealing of money and household fnance. The relatvely high level of fnancial-discipline shown by the Indians could perhaps be due to their relatvely low level of per capita income and the lack of general social support systems. 14Variaton in fnancial behaviour across sub-groupsAmong the young, it appears that men, respondents of urban origin, and married show relatvely more positve behaviour in dealing with money and household fnance. The relatvely greater score of the ur-banites could probably be due to their beter exposure and educaton. The beter behaviour score of the married could also be understood in the context of the greater fnancial burden involved in raising a fam-ily. Among the retred there are no signifcant diferences between sub-groups based on any of the above criteria, except that less among the divorced exhibit positve fnancial behaviour. The educaton level seems to infuence the reported fnancial behaviour of the employed.Respondents with educaton of graduaton or above seem to show a more positve behaviour compared to their coun-terparts with lower educatonal atainments. The fnancial behaviour of the highly educated and less edu-catedissimilaramongtheretredgroup.Perhaps,therichexperienceoflifeeventsmakesthemmore atentve, cautous, and thrify. 15Amongtheemployed,thefnancialbehaviourdoesnotappeartobesignifcantlydiferentacrossthe income categories. On the contrary, it appears that respondents in the lower income category show more positvebehaviour.Thisresultsuggeststhattherelatvelylow-incomegroupismorecarefulaboutex-penses, borrowing, saving and fnancial planning. However, among the retred respondents more among the higher income levels exhibit positve behaviour, except for the highest income group. Possibly, those with lower income, partcularly the sub-group with less than `5,000 of income, cannot comfortably meet all their living and family expenses. Overallthesefndingssuggestthatboththeyoungemployedandtheretredareveryconsciousabout their level of afordability, need for saving, need for individual and household fnancial planning, and are reasonably disciplined in meetng their expenses. These results present a picture of positve fnancial behaviour among the Indians. Ideally, the positve be-haviour could help them to secure their fnancial goals, despite being in one of the low-income countries intheworld.Thispositvebehaviourispossiblycorroboratedbythedocumentedevidenceoftherela-tvely high level of savings by the Indian households. Overall, the fnancial behaviour of Indians is at par or beter than that reported from other countries.16Financial attude Itisbelievedthattheattudetowardsmoneyandfnancecouldafectthebehaviourtowardssavings, borrowings, risk-taking etc. Based on this belief, the OECD has developed a scale to measure the fnancial attude.InthelinesoftheOECDsurvey,thissurveyhasatemptedtounderstandtheattudesofthe respondents towards two interrelated aspects - fnancial planning and consumpton. These are measured with three items as recommended by the OECD survey. The items sought response in terms of agreement or disagreement towards three statements. The follow-ing aspects are refected in the three statements (i) the extent of belief in planning (ii) propensity to save, and (iii) propensity to consume. The attude responses are mapped to a scale based on its desirability. The maximum score for each item, indicatve of its desirability, is 5. The scores across the three items are then averaged. An average score of 3 or above is considered as a positve attude as used in the OCED survey.Close to half of the respondents in both the categories seem to have a positve attude towards fnancial planning and do not seem to show a very high propensity for consumpton as indicated by their responses towardsindividualitems.ThisiscomparabletothelevelsobservedintheOECDsurveyinEstoniaand United Kingdom. However, this is signifcantly lower compared to many other less developed countries in the Eurozone like Czech Republic, Hungary and Albania.Variaton in fnancial attude across sub-groupsAmongtheemployed,womenarefoundtohavepositveattuderelatvetomen.Amongtheretred, the men and women have similar attudes. The survey results do not indicate that respondents of urban origin are more likely to have positve attudes towards fnance. As observed in the case of fnancial behaviour, among the young, the married appear to be more positvely inclined to plan fnancially and consume more cautously. However, among the retred these diferences are not very signifcant. Being part of a joint family does not appear to infuence the aggregate attude towards fnance examined in the survey. 