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Introduction to Financial Literacy

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Module 1:
Introduction to Financial Literacy
Dr. Mrunal Joshi
Assistant Professor,
B.R.C.M. College of Business Administration.
Contents of the Module
• Concept and Significance of Financial Literacy
• Financial Exclusion and Inclusion: Meaning and Benefits
• Utility of Money/finance.
• Importance of Savings in modern day society.
• Importance of liquidity and emergency fund in life.
• Meaning and Importance of Investment
• Meaning and Significance of Borrowings or Credit. Non-desirable requirements
of borrowing.

Dr. Mrunal Joshi B.R.C.M. College of Business Administration

Concept of Financial Literacy
https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/NSFE202020251BD2A32E39F74D328239740D4C939
80D.PDF

The Organization for Economic Co-operation & Development (OECD) defined

“Financial Literacy is a combination of financial awareness, knowledge, skills,
attitude and behaviour necessary to make sound financial decisions and ultimately
achieve individual financial well-being” (OECD, 2012).

People achieve Financial Literacy through the process of Financial Education.

Dr. Mrunal Joshi B.R.C.M. College of Business Administration

Financial Education is defined 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 the skills
and confidence to become more aware of 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 well-being (OECD, 2005).

Dr. Mrunal Joshi B.R.C.M. College of Business Administration

Significance of Financial Literacy
https://www.financialexpress.com/money/importance-of-financial-literacy-in-the-new-indian-retail-investment-lands
cape/2361334/

1. Financial literacy will provide in-depth knowledge of financial education and

strategies that are crucial for financial growth and success.
2. Financial literacy helps in securing present and the unseen future trough
savings. Saving can become your emergency fund or a way to keep your
expenses in control - not investment.
3. Financial literacy helps to prepare Budget to achieve financial independence -
income should be greater than expenses.

Dr. Mrunal Joshi B.R.C.M. College of Business Administration

4. Financial Literacy helps in Investment Decision, which leads to creating and
growing wealth for the future. Investing with the effect of compounding leads
achieve financial goals.
5. It Helps to use the debt wisely. Debt is basically spending money that isn’t
yours for e.g. loans or credit cards. - take debt for things that are necessary -
borrowing money for things that aren’t really needed should be avoided.
6. For financial inclusion, which is an enabler for inclusive growth of the nation
7. Financial education initiatives by concerned stakeholders will help people
achieve financial well-being by accessing appropriate financial products and
services through regulated entities.
8. Incidentally, financial education also supports achievement of Sustainable
Development Goal (SDG) No. 4 on Education which aims to ensure inclusive
and equitable quality education and promote life-long learning opportunities for
all.

Dr. Mrunal Joshi B.R.C.M. College of Business Administration

NJ-FLAP (Financial Literacy Awareness Program)

● To handle our finances better - to decides the priority

● Save us from debt trap - purpose and repayment capacity
● Emergency Fund
● Retirement Fund
● For the overall development of the nation

Dr. Mrunal Joshi B.R.C.M. College of Business Administration

As per a global survey by Standard & Poor’s Financial Services LLC (S&P), India
is home to 17.5 per cent of the world’s population, but nearly 76 per cent of its adult
population does not understand even the basic financial concepts.

Dr. Mrunal Joshi B.R.C.M. College of Business Administration

Financial Exclusion and Inclusion: Meaning
Financial exclusion refers to individuals and populations without access to common
financial services. These can include savings accounts, loans, cashless transactions,
credit, and other traditional banking services.

The World Bank defines financial inclusion to mean, “that individuals and
businesses have access to useful and affordable financial products and services that
meet their needs—transactions, payments, savings, credit, and insurance—delivered
in a responsible and sustainable way.”

Dr. Mrunal Joshi B.R.C.M. College of Business Administration

Financial inclusion has been defined as “the process of ensuring access to financial
services, timely and adequate credit for vulnerable groups such as weaker sections
and low-income groups at an affordable cost”. (Committee on Financial Inclusion -
Chairman: Dr C Rangarajan, RBI, 2008).

In the Indian context, financial inclusion is the process of ensuring access to

appropriate financial products and services needed by vulnerable groups such as
weaker sections and low income groups at an affordable cost in a fair and
transparent manner by mainstream institutional players.

Dr. Mrunal Joshi B.R.C.M. College of Business Administration

Important financial inclusion initiatives by Government of India are:

● Pradhan Mantri Jan-Dhan Yojana (PMJDY),

social security schemes viz.

● Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY),

● Pradhan Mantri Suraksha Bima Yojana (PMSBY),
● Atal Pension Yojana (APY),
● Pradhan Mantri Kisan Maan Dhan Yojana (PM-KMY),
● Pradhan Mantri Shram Yogi Maan Dhan Yojana (PM-SYM) and
● Pradhan Mantri Mudra Yojana (PMMY).

