Statistics show that in 2015 youth literacy rate in India stood at 90.2%. It exceeds the world average rate of 89.6% (2010) and is way ahead of most of its neighbouring countries. Although, it feels great to see the rate of literacy soaring in India yet it stings to find that most Indians are “Credit illiterate”. In the sense, most Indians have no knowledge about what credit is, how it can be used, why you should be careful about your credit scores etc. This blurs their vision about what financial options are available and disables them from taking well informed decisions. Bottom line, credit literacy is a must to be able to manage your finances well.
India is a huge country and given its demographics, managing its economic needs is an enormous challenge. Alongwith this, India is also a huge market for goods and services and therefore, credit opportunities are galore. A lot of people residing in semi-urban and rural India have absolutely no knowledge about “credit”.
According to a recent survey done by S&P, in India more than 76% of Indian adults were “financial illiterate” and knew nothing about simple every day concepts like inflation, compound interest, financial risk and its diversification etc. This can pose a huge threat to the economy as due to lack of information people are not using various financial options to their full potential.
The apex banking body has taken cognizance of the lack of knowledge about credit in India. One of its challenges is to educate people on why credit must be used and how it can benefit them. About seven years ago it came up with the concept of “Financial Literacy and Credit Counselling Centres” and “Financial Literacy Centres” to reach out to the masses. It was done in tandem with banks to reach the remotest parts of India and explain the benefits of credit to general public in various states. In rural areas, FLCs were handled by agricultural bankers. A lot of farmers feared that FLCs will turn into debt collection centres and avoided them. Therefore, now RBI itself is involved in getting the material printed in regional languages and having it distributed among people through banks.
The bigger challenge is to draw people out of their comfort zones and make them experiment with newer financial alternatives. When more people are willing to take up credit and use it for purchasing, spending or enterprising it leads to a multi fold effect in the economy such as the velocity of cash flow in the economy increases, more jobs are created, investor & consumer confidence improves, higher GDP, higher economic growth and lower fiscal deficit. In a few words, it gives a huge boost to the economy. Thus, credit literacy helps at the micro as well as at the macro level.
No, we are not going to talk like an ophthalmologist. In reality, people still have a myopic attitude in planning for future financial needs. Gaining knowledge on how you can use debt and other financial tools to your advantage will give you a perfect 20/ 20 vision. It’s essential to plan for your future monetary requirements and invest in various financial instruments accordingly. For example, a lot of people underestimate their financial needs post retirement. Thereby, they end up falling short of funds and are pushed to sell their homes. Instead of selling their house, older people can take a reverse mortgage loan in which repayment of principal or interest is not required until the borrower lives.
Similarly, a lot of people sell valuable possessions to meet their medical expenses. Instead they could invest in a family health insurance policy to take care of all medical needs. This is how financial literacy helps. It gives you knowledge of easier options which you may not be aware of.
CIBIL and Credit Scores
Credit Information Bureau (India) Limited was set up with a view of an authority maintaining records of an individual’s loan repayments. It uses a proprietary formula to calculate the credit score of a person. Credit scores in India are interchangeably referred to as CIBIL scores. It is vital to know about CIBIL and your CIBIL scores because your score is instrumental in assessing your eligibility of a loan. Even if you would like a simple credit card, the bank does a background check of your credit history and credit score. Only if the score is well within their permissible limits, guided by their internal policy, then a loan is approved or else a poor score can shatter your credit desires.
Incase, you were ignorant about the existence of your scores up till now and are wondering on what are the ways to improve credit score fast, then you can read more about it on our blog. You will find a lot of helpful articles and handy tips.
In a Nutshell
The need of the hour is to take a pragmatic view of credit and its benefits, both at the microeconomic and macroeconomic level. Our great nation will not be able to free itself from the clutches of economic challenges, unless its people learn the various aspects of using credit wisely. It can be easy to go overboard with borrowed money, thus learning about the perils of credit is equally important. Financial literacy enables well informed financial decisions, which in turn leads to better standard of living and greater financial confidence.
Let us not perplex a topic simple in itself. Being credit literate is as important for the growth of the nation as a good monsoon.