17The level of educaton does not seem to infuence the fnancial attudes as much as it is found to infuence the fnancial behaviour or the fnancial knowledge. However, given that the survey has concentrated on a rather educatonally homogenous group of employed respondents it would be difcult to draw reliable conclusions about the infuence of the educaton level. Hence these results are not reported. May be the fnancial attudes are shaped mostly from stmuli other than educaton.Positve fnancial attude seems to be related to income levels. A signifcantly larger number of respond-ents from the high income brackets have positve attude towards consumpton and planning to achieve future goals. The income groups below the per capita income level in India seem to have lower number of respondents with positve attude.Overall, these results seem to show that majority of the Indians maintain a healthy attude towards plan-ning for future fnancial goals and consumpton. This is despite the fact that the Indians have reported a lower score on fnancial knowledge. 18Financial knowledge, behaviour and attude:Inter-linkagesIt is likely that the diferent dimensions of the fnancial literacy could be related to each other. For instance, highfnancialknowledgecouldinfuenceboththefnancialbehaviourandattude.Alternatvely,poor fnancial attude could lead to less desirable behaviour. These relatonships are examined to gain more insights about how the diferent aspects of fnancial literacy infuence each other. These insights could be helpful as the fnancial literacy literature has not so far evolved any distnct or reliable explanatory model about how individuals obtain high fnancial literacy. Such a model could be helpful to formulate efectve fnancial educaton policies and delivery methods. There is some support for the noton that high fnancial knowledge leads to more positve fnancial be-haviour. The attude appears to be almost unafected by the fnancial knowledge. This might imply that focussing fnancial numeracy skills may not lead to the desired change in attude towards money among individuals. We also do not observe any identfable relatonship between the fnancial attude and fnan-cial behaviour, which is somewhat puzzling. If anything, it appears to be negatve relatonship. May be the scale used to measure the fnancial attude with only three items is not a very valid measure to capture the relatonship, even if it exists. These results are true for the employed and retred.The results suggest that fnancial behaviour is infuenced by fnancial knowledge, which tend to suggest that fnancial educaton is a valuable tool to achieve desirable fnancial behaviour. We intend to examine the relatonship across the possible dimensions of fnancial literacy as a future agenda of research.19Financial literacy Financial literacy is ofen hypothesised as the essental knowledge of fnancial maters and desirable at-ttudes which leads to outcomes related to money and fnance. Hence, it is ideal to measure the fnancial literacy through a combinaton of its most likely dimensions fnancial knowledge, behaviour and attude as discussed above. The lack of a very high level of associaton among these diferent dimensions also sup-ports such a combined measure to beter capture the fnancial literacy. Through such a combinaton, we have atempted to map the fnancial literacy level in India.8Thefnancialliteracyscoreisobtainedbyaddingthescoresofthethreediferentdimensions fnancial knowledge, fnancial attude, and fnancial behaviour. The maximum possible score for the fnan-cial literacy measure is 21 (8 for fnancial behaviour, 8 for fnancial knowledge, and 5 for fnancial attude). The average score of 13.7 observed in the OECD survey across the set of 13 countries is used the bench-mark to compare India with the rest of the world. Also we examine how the diferent socio-demographic groups fare compared to the overall average. Largely, the analysis is based on the percentage of respond-ents scoring above the OECD/Indian average score of fnancial literacy.The average fnancial literacy score of the respondents is about 13.7 for both the groups which is almost the same as the average observed for the countries in the OCED survey.9 Compared to the average score range of 12.4 to 15.1 observed for the countries included in the OECD survey, these results would imply that the average fnancial literacy level of Indians is not exceedingly poor.However, it is alarming to note that only about 39% of the employed respondents have fnancial literacy scores above the OECD average. Similar fgure for the retred is about 56%. This seems to suggest that for themajorityoftheyoungemployedandforalargenumberoftheretredIndiansthefnancialliteracy level is not very high. This is despite their relatvely beter score for fnancial behaviour and their almost at par score for fnancial attude. ThemajorreasonfortherelatvelylowerfnancialliteracyscoreisthepoorscoreofIndiansfor fnancial knowledge. The inadequacy in the basic numeracy skills observed through our survey is also cor-roborated by the poor educatonal outcomes observed in India.8This follows the approach adopted by the OECD in their fnancial literacy survey.9 The actual average is infated by