#1Education & Investor Protection IEPF Investor Education in India: its relevance and Roadmap BY: Prof. Kamakhya Nr. Singh, IEPFA Research Chair, IICA 1 Fund Authority#2Structure of Presentation Background - ▪ Status on investor education and financial literacy – global, Indian ■ Relevance of investor education . Investors' perspective • Government perspective ▪ Roadmap of investor education and financial literacy • Theoretical basis • Policy initiatives • Practical actionable points Prof. Kamakhya Nr. Singh, IEPFA Research Chair 2#3Background Process of Financial Education Achievement of Financial literacy Investor's Education Education Investor & Protection IEPF Financial well-being 3 Prof. Kamakhya Nr. Singh, IEPFA Research Chair Fund Authority#4Financial literacy is defined by OECD (Organisation for Economic Co-operation and Development) as "A combination of awareness, knowledge, skill, attitude and behaviour necessary to make sound financial decisions and ultimately achieve individual financial wellbeing" (OECD/INF, 2018) Education & Investor Protection IEPF Financial education is a 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). The process of investor education can be defined building on the OECD definition of financial education (OECD, 2005) as "the process by which through information, instruction and/or objective advice, potential and existing investors improve their understanding of investment products, concepts and risks and develop the skills and confidence to become more aware of investment risks and opportunities, to make informed choices, to know where to go to seek advice, and to take other effective actions to improve their long-term financial well-being". (OECD, 2017) Prof. Kamakhya Nr. Singh, IEPFA Research Chair Fund Authority#5Education & Financial Literacy and Financial Inclusion form a dyad, which is necessary for ensuring financial well-being of citizens in the country. Financial Inclusion, as an enabler for inclusive growth and financial well-being of Indians, is a national priority of Government of India. Though the term Financial education and Financial Literacy are not the same, these are related concepts. People achieve financial literacy through the process of financial education. Investor education/awareness is a subset of financial education and as various function/transaction of finance, such as banking, investment, insurance, pension, remittance, etc. are closely interlinked, and as it's the same individual who has to take decision for herself/himself, programmes of investor education are not solely focussed on investment, but are more encompassing, covering other aspects of finance as well. Investor Protection IEPF 5 Fund Authority#6Global status on Financial Literacy Education & Investor In the OECD/INF Global Survey of Adult Financial Literacy, 2020, where 26 countries from Asia, Europe and Latin America had participated), the average financial literacy score was 12.7 as against the maximum financial literacy score of 21 (Financial knowledge - 7, Financial behaviour - 9, Financial attitude - 5). Minimum target score for inclusion in financially literate group is: Financial knowledge - 5 out of 7, Financial behaviour - 6 out of 9, Financial attitude -3 out of 5 Minimum Target Score Financial Knowledge Fiancial attitude 53% Financial Behaviour 49% 43% Financial Knowledge Financial Behaviour Fiancial attitude Figure 1: OECD/INFE Global Survey of Adult Financial Literacy, 2020 Prof. Kamakhya Nr. Singh, IEPFA Research Chair Protection IEPF Fund Authority#7Status of Financial Literacy in India Education & Investor Protection IEPF Prof. Kamakhya Nr. Singh, IEPFA Research Chair 7 Fund Authority#8Fund Authority National Centre for Financial Education (NCFE) Report (2019) on Financial Literacy and Inclusion in India • Financial Literacy and Inclusion Survey was conducted in 2018-19 • As compared to global figure on achieving minimum target score for inclusion in financially literate group, Indian figures appear better on financial behaviour (53%) and attitude (89%), while it is slightly lower for financial knowledge (49%). • The survey found that, on an average, only 27% of Indian population was financially literate. This was higher than 2013 survey figure (of 20%). DISTRIBUTION OF RESPONDENTS QUALIFYING BY SCORES FOR COMPONENTS OF FINANCIAL LITERACY Central East North Education Investor & Protection IEPF Financial Attitude >=3 points Financial Behaviour >= 6 points % of Respondents Qualifying for Financial Knowledge Financial Literacy >= 6 points >= 15 points 5 points 9 points 8 points 88% 51% 41% 22 points 21% 92% 52% 31% 20% 91% 53% 56% 32% NorthEast 84% 47% 56% 33% South West 88% 52% 64% 30% 85% 61% 52% 37% All-India 89% 53% 49% Figure 2. Financial Literacy Score 27% (Source: Adopted from NCFE report (2019) on financial literacy) 8 Prof. Kamakhya Nr. Singh. IEPFA Research Chair#9GFLEC report (2019) based on S&P Global Survey on financial literacy Education & Protection Investor Fund IEPF Authority According to the survey conducted by the Global Financial Literacy Excellence Center (GFLEC), only 24% of the Indian adult population were found to be financially literate. This is a confirmation of the financial literacy score of Indians, which was brought out by NCFE survey as well as the IICA-IEPFA survey. 