Some years ago, a research study in America found that people who were financially literate were more susceptible to financial fraud than those who weren't. This 2006 study was conducted by a non-profit organisation called the FINRA Investor Education Foundation. The research discovered that people who became victims of fraudulent investment schemes had a higher score on financial literacy than those who hadn't been such victims by a statistically significant 27 percentage points. There's no equivalent Indian study that I know of, but these findings are very much what I have observed in my interactions with savers and investors in India. I think the secret lies in what is meant by the term 'financial literacy'.
Here's my argument, which is quite simple. By definition, if a person is making bad personal financial decisions, then whatever kind of knowledge he possesses is not actually financial literacy. It may be called financially literacy by those who provide it, or those who possess it. It may superficially resemble what financial literacy should be like, but it cannot actually be financial literacy. The proof of the pudding lies in the eating. If someone who has had a basic education cannot read or write, then can that actually be called education? Surely not.
However, surely there's nothing wrong with what is actually part of various financial literacy programs. People learn the basics of money, financial planning, different avenues of investment, insurance, loans, deposits, interest, etc. How can learning about these things actually make one more susceptible to financial fraud? The simplest explanation may lie in the saying 'a little knowledge is a dangerous thing'.
But there's more to it than just that. From what I've observed, there's a deeper problem with financial literacy programs. All of them focus on what the saver should do, but pay no attention to what he or she should not do. Moreover, all financial literacy programs--at least all in India that I know of--seem ideologically committed to the view that there is no fundamental behavioural problem with the various entities which are selling you financial services. This is a goody-goody view of the financial world which is based on the idea that since all personal financial services are regulated by some government regulator or the other, no harm can come upon the saver who avails of any such service. It's a no-criticism model of education, which is committed to not saying anything negative about anything which is otherwise legal.
However, this view of the world is fiction. In reality, a good proportion--perhaps a vast majority--of financial service providers have no interest except to maximise their own earnings while sticking to the minimum letter of the law. For obvious reasons, this is especially true of the sellers or distributors of products who earn money out of commissions.
It could be a stockbroker who will try and make you trade excessively, or a mutual fund distributor who will churn your portfolio to generate commissions, or it could be insurance sellers, who are often the worst offenders of the lot.
Essentially, financial literacy and the actual hard-sell techniques used by service providers is an attack vs. defence problem. The interesting thing is that those who are completely conservative about financial choices, and simply won't use financial products apart from the conventional ones that their grandparents used, are relatively immune to such problems. However, sticking to PPFs and FDs is also not a solution because what you gain on one side will be eaten away by inflation on the other.
What is needed is a kind of an aggressive, negatively-oriented financial literacy syllabus which tells people what not to do. Obviously, this won't be delivered through conventional channels. We will either learn through our own bitter experiences, or through those of others. Hopefully, this column will make some contribution to doing so.
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