multplying it with 22/21 to match the maximum fnancial literacy score of the OECD survey.20Relatve to the overall average of the fnancial literacy score of the OECD survey, Indians perform beter than several countries including South Africa, Armenia, Poland, Estonia, and Albania.Variaton in fnancial literacy across sub-groups The Indian women are not distnctly diferent from the men in terms of the overall fnancial literacy meas-ure. This could be largely due to their beter scores on behaviour and attude compared to men, despite theirrelatvelylowerfnancialknowledge.However,stllthelackofbasicfnancialknowledgeandnu-meracy skills probably keeps them ill-equipped to secure their fnancial goals.Respondentsofurbanoriginappeartomarginallyoutperformthosefromtheruralareasasob-servedfortheindividualcomponentsoffnancialliteracy.Thisgapislargelyduetotherelatvelypoor fnancial knowledge score of the respondents from rural origin. Perhaps one can atribute this to the rela-tvely poor academic atainments in the rural areas.Themarriedappearstobeoutperformingsinglesintermsofoverallfnancialliteracy.Thisislargely brought about by their beter behaviour and attude towards money and household fnance. It is interest-ing to observe, how raising a family brings about signifcant changes in the behaviour and attude towards saving and consumpton, borrowing, and fnancial planning, among the young. It could be that the incre-mental expenditures involved in raising a family brings about thrifiness and cauton among the married.As discussed earlier, educaton levels are somewhat homogenous for the employed respondent group that we have surveyed, and therefore may not ofer reliable insights about the impact of educaton on fnan-cial literacy. Among the young employed, it appears that the educated tend to score high on the fnancial literacy. However, there is no perceptble relatonship between educaton and fnancial literacy among the retred. As observed, for the diferent dimensions of fnancial literacy, respondents in the higher income levels are fnancially more literate than those from the lower income levels. A similar, observaton emerges from all thecountriessurveyedbytheOECD.Therelatvelypoorfnancialliteracyofthelowerincomegroupis 21despite the reported at par or beter attude and behaviour towards money and fnance. These observa-tons suggest that perhaps it might be more helpful to target fnancial literacy programs to improve the basic numeracy skills of the low-income group.22Self-reported measure of fnancial literacy Wealsoatempttoobtaintheself-perceptonoftherespondentsabouttheirfnancialliteracy.There-spondentsareaskedtoreporttheirperceivedlevelofpreparednesstomanageexpensesandsavings, including knowledge about fnancial products on a scale of 1 to 5. Nearly 48% of the employed and 60% of the retred respondents report that they are either equipped or completely equipped to deal with the challenges involved in managing their personal fnances. This self-reported measure of fnancial literacy is marginally positvely biased relatve to the observed measure of fnancial literacy as only about 50% of the employed and 60% of the retred remain above the OCED aver-age, and high literacy scorers are not widespread.While, the overall relatonship between self-reported fnancial literacy and measured fnancial literacy is positve for both the groups, it is interestng to note that there is a tendency for the fnancially less liter-ate to overestmate their own skills as only about 15% from both the groups admit that they are either unequipped or completely unequipped. This level of self-percepton is despite the fact that the fnancial knowledge of nearly 35% of the employed and 30% of the retred respondents may be regarded as poor.This suggests that a number of respondents have misplaced expectatons about their own fnancial litera-cy, which makes them vulnerable to loss of fnancial wealth. The possibly biased self-reportng of fnancial literacy is documented in many other studies. Variaton in self-reported fnancial literacy across sub-groups Relatve to women, more men are overconfdent about their fnancial skills. This is similar to the widely documented fndings in behavioural fnance. We fnd that respondents of urban origin have relatvely low levels of overconfdence compared to their rural counterparts. Perhaps, the relatvely greater fuency of the urbanites in fnancial maters makes them more realistc. We do not observe any signifcant diference between the married and unmarried in the proportonofrespondentsquotnghigherfnancialliteracy.Whilenotverydistnct,respondentsinthe higher income brackets appear to be more confdent about their own fnancial skills, which is possibly in linewiththeobservatonsabouttheirfnancialliteracy.Theseresultsaretrueforboththerespondent groups. Most of the respondents (more than 5%) feel that they would beneft from training on how to manage their expenses and savings.23Conclusions on