Dr. Mrunal Joshi B.R.C.M. College of Business Administration

Financial Inclusion: Benefits
https://www.nelito.com/blog/importance-of-financial-inclusion-in-india.html

● The rural masses will get access to banking like cash receipts, cash payments,
balance enquiry and statement of account can be completed using fingerprint
authentication. The confidence of fulfilment is provided by issuing an online
receipt to the customer.
● Reduction in cash economy as more money is brought into the banking
ecosystem
● It inculcates the habit to save, thus increasing capital formation in the country
and giving it an economic boost.

Dr. Mrunal Joshi B.R.C.M. College of Business Administration

● Direct cash transfers to beneficiary bank accounts, instead of physical cash
payments against subsidies will become possible. This also ensures that the
funds actually reach the intended recipients instead of being siphoned off along
the way.
● Availability of adequate and transparent credit from formal banking channels
will foster the entrepreneurial spirit of the masses to increase output and
prosperity in the countryside.

Dr. Mrunal Joshi B.R.C.M. College of Business Administration

Utility of Money/Finance
Primary Function
1. Money as medium of exchange - removes the need of double coincidence of wants
2. Money as unit of value - Price - standard of measurement - common denominator (n-1)
prices in place of n(n-1) quotes - accounting - economic importance
Secondary Function
1. Money as a standard of deferred payment - loan taking and repayment - PV - capital
formation
2. Money as a store of value - kept for longer period without deterioration or wastage -
other assets
3. Money as transfer of value - between persons and places

Dr. Mrunal Joshi B.R.C.M. College of Business Administration

Contingent Function

1. Money as most liquid of all liquid assets

2. Basis of Credit System - money is at the back of all credit
3. Equaliser or Marginal utilities or productivities
4. Measure of National Income
5. Distribution of National Income e.g. wages, rent, interest and profit

Other Functions

1. Helpful in making decisions - e.g. switched from one asset to another

2. Money as a basis of adjustment - between money market and capital market,
international payment

Dr. Mrunal Joshi B.R.C.M. College of Business Administration

Utility of Money/Finance
https://www.imf.org/external/pubs/ft/fandd/basics/26-money.htm

https://lendedu.com/blog/why-money-is-important/

Dr. Mrunal Joshi B.R.C.M. College of Business Administration

Importance of Savings in modern day society
● To enjoy life and to better their future prospects
● To provide for old age, disease, accident and unforeseen needs and emergencies,
etc.
● To raise his standard of living
● To make provision for education, marriage, etc. of children
● To increase their future incomes
● To take advantage of fluctuations in the rate of interest
● To start a new business or to expand the existing one
● To be self-sufficient or economically independent - avoid future borrowings
● To satisfy their desire for wealth

Dr. Mrunal Joshi B.R.C.M. College of Business Administration

● For Peace and Security
● To encourage financial inclusion
● To Save Tax
● To initiate the investment

Dr. Mrunal Joshi B.R.C.M. College of Business Administration

Importance of liquidity and emergency fund in life
Liquidity is ease with which savings can be withdrawn.

Experts suggest having a liquid fund of at least three to six months of living
expenses.

It covers you in the event of an unexpected financial blow and can help prevent you
from going into debt.

It also provides peace of mind if you lose your job, become too ill to work, or have to
cover a major car or home repair.

There are many reasons why you should work on padding your emergency fund.

Dr. Mrunal Joshi B.R.C.M. College of Business Administration

● To pay off debt
● To adjust the budget
● In case of only one income - job loss, illness
● If you are self-employed or contractor
● Repair and maintenance of household - plumbing, electrical etc.
● Living far away from home/family
● To cope up with medical issues
● Ensures that you do not redeem from your future savings
● Ensures that you do not fall into a debt trap

https://www.thebalance.com/reasons-you-need-an-emergency-fund-2385536

https://www.franklintempletonindia.com/investor-education/new-to-investing/artic
le/head-start-9/what-are-emergency-funds

Dr. Mrunal Joshi B.R.C.M. College of Business Administration

Meaning of Investment
Investment is an employment of funds with the objective of realising the additional income
or growth in values of investment at future date. (V.K.Bhalla)

Deployment of money, say out of savings, with the expectation of earning higher returns
overtime is investment. e.g. purchase of land, fixed deposit in banks etc.

Traditionally, investors preferred gold, land and real estate as investment. Lately, however,
the number of investors choosing financial assets like stocks or mutual funds is on the rise.

Thus, Financial investments come in different forms, such as mutual funds, unit linked
investment plans, endowment plans, stocks, bonds and more. However, the primary goal
behind all investments remains the same, i.e., to increase the value of your invested money.

