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Need of Financial Education and Investor Protection

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Financial Education and Investor Protection

It is needless to say that over the last few decades, the global economy has witnessed the emergence of developing economies, increased global integration and financial innovation. These factors along with the technological innovation which includes internet and the electronic movement of money, has helped the economy grow at a reasonable pace.

Emerging market countries like India, China have witnessed fast growth in the last decade which has resulted in increasing demand for goods and services.

It is estimated that over 150 million new consumers of financial services were being added every year across the world until the financial crisis. The financial crisis taught the people about the importance of financial literacy and an appropriate framework for investor protection.

Regulatory Reforms & Financial Innovation

Following the financial crisis, there has been tremendous push for increased regulatory reforms with the objective to ensure that investors are given adequate information and have the ability to assess investment risk. The tight regulatory reforms in any manner were not meant to stifle financial innovation but only to safeguard the interest of the investors.

The increasing income levels and growing demand for financial services in this highly competitive world has led to constant financial innovation in order to meet the varied needs of investors.

There has been considerable increase in the complexity of financial products. The complexity of the products when combined with low financial literacy levels in countries like India indicated that a large number of households have difficulty in understanding the financial products, as well as the risks associated with them and as a result of which they end up losing their hard earned money.

India is a land with diverse demographic profile where currently the young population is growing at a rapid pace. It is very likely that the future generations will be more comfortable with market-linked financial products unlike their parents who are used to deal in financial products with least risk (the conservative savings method).

Financial Services in India

India’s GDP is expected to witness continued growth to reach US$ 6 trillion by 2025. The cumulative savings flow is expected to touch US$ 1 trillion, thus presenting a substantial opportunity for the growth and development of financial services in the country.

It is important that the access to basic financial services which is currently limited, be addressed, so as to ensure an increase in the retail penetration of financial services beyond the cities. For example: we can see that despite the strong growth witnessed in recent years, the share of mutual fund assets as a percentage of total GDP remains low compared to developed markets. In India it is about 14% as compared to over 70% in the US. The products like insurance, mortgage and pension too have very low penetration in the India.

Read more about Insurance Companies in India.

Ways to Increase Financial Awareness amongst the Indian Population

Under such circumstances effective investor protection and adequate financial awareness can only help in making the retail financial markets efficient and transparent.

i) The method of awareness and protection will enhance the depth of the markets as well.

ii) It is important to ensure that there is no imbalance of information and knowledge and adequate and plain disclosures are implemented while selling the financial products to the investors.

iii) The unfair practices followed by institutions needs to be checked.

iv) A clear framework covering investor rights and dispute resolution mechanisms needs to be installed.

v) Further given India’s diversity and literacy levels, the program needs to be organized regionally which will help the prospective investors gain insights about the importance of financial planning and ways to do the same.

vi) The language and concept should be simplified while imparting financial literacy to the people and it should be checked that proper visual aids are used for effective learning. Given the growing percentage of younger population, the medium used needs to be relevant which includes internet, social media and mobile.

Read aboutĀ  Role of Financial System in Economic Development.

Conclusion

Summing up we can say Financial Literacy and Investor Protection are clearly intertwined and any effort to enhance them needs to be a holistic process that takes into consideration investor interests as well the need to develop and grow the industry.

A well informed and fully aware investor base is important for a growing economy like India, as it fosters financial stability with expectations aligned with market realities.

PG

Niraj Satnalika

Niraj is an MBA in International Business (Finance). Prior to this he completed B.Tech in Electronics and Instrumentation. He is currently working with Confederation of Indian Industry (CII), Kolkata in capacity of Consultant. Satnalika is actively involved with an NGO and works towards promoting education among the underprivileged.

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