80% 60% 40% 20% 0% Major emerging economies Figure 3. Financial Literacy in BRICS Nations (Source: S&P Global FinLit Survey) Prof. Kamakhya Nr. Singh, IEPFA Research Chair 6#10IICA-IEPFA Survey on Financial Capabilities (2018) Indian Institute of Corporate Affair (IICA) carried out nation wide survey on Investor's financial capability in India on more than 11,000 households. • Out of a maximum possible score of 21, the financial literacy score for the target group was found to be 11.97. Financial Capability Financial Attitude (% of above 3)- 29% Financial Knowledge (% of 5 & above)-33% Financial Behaviour (% of 6 & above)- 56% Figure 4. Financial capability score under each category Prof. Kamakhya Nr. Singh, IEPFA Research Chair 10 Education Investor & Protection IEPF Fund Authority#11Education & Investor Protection IEPF Relevance of investor education Investors' perspective ➤ Government perspective Prof. Kamakhya Nr. Singh, IEPFA Research Chair 11 Fund Authority#12Authority Relevance of investor education - Investors' perspective Education & Investor Protection IEPF As stated in the definition of Financial Literacy, Investor/Financial education is necessary for making sound financial decisions and ultimately achieving individual financial wellbeing. Investor education is helpful for investor in making better assessment of relevance and suitability of the investment advice, investment products and services. This is really helpful, when there are numerous advisors who promise great return from investment. Thus apart from guiding investors in making investment decisions for their financial well being, investor education is required for investor protection as well. Case study - keeping FD with bank (how risky is it? - Depends, whether the FD is with SBI/HDFC or Cooperative bank like PMC) It is expected that investor education will make the investors Aware of the (financial) risks they are confronted with and be able to estimate the amount of savings and investments they will need to meet their own needs and those of their family; ■ understand the balance of risk and reward relative to saving and investment products and their costs; ■ recognise that market fluctuations are normal; and, acknowledging their own limitations, know who to trust to provide unbiased, objective advice. ■ better equipped to recognise and avoid fraud and scams. help investors, detect and avoid suspected fraudulent activity, and distinguish between regulated and non- regulated activity, all of which could reduce investor losses. As a result of sound investor education, it is expected that consumer complaints will reflect genuine breaches in consumer protection and regulation, reducing the burden on ombudsmen and consumer complaints bureaux caused by consumers misunderstanding their rights and responsibilities and increasing the speed with which genuine problems are resolved. Prof. Kamakhya Nr. Singh, IEPFA Research Chair 12#13Fund Authority Relevance of investor education - government perspective Education & Investor Protection IEPF This way, Investor education and financial literacy programs have the potential to help improve financial outcomes for retail investors. Some key benefits include more informed saving and investment decision-making, better financial and retirement planning, greater confidence and higher participation in the securities markets, greater wealth accumulation, and increased awareness of investor rights and responsibilities. (Lusardi & Mitchell, supra note 6 at 42-3) Ideally, investor education and financial literacy programs, as a complement to securities market regulation and supervision, can help address any misalignment of investor and industry interests, particularly with respect to information asymmetry. For example, investor education could potentially reduce both the propensity for investors to mis-buy investment products and services, and for intermediaries to mis-sell products and services. This could lead to fewer investor complaints. From government perspective, investor education: ■ Helps in supporting informed and effective participation of consumers in retail investment markets Encourages savvy and commensurate behaviours with a focus on the balance between short-term priorities and longer-term security. This is the case in particular when individuals and households would have available income to dedicate to long-term investments, but lack the financial literacy and confidence required to overcome the barriers Increases the levels of investments (from low to high) and/or diverts investments from unproductive assets to better yield assets (governments might wish to use investor education policies to stimulate investment in domestic capital markets to deepen the capital markets). For emerging economies in particular, encouraging participation of local investors in domestic capital markets can increase their depth and make them less dependent on external factors and more resilient to global financial shocks, as capital market development tends to lower the sensitivity of asset returns to global financial conditions (IMF, 2014). ■ Contributes to effective financial markets regulation, as