Oinam Nabakishore Singh
What do we understand by the term “financial literacy”? It has different definitions. For the sake simplicity, it refers to knowledge and understanding of money, how it is earned, how it is saved, budgeted, borrowed, spent and invested in order to improve the financial health of individuals, firms or nations. Financial management is broadly categorized as personal finance at the level of individuals, corporate finance at the level of organizations and firms, and public finance at the level of government. If we want to achieve better financial outcomes for any level, it is necessary to understand the entire ecosystem of finance, its products and services, various intermediaries in the transactions, vocabulary, dynamics of financial transactions, risks and returns involved. While firms and governments may be assumed to be having financial managers acquainted with knowledge and understanding of finance, most of the small firms and individuals really lack financial literacy. Three out of every four Indian adults are not financially literate, accordingto a survey by Standard & Poor’s Ratings Services in 2015 as reported in the BusinessLine in December, 2015.
In the article, “Deciphering Financial Literacy in India: Evidence from States” by Manuela Kristin Günther&Saibal Ghosh published in Economic and Political Weekly,Vol. 53, Issue No. 13, 31 Mar, 2018, wide variations of financial literacy among the states in India are reported.While average all India adult financial literacy was 26%, Himachal Pradesh was at the top with 77% and North East India had 25%. We need to look at the reasons behind the lack of financial literacy and formulate strategies to raise the awareness and proficiency.
Manipur has been largely an agricultural economy for centuries-wet paddy cultivation in the valley areas, shifting cultivation in the hills and growing of limited quantity of horticultural crops. There was little banking network till about fifty years back. Formal banking and financial services were almost negligible. Most of the people borrow money from money-lenders at varying high interest rates to meet their requirement of cash for various purposes-wedding of sons or daughters, death in the family or any other reason which may not be income generating. The mostusurious form of lending made available to poor farmers during lean season, when they had little to eat or urgently require cash for unavoidable and pressing needs, is called “Phoudamsel”. In this practice, the farmer borrower repays in kind after harvest about twice the value of amount borrowed. Borrowing by mortgaging gold jewellery and pension papers or ATM cards of salaried employees at about 2.5-3.5% per month is still very common in Manipur now.
In order to have a better financial system to provide banking and financial services of the people, it is necessary to have a fair knowledge and understanding of basic finance as well sophisticated financial markets like stock market, derivatives market, bond market, capital market, etc. Most financial service required is banking services to provide services of facility of deposit of savings, extending credit of different types to meet various purposes.
This service is provided by the bank branches. Unfortunately, the number of bank branches in Manipur is much less than other those in similar states in the north-east India. Tripura and Meghalaya have about three to four times the number of bank branches in Manipur.
What are the benefits of having a bank branch or branches in one’s locality? First, one can save his/her earnings in the form of deposits at a safe and reliable place. Earlier, in good old days, people used to hide cash at eaves, inside mattress, etc. to avoid theft and burglary. Later, cash is kept in almirah and chestsas safe place without earning any interest. Providing the service of accepting deposit and withdrawal of cash is, indeed, meeting one of the most needed financial services of people, even though this fact is not highlighted. This service also leads to saving by anyone who opens an account with the bank for himself to meet the requirement of fund in future. Besides, savings is also critical for investment and economic activities in the state.
A bank also provides many other services-savings account, current account, term deposits, cash credit, overdraft, term loans, remittance of cash anywhere in the world, etc. It is necessary for citizens not only know these services, but also to avail them to meet their specific needs.
In a market economy like ours, the role of private business as engine of economic growth cannot be underestimated. Any business to start, to continue its operation and to diversify requires capital.A promoter of the business has to contribute his/her own fund towards the equity/working capital. His own fund can be leveraged to raise capital to meet requirement of fund for civil construction of infrastructure, acquisition of machinery and equipment, which are in the nature of capital investment.
The fund raised from bank or any other financial institution is term loan for period beyond one year. Normally, debt equity ratio between promoters’ contribution as equity and term loan is 1:2, which may vary from business to business.Of course, before sanctioning a term loan, the bank does due diligence bylooking at the future cash flow of the business and other parameters like viability of the business and collateral for the loan.
Stock markets play important roles in economic development of a state or country. Two leading stock exchanges in India are Bombay Stock Exchange(BSE) and National Stock Exchange(NSE). On 5th October, cash trade in BSE was Rs.3,266.53 crores, while that in NSE was Rs.39,712.14 crore on the same day. In terms of flow of fund from investors to business, stock exchanges act as a conduit. Investors, small and big, financial institutions, pension funds, mutual funds, foreign institutional investors, speculators, insurance companies, etc. use stock market for returns and appreciation. Returns from stocks are in general much higher than the returns from term deposits though there are high risks in equity investment. Knowing the process of trading, especially online trading and with advice or knowledge of different stocks traded in the exchange, one can venture to make good money.
From the point of view of business, stock market provides space for raising fund for business by using the route of Initial Public Offering(IPO) of equity by complying the requirements of Securities and Exchange Board of India(SEBI). Fund raised from retail investors and financial institutions through equity is relatively much cheaper as compared to cost of debt for business. Reliance Industries had used the route of equity to finance a large number of their projects.
Mutual Funds are another financial products available for small investors. There are several Mutual Funds established by well-known financial institutions with different objectives. A mutual fund is a pool of funds from small investors managed by experts on behalf of the investors for a small fee. Investment portfolio of mutual funds widely vary based on percentage of exposure to equity and debt instruments.
With higher exposure to equity, higher return is expected with higher risk. Similarly, with main investment in safe government securities, the risk is much lesser while return too is less. As compared to investment in term deposits in banks and corporate debt instruments, mutual funds over a long term horizon give higher returns.
Life Insurance policies offered by various insurance companies too provide both security against risk of death and reasonable returns for a premium charged. Further, income tax rebate under section 80C of Income Tax Act upto Rs.1.50 lakhs per annum is available. General Insurance Companies provide a range of coverage against risks on payment of premium. Having a good knowledge of insurance products available for properties help in making a better choice. Vehicle insurance is mandatory for the vehicle to be on the road. In the event of accident of vehicles, the insurer compensates the loss. If one buys a nil-depreciation policy, full compensation is available.
It is good to have some knowledge about trading of derivatives. Derivatives are contracts between two or more parties, whose value are based on underlying assets. Underlying assets can be securities like equity, bond, currencies, commodities or indexes or interest rate. Forward, Future, Options and swaps are derivatives. Forward contract can play a big role for commodities produced in Manipur-pineapple, ginger, black rice, etc., as it will assure market for the produce at a pre-determined price.
It is good for both producers and processors or traders. It may be noted that forward contract is not traded in exchanges. Future contracts are traded in commodities exchanges like multi commodity exchange(MCX), Indian Commodity Exhange Limited(ICEX), etc. Recently BSE received clearance from SEBI for trading in commodity derivatives. By participating in future and option trading, an investor takes either long(buying) or short(selling) positions and can earn money. However, the investor needs good advice from experts in order to gain from derivative trading.
Lastly, I would add that it is necessary to have at least basic knowledge of finance, financial instruments and financial markets in order to participate in the game of wealth creation successfully.
Views expressed are personal.
Oinam Nabakishore Singh