fnancial knowledge,behaviour and attudeThe survey suggests that high fnancial knowledge is not widespread among Indians. Less than a quarter among the surveyed get ranked among the highly knowledgeable, based on the OECD approach. This is signifcantly lower than the fgures reported from many countries including South Africa. There is lack of understanding among Indians about the basic principles of money and household fnance, such as compound interest, impact of infaton on rates of return and prices, and the role of diversifcaton in investments. While more men are found to be knowledgeable than women, the gap is not high com-pared to the rest of the world. More of the respondents of rural origin score low on fnancial knowledge. Financial knowledge is more widespread among the more educated and the relatvely wealthy.MostIndiansappeartohavepositvefnancialbehaviour,whichrefectsdiscipline,planning,andthrifwhile dealing with personal and household fnancial maters. Saving behaviour appears to be widespread amongIndians.OnfnancialbehaviourIndiansscoreveryhighcomparedtotherestoftheworld.The fnancial behaviour appears to be associated positvely with fnancial knowledge. The attude towards saving and consumpton also appears desirable among the Indians. Generally, more women exhibit positve attude than men. The spread of positve attude among Indians in dealing with money is comparable to some of the countries surveyed by the OECD. This positve attude is despite the relatvely low fnancial knowledge among Indians. This suggests that for the majority of Indians, the widely documented behavioural bias the lack of self-control may not in itself signifcantly upset the atainment oftheirfnancialgoals.However,somecautonisrequiredininterpretngtheseresultsasself-reported behaviour is likely to be positvely biased. On the measure of fnancial literacy; obtained by combining, fnancial knowledge, behaviour and attude; the average score of Indians is very similar to the average score of the 13 countries surveyed by the OECD. However, the fnancial literacy is not widespread as a large number of them would be classifed as fnan-cially less literate by the OECD average.The survey results tend to suggest that while most Indians do not score high in their understanding of the principles underlying most fnancial products available, they are disciplined and cautous in their personal and household fnancial dealings. However, fnancial discipline may not be adequate in itself, when indi-viduals and households have to deal with a complex and volatle economy and fnancial markets to secure their fnancial well-being, where understanding could be a decisive factor. 24Awareness of fnancial products and choice of investment advice The survey examines the respondents awareness about the most commonly available saving, insurance, andcreditrelatedproducts.Onlyabout7%amongtheemployeeshaveheardofalltheproducts.The proporton is marginally higher among the retred (about 9%), probably due to their greater exposure to these products. There are many interestng paterns that emerge out of the product-wise awareness. Firstly, the aware-ness about even fxed deposits, a very commonly available product, is not universal. Secondly, more than half of the young employees are not aware of employee specifc vehicles for long-term wealth creaton like the PPF and pension-fund. Thirdly, the awareness about many of the fnancial market saving vehicles, like shares, bonds, and mutual funds are not very high.About one-fourth of the employees seem to be aware of only three products, which include savings ac-count, fxed deposits, and insurance. This lack of product awareness might limit the ability to diversify risk across products, which is not optmal for any investor. At the macro level too the low awareness could lead to inefcient allocaton of capital. Among the retred, the most frequently used source of advice in their choice of fnancial products appears to be friends and relatves who are not associated with the fnancial industry. They also frequently take decisionsbasedontheirpersonalexperiencewithinvestments.Therelianceonindependentfnancial advisers and advertsements seem to be only among less than a quarter of the respondents. Moreover, the employer does not fgure prominently among the sources relied on for investment advice. As one would expect, the young employees rely more on the internet, than the retred, as a source of in-vestment advice. They also seem to rely relatvely more on their own experience.The rest of the response patern of the employees is not signifcantly diferent from that of the retred.25Conclusions about product awareness It appears that the level of awareness about fnancial products is not universal even for commonly avail-able products. This might adversely afect the ability of investors and borrowers to have optmal porto-lios, which would meet their investment needs at diferent stages in life. While the young employees can probably aford a greater risk in their investments at early stages of life, their awareness about fnancial market related products remains relatvely low. Further, the lack of diversifcaton may also increase the risk of investments. The low awareness about PPF and pension funds among the employees probably needs atenton from the policy makers. It appears that the employers are not commonly regarded as a source of investment advice. The employ-ers could possibly play a much more actve advisory role to the employees. Perhaps through independent fnancial advisers, it could be possible to spread greater awareness and ofer more efectve advice. 