educated investors can support securities markets regulators by spotting and reporting frauds and scams. Prof. Kamakhya Nr. Singh, IEPFA Research Chair 13#14Roadmap of Investor education and financial literacy ➤Theoretical basis ➤ Policy initiatives ➤ Practical actionable points Prof. Kamakhya Nr. Singh, IEPFA Research Chair Education & Investor Protection IEPF 14 Fund Authority#15Theoretical basis - Research - Literature Review Financial Education Financial literacy Education Investor Financial knowledge Financial behaviour Huston, 2010, Potrich et al., 2016 Capuano & Ramsay (2011), Widyastuti et. al, 2020 Financial Attitude Funfgeld & Wang, 2009; Rai et al., 2019 Prof. Kamakhya Nr. Singh, IEPFA Research Chair 15 & Protection IEPF Fund Authority#16Theoretical basis – IEPFA Research - Education Investor & Protection IEPF ✓ Safeguards against Ponzi scheme and financial fraud Enables digital financial transactions, which is more efficient for users as well as financial system Helps understand, manage and mitigate risks arising from making risky investment in securities market Enhances the financial resilience of individuals, especially in a crisis situation Helps in better management of Financial fragility Prof. Kamakhya Nr. Singh, IEPFA Research Chair 16 Fund Authority#17Protection Fund Authority IEPF Illustration1: Retail Investor's participation in Stock market post COVID 19 Increase in the trading volumes in inferior- quality stocks (Z category stocks), reduction in percentage of deliveries in cash segment, and exclusive dependency of investors on financial advisors/facilitators/firms in the form of distributors suggest that a lot needs to be done to augment the investors understanding of investment related risks, financial markets, financial instruments and process of investing so that their financial well-being are not compromised. Education & Investor BusinessToday.In Total number of demat accounts (in million) 55 50 47.6 46.6 44.3 45 42.2 45.3 40.9 39.6 43.2 40 41.5 40.1 35 30 Jan Feb Mar Apr May Jun 2020' Source: SEBI Jul Aug Sep Oct Figure 5. Total number of demat accounts (in million) (Source: SEBI, adopted from Business Today) Prof. Kamakhya Nr. Singh, IEPFA Research Chair 17#18Fund Authority National Strategy for Financial Education (NSFE: 2020- 2025) The National Centre for Financial Education (NCFE), in consultation with the four Financial Sector Regulators and other relevant stakeholders, has developed National Strategy for financial education 2020-2025. This strategy was approved by TGFIFL and FSDC, Ministry of Finance, Government of India. • In order to achieve the Strategic Objectives laid down by the new NSFE, it has been recommended to adopt '5 Cs' approach. Accordingly, the roadmap has been laid out for the period 2020-25. Collaboration Communication Content Education Investor & Protection IEPF Capacity Community Figure 6. 5'Cs under NSFE (2020-2025) Prof. Kamakhya Nr. Singh, IEPFA Research Chair 18#19Role of IEPFA in Investor Education and Protection Education & Investor Protection IEPF Fund Authority While institutions like SEBI have a regulatory role for security market and its investors and are empowered to take actions and steps related to protection and education of investors on their own, IEPFA plays an important role when it comes to investor education and protection of investors interest IEPFA, while administering the IEPF, facilitates investor education and protection of investor interest by: The refund in respect of unclaimed dividends, matured deposits, matured debentures, the application money due for refund and interest thereon Distribution of any disgorged amount among eligible and identifiable applicants for shares or debentures, shareholders, debenture-holders or depositors who have suffered losses due to wrong actions by any person, in accordance with the orders made by the Court which had ordered disgorgement Reimbursement of legal expenses incurred in pursuing class action suits under sections 37 and 245 by members, debenture-holders or depositors as may be sanctioned by the Tribunal and Conduct of Investor Awareness Programmes (IAPS) for investors to enlighten them about issues related to finance about which they needful to be mindful and watchful Prof. Kamakhya Nr. Singh, IEPFA Research Chair 19#20Implementation of NSFE from IEPFA perspective Education Investor & Protection IEPF Fund Authority For implementation of NSFE (2020-25), IEPFA has prepared its own indicative action plan. A few of the actionable points are as under: ✓Dashboard of Programmes on investor education-Have a dashboard to digitally collect data (through online and automated mode) on all the IAPS conducted across country. Nationwide contest/competition to promote investor/financial education - it can be planned to work with NCFE for using the system and question bank of National Financial Literacy Assessment Test (NFLAT) ✓ Programme for School principals - It can be planned to work with CBSE/ICSE and conduct nationwide online half-day programme of financial education for school principals. ✓Install DSS (digital display) and kiosks in partnership with banks like ICICI, Kotak Bank and Indusind Bank at prominent colleges and schools. ✓ Establishment of Media Manager Cell: (i) Actively driving financial literacy campaigns on Social Media focusing on providing social media updates. (ii) Creation of Chatbots on the Portal which act as guiding points of reference to the investors in case of grievances and related procedures, (iii) Development of Mobile applications related to Investor Awareness ✓ Use of short training programmes and material for conducting IAPS: ✓ Development of Model Code of Conduct and Procedural Guidelines to be Followed by Resource Persons (RPs) ✓ Carry out action research with focus on the issues related to financial markets, aspects related investor well being and other areas of interest as per requirements of regulators/stakeholders. 