Dr. Mrunal Joshi B.R.C.M. College of Business Administration

Features of Investment
Return - Income or Capital Gain

Risk - uncertainty of return - stability

Liquidity - how fast assets can be converted into cash

Marketability - how fast assets can be transferred

Dr. Mrunal Joshi B.R.C.M. College of Business Administration

Importance of Investment
● Meet Financial Goals - financial stability, retirement plan, for children …
● Stable Future Income / Generates Income - periodic and regular
● Capital Growth / Wealth Creation - appreciation of capital
● Tax saving - mainly under the section 80C upto the investment of Rs. 100,000
● Purchasing power stability / To beat the inflation
● Conceal Income - reinvestment and not hiding the income
● Economic Development - efficient mobilization of resources of investors towards
productive use

Dr. Mrunal Joshi B.R.C.M. College of Business Administration

https://commercemates.com/characteristics-and-importance-of-investment/

https://financeplusinsurance.com/importance-investment/

https://www.iciciprulife.com/investments.html

Dr. Mrunal Joshi B.R.C.M. College of Business Administration

Meaning of Borrowings or Credit
It is a contract agreement in which a borrower receives a sum of money or
something of value and repays the lender at a later date, generally with interest.

Many people need to borrow money to buy a house or car or for their children’s
education. This is called credit. Borrowing money is neither good nor bad.

We borrow money when our expenditure is more than our income or when there are
emergencies. We also borrow when we need money for undertaking some business
activities.

Dr. Mrunal Joshi B.R.C.M. College of Business Administration

Types of Loan (Based on need)
● Consumer Loan
○ Housing Loan (up to 20 yrs)
○ Vehicle Loans (3-5 yrs)
○ Personal Loan (up to one year)
● Business Loan
○ Term Loan (may be more than a decade)
○ Working Capital Loan (six months or so)

Dr. Mrunal Joshi B.R.C.M. College of Business Administration

Types of Loans (based on collaterals)
● Secured Loans
○ Home loan
○ Loan against property
○ Loan against insurance policies
○ Gold loan
○ Loan against mutual funds and shares
○ Loan against fixed deposits
● Unsecured Loans
○ Personal loan
○ Short-term business loans
○ Flexi loans
○ Education loans
○ Vehicle loans

Dr. Mrunal Joshi B.R.C.M. College of Business Administration

https://www.bajajfinserv.in/insights/the-different-types-of-loans-available-in-india

Dr. Mrunal Joshi B.R.C.M. College of Business Administration

Good debt is an investment in something that creates value or produces more wealth
in the long run. Examples are a loan to buy a house or an education loan for your
children to pursue higher education.

Bad debt is money taken to buy something that immediately goes down in value or to
buy something that you can't repay on time. Example are a loan to buy a large
television or a loan to pay your monthly expenses.

Dr. Mrunal Joshi B.R.C.M. College of Business Administration

Non-desirable requirements of borrowing.
● Taking loan from informal channel
○ Usurious interest and unfair seizure of collateral
○ Outside the review and control of monetary authority
○ Money laundering may involved
● Taking loan more than repayment capacity
● Borrowing to meet consumption expenses like
○ celebrating festivals,
○ lavish wedding,
○ buying jewellery or costly consumer durables
○ International trip - going on vacation
○ Expensive vehicle - two wheeler or four wheeler - without need

Dr. Mrunal Joshi B.R.C.M. College of Business Administration

● consumer finance schemes and credit cards fast becoming big drivers of this
devil - use it carefully
● overspending or spending more than we can afford
● Impulse buying or spending
● Taking a home loan with a view of selling the house a few years down the line
at a higher price to help you settle your liability may not always work
● Taking loan for buying stocks and shares

Dr. Mrunal Joshi B.R.C.M. College of Business Administration

Significance of Borrowings or Credit
● Borrow within limit
● borrow only for income generating activities
● Take loan/credit through formal channel like bank
● Use the credit/loan of particular type only - match with the requriment
● Repay the loan timely - do not extend the time

https://youtu.be/UqBGxIFKSDE

Dr. Mrunal Joshi B.R.C.M. College of Business Administration

https://www.investopedia.com/terms/c/credit.asp#:~:text=This%20term%20has
%20many%20meanings,later%20date%2C%20generally%20with%20interest.
https://www.adb.org/sites/default/files/publication/486521/adbi-wp923.pdf
https://www.simplepersonalloans.co.uk/articles/money-management/reasons-peopl
e-borrow-money/
https://openknowledge.worldbank.org/bitstream/handle/10986/5972/978019520
7880_ch08.pdf
https://economictimes.indiatimes.com/money-you/our-own-habits-lead-to-debt-trap
/articleshow/7045384.cms?utm_source=contentofinterest&utm_medium=text&ut
m_campaign=cppst

Dr. Mrunal Joshi B.R.C.M. College of Business Administration

Other References
https://rbidocs.rbi.org.in/rdocs/content/pdfs/FLS140115SB_I.pdf

https://rbidocs.rbi.org.in/rdocs/content/pdfs/GUIDE310113_F.pdf

https://www.thebalance.com/reasons-you-need-an-emergency-fund-2385536

J.R.Kapoor, L.R. Dlabay, R.J. Hughes (2011) Personal Finance. McGraw-Hill

Companies

M.L.Jhigan (2006) Money, Banking, International Trade And Public Finance,

Vrinda Publication Pvt. Ltd.

Dr. Mrunal Joshi B.R.C.M. College of Business Administration

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