26Retrement fnancial planningA critcal stage in the life of most employed is retrement afer which the income levels abruptly decline. Retredemployeescritcallydependontheincomefromthesavingsaccumulatedduringtheiremploy-ment. The savings accumulaton during pre-retrement years and its judicious re-investment on retrement would largely decide the well-being during their post-retrement years. Incompetent decisions in the rein-vestment of the accumulated savings could lead to a signifcant loss of wealth. This part of the survey has atempted to understand how employees plan and save for their retrement. The key aspects of retrement which are investgated include (i) how employees identfy their post-retre-mentincomeneedsandestmatetherequiredsavings(ii)thesavinghabitsduringthepre-retrement years, and (iii) the preferences for disbursement or reinvestment of the amount available at retrement.Only about 10% of the retred respondents depend on their children/spouse/relatves for their income. About 68% depends majorly on the pension. The other major sources of income afer retrement includes interest on deposits and income from house property.This seem to suggest that majority of this genera-ton has achieved a modest degree of success in their fnancial planning.Pre-retrement planning More than half of the respondents (about 59%) report that they have atempted to estmate the saving needs,whichcouldsupporttheirpost-retrementexpenses.About17%reportthattheyhadnomajor savings during their service life. While it may appear worrisome that nearly 40% of the retred have not atempted to fnancially plan their retrement, in a country like India without any signifcant social support, a large number of the respondents are part of defned pension schemes. Due to the assured pension sup-port probably actve involvement by employees was limited.It appears that there is some degree of associaton between fnancial knowledge and the proporton of those who fnancially plan for their retrement. Nearly40%seemtostartsavingwell-beyondtheirprovidentfundcontributonsbeforetheirmid-30s. This is probably not very late in their life given that many of the retred respondents would have started their employment in the early 30s. The reported saving propensity is in line with their reported fnancial behaviour. 27Again, the more fnancially literate tend to have started their savings at a relatvely younger age. However, this is not a very distnct associaton across sub-categories.More than 60% of the respondents have atempted to self-estmate their saving requirements and about a quarter of them were dependent on advisers. We do not observe that the highly literate group were more likely to self-estmate their savings requirements compared to the less literate. The employer does not fgure among the sources of advice for retrement planning and about 72% report that their employer did not provide any training on retrement fnancial planning.Amongthosewhohaveself-estmatedthesavingrequirements,mostofthemdidnotconsidereither living expenses or expected infaton, the two key factors which could impact their postretrement well-being. The failure to account for infaton and living expenses is probably a refecton of the lack of under-standing about infaton. The factors considered are similar across groups with varying fnancial literacy.28Pre-retrement savingsOnlyaboutone-fourthreportthattheyhadnotsavedeveryyearforretrement.Nearlyhalfofthere-spondents (about 46%) claim that they have saved a certain percentage of salary every month per year for retrement. Another 20% claim that they have saved a certain amount every year though they could not save every month. These fndings about systematc savings can be regarded as a refecton of their positve fnancial behaviour. The more frequently used investment vehicles for pre-retrement saving appear to be the relatvely less risky avenues, such a savings account, fxed deposits, and insurance apart from pension funds. Equity or bondsdidnotappearfrequentlyamongthepreferredinvestmentvehicles.Thistendstosuggestalow 29diversifcaton in their investment portolios during the pre-retrement period. This could partly be due to the poor awareness about the available products.Post-retrement investment behaviour The survey