20 Prof. Kamakhya Nr. Singh, IEPFA Research Chair#21Illustration 2: Operationalize the strategy of popularizing digital financial transaction in rural areas 1. Emphasis on the rural regions for penetration of financial transaction 2. Sensitization of the stakeholders - decision makers - in the rural regions of India Identification of Gram Panchayat and enrollment of Panch/Member of GP with the help of DMs in respective district Online training of the beneficiaries through Industry & academic experts Collaboration with different ministries and agencies for building capacity and skill (OUR MODEL) MORD Ministry of Panchayati Raj MEIT NPCI MoF Bank Mitra Bank Sakhi 3. Mainstreaming the programme using network of low cost trainers like NRLM/SRLM Asha and Anganwadi workers 4. Empowerment of women - as SRLM women bank sakhi get involved Prof. Kamakhya Nr. Singh, IEPFA Research Chair Education Investor & Protection IEPF Fund Authority#22Fund Authority Illustration 2: Emphasizing more on usage of digital financial services especially in the current scenario of COVID19 ADBI (2020) working paper in the context of South Asia And Sub-saharan Africa found that financial and digital literacy are key factors to building inclusiveness and financial resilience. Kaiser, Lusardi & Menkohoff (2020), seeking evidence from a meta-analysis of 76 randomized experiments, found a positive impact of financial education programmes on financial knowledge and downstream financial behaviour. IEPFA working paper (2020) Mainstreaming Digital Financial transaction COVID 19 Crisis Financial Education Education Investor & Protection IEPF Figure 7. Mainstreaming digital financial transaction through financial education under COVID 19 Prof. Kamakhya Nr. Singh, IEPFA Research Chair 22 22#23How to do it????? 1. Encourage digital financial transaction by providing incentives, prizes, cashback, etc. Very recent scheme of PM Svanidhi Yojana has recently come out with incentivization of digital financial transaction made by street vendors of India. If the street vendors make repayments of their PM Svanidhi Yojana loan through digital means, they get back a part of the interest chargeable on their loan! CASH BACK CASH BACK CASH BACK 2. It is important for these financial education programmes to focus more on "doing" aspects rather than just "classroom teaching/studying" aspects. Doing aspect could be actually carrying out digital transfer of small amount of fund amongst the group members. Prof. Kamakhya Nr. Singh, IEPFA Research Chair Education Investor & Protection IEPF Fund Authority#24Fund Authority Way Forward Education Investor & Protection IEPF Given the population of India (indicative of demand and requirement of financial education) and varied requirement of different segment of population on one hand and the number of agencies (indicative of supply/provision of financial education) conducting programmes of financial education, whose efforts are many a times duplication of energy, resources and effort on the other hand, it's important that all the stakeholders need to make joint effort in creating a bigger impact through programme of financial education than would be possible, if the agency/institutions were to continue working on their own. As an indicative roadmap, to further strengthen the impact and scope of programmes on investor education and protection, programmes and projects can be considered to 1) Catch young - focus on school and college - provide basic financial education at the earliest so that they are protected from making serious mistakes in taking financial decisions 2) Reach diverse segment of population, based on regions (rural, urban-slums, etc.), gender (women), occupation (farmers), income level (low income), keeping their needs 3) Use technology in making programmes of financial education efficient and scalable 4) Work in partnership with wider set of international/national organization/stakeholders, who have similar aims 5) Promote digital financial transaction to not only support government initiatives but also change the behaviour of users of financial transaction in making it more efficient 6) To undertake path-breaking research to gain insight into developing better understanding of financial education and financial inclusion, while carrying out policy changes in the area related to investor education and protection. Prof. Kamakhya Nr. Singh, IEPFA Research Chair 24#25THANKS Prof. Kamakhya Nr. Singh, IEPFA Research Chair Education & Investor Protection Fund IEPF Authority 25 25