fnds that about two-thirds commuted their pension on retrement with about 20% commutng nearly 50% of their pension. The most frequently cited motvaton for commutaton is tax saving (40%). The other frequently cited motvatons are repayment of liabilites (32%), payment to dependents (26%), and atractve investment opportunites (24%). About 30% report that they have commuted their pension as advised by friends and relatves. These observatonssuggest that there isa signifcant preference for lumpsumreceipt onretrement in place of regular monthly income. The commutaton of pension for investment purpose places additonal burden on the retred to safely invest the amount. The decision to commute might increase the chance for wealth loss given the poor product awareness and relatvely low fnancial literacy. Ofen the employed receive a sizeable lump sum on retrement, which includes gratuity, provident fund, andothersuperannuatonbeneftsapartfromthelumpsumfrompensioncommutaton.Thewayin which this lump sum is disposed of or invested is likely to leave a lastng impact on their fnancial well-being.Itappearsthatabout62%oftheretredhavesavedsubstantallyfromtheamountreceivedon retrement, while the remaining have either repaid liabilites or given it away to their dependents. Amongthosewhohavere-investedthelumpsumreceivedonretrement,mostofthemseemtohave spread the investment across a number of avenues. The savings account is a preferred choice. Substantal investments, involving more three-fourth of the lump sum, are parked in relatvely less risky opportunites like savings bank, fxed deposits, and post ofce or NSC except for land or property. These observatons re-fect the somewhat judicious choice of the retred by selectng less risky opportunites for post-retrement investment.Conclusions on retrement planning It appears that majority of the employees fnancially plan for retrement and start their savings early in life. Majority of them claim to have estmated their post-retrement income requirements. Relatvely more among the fnancially literate plan for retrement compared to the less literate.Most of them appear to have saved systematcally for retrement and the frequently used investment av-enues are the relatvely safe assets, such as savings account and fxed deposits. These fndings are in line with the fnancial behaviour observed among the respondents.The retrement fnancial planning seems to be done commonly by self. However, in the estmaton of the income required to support post-retrement living, the two key aspects, infaton and living expenses, ap-pear to be ignored. This seems to underscore the need for greater fnancial knowledge.Commutng a signifcant proporton of future pension is a widespread practce and the most commonly cited motvaton is tax savings. The amount available to employees on retrement appears to be invested in relatvely safe assets, which is a desirable practce. However, this preference for lump sum instead of regularmonthlyincomemayputadditonalinvestmentmanagementburdenontheretredandcould perhaps increase the risk for the fnancially less literate.These observatons about the retred suggest that most of them are conscious about future requirements and appears to have saved systematcally. However, these fndings need to be treated with a certain level of skeptcism for several reasons. 30First, most of the retred surveyed by us had stable and regular jobs which allowed them to save system-atcally.However,mostoftodaysemployedareinrelatvelylessstablejobsandmightnotbeableto save systematcally at every point in their life cycle. Second, most of the retred have invested in an era of administered interest rates and possibly would have had only very limited exposure to market linked instruments. The investment in relatvely safe and low volatlity opportunites would have helped them to beter protect their wealth, although it might have earned them only a lower rate of return. Thesechangesintheenvironmentmightmakeitdifculttoexpectthesameoutcomeforthecurrent generatonofemployees.Theerratcnatureofincomefromemploymentitselfmightcallforreason-ably sophistcated investment approaches, which requires a certain degree of comfort with the fnancial concepts. The volatlity in the macroeconomic environment would also demand sound investment skills.31Tentatve conclusions and future directons This study is an atempt to understand the fnancial literacy levels of three important demographic groups, young working adults, retred and students in India. The employed and retred are surveyed on fnancial knowledge, behaviour and attude. The students are surveyed only on fnancial knowledge as they might nothavesignifcantdirectexposureindealingwithpersonalorhouseholdfnance.Thesurveyinvolves nearly 3,000 respondents from the three groups distributed across the country. The fndings suggest that high fnancial knowledge is not widespread among Indians. Less than one-fourth rankamongthehighlyknowledgeablebytheOECDapproach.ThefnancialknowledgeamongIndians appearstobelowbyglobalstandards.Thebasicprinciplesofmoneyandhouseholdfnance,suchas compound interest, impact of infaton on rates of return and prices, and the role of diversifcaton are not well understood. As most personal fnancial decisions involve these concepts, their limited understanding is a serious mater.ThefnancialbehaviourofIndiansappearstobepositve.Theemployedandtheretredscorehighon behavior relatve to the rest of the world. Indians match the best of the OECD sample in their propensity to assess afordability and have a high level of fnancial discipline. Most employed and retred borrow less anddependontheirsavings.PositvefnancialbehaviouramongIndiansappearstobeassociatedwith higher fnancial knowledge.There is positve fnancial attude among Indians. The spread of positve attude among Indians in deal-ing with money is comparable to some of the countries surveyed by the OECD. There is desirable attude towards saving and consumpton among Indians. More men are found to be fnancially knowledgeable than women. However, the gap is not high compared to the rest of the world. More respondents from rural regions score low on fnancial knowledge. Financial knowledge is more widespread among the more educated and the relatvely wealthy. Thefnancialbehaviourandattudeofwomenaremarginallybetercomparedtomen.Marriedand thosewithhigherincomestendtobelieveinplanning,savingandconsumpton.Educatonandurban background have no infuence on the fnancial attude.Informatononretrementfnancialplanningwasalsogatheredfromtheretredinadditonto fnancial knowledge, behaviour and attudes. It appears that majority of them fnancially plan for retre-ment and start systematc savings early in life. Majority of them claim to have estmated their post-retre-ment income requirements. The investment avenues frequently chosen are the relatvely safe assets. Their retrement fnancial planning appears moderately successful as 68% of the retred depend on pensions.Theawarenessoffnancialproductsisgenerallylow.Thiscouldlimitthediversifcatonofinvestment portolios across asset classes. Less than a quarter of the respondents depend on independent fnancial advisers and advertsements.The striking conclusion from the study is that fnancial knowledge in India is very poor even by low global standards. A large part of this is due to the poor numeracy and is probably due to the poor performance of the Indian primary educaton system as documented in other studies.The low fnancial knowledge of students, which largely depends on their learning outcomes rather than on direct experience in fnancial maters, also refects poorly on the academic outcomes.However,thispoorknowledgeappearstobeofsetbyprudentfnancialbehaviourandgoodfnancial attudes that lead to an overall score of fnancial literacy that is on par with the admitedly poor global standards. The result has been a somewhat benign outcome for the current generaton of retrees in terms of adequacy of savings and choice of savings vehicles. It would be a mistake however to extrapolate from this outcome to the current generaton of employees for several reasons. The current generaton has to cope with defned contributon plans rather than the defned beneft plans that the earlier generaton enjoyed. Rising longevity and increasing fnancial market 32volatlity pose threats to retrement savings. The current generaton is likely to face greater job insecurity andincomeuncertainty.Greateraccesstoconsumptoncreditandotherliabilityproductscouldalter fnancial behaviour over a period of tme. The informal sources of fnancial advice that served the old gen-eraton reasonably well are unlikely to perform equally well in an age of nuclear and sub-nuclear families and an environment of increasing fnancial complexity. There is an urgent need for government policy measures to improve fnancial literacy. Fortunately, knowl-edge defcits are easier to remedy than problems in attudes and behaviour. The relatvely good behaviour and attude scores of the Indians provide a strong base on which a fnancial literacy programme focused on improving knowledge can be built.Equally, it is important to build regulatory frameworks that improve the delivery of fnancial services and fnancial advice to serve the more complex and challenging needs of the present generaton.There is need for lot more research on fnancial literacy in India. Despite our own study and other recent studies, we know too litle about fnancial literacy in India. India is a vast country with many languages. Regional diferences in educaton levels and economic development are very large. These suggest that the ofen-employed survey results need to be supplemented with other methodologies, such as focus group interviews, experiments and longitudinal studies. Indian Insttute of Management AhmedabadVastrapur, Ahmedabad 380 015Phone: 079-6632 3456/ 2630 8357 E-mail: fs@iimahd.ernet.in