RIS Discussion Paper Series

Financial Literacy across

Different States of India:
An Empirical Analysis

Priyadarshi Dash & Rahul Ranjan

Discussion Paper # 286

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 Financial Literacy across
Different States of India:
An Empirical Analysis
Priyadarshi Dash & Rahul Ranjan

RIS-DP # 286

November 2023

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Financial Literacy across Different States
of India: An Empirical Analysis
Priyadarshi Dash* & Rahul Ranjan**

Abstract: The paper examines the extent of financial literacy levels across
states, sectors, educational levels, and income groups. The paper also evaluates
the relationship between financial literacy and saving/investment behaviour,
and analyses the determining factors of financial literacy in India. For that, we
use the National Sample Survey (NSS) 77th round of unit-level data of ‘All
India Debt & Investment Survey (January-December, 2019)’. The result shows
that 33 per cent and 29 per cent of the rural and urban population respectively
do not have any bank account, credit/debit card and e-wallet. It also highlights
that Assam, Bihar, Manipur, Nagaland, and Uttar Pradesh need to catch up with
the other states and the national average. Logit regression result indicates that
education level, income and self-employed workers are the important factors
for determining financial literacy in India.
Keywords: Financial Literacy, Saving, Investment

Introduction
Since the 1991 economic reforms, India’s economic and financial
landscape has evolved significantly. As a result, the economy has become
more diverse, with new prospects of growth, marked with significant
developments in the financial sector. The financial sector provides a wide
range of products with sophisticated features and services (IMF, 2005).
These services should reach ordinary people in the most cost-effective
manner. In recent years, interest in understanding financial literacy has
grown across all countries (OECD, 2020). Financial literacy not only
improves people’s lives but also contributes to a country’s economic
growth and development (Hogarth, 2006; Jariwala, 2015; Lusardi, 2019).

* Associate Professor at RIS, New Delhi; Corresponding Author: Email: [email protected]

** Formerly Consultant at RIS, New Delhi.
The authors thank Professor Sachin Chaturvedi, Director General, RIS for valuable
comments on an earlier version on the paper.

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The financial system in a developing country like India aids economic
development through channelising savings into investments through
efficient financial intermediation (Willis, 2008; Ribaj and Mexhuani,
2021). The depth of domestic financial markets enables this efficient
mobilization of savings for capital formation. It also enables a person to
make sound and effective financial decisions by understanding finances,
which improves one’s financial situation as well as the overall economy
of a country (Kaur, Vohra and Arora, 2015). Financially educated people
are regarded to have positive macroeconomic effects, both within a
country and potentially globally (OECD, 2015). Recognizing the growing
importance of financial literacy, the OECD/INFE developed a National
Programmes for Financial Education Policy Handbook in 2014 to assist
governments throughout the world in creating and executing national
financial literacy programmes (Davies, 2015; OECD, 2015).

Financial literacy is a weapon in the hands of individuals to improve

their financial status and well-being by making informed decisions in
creating household budgets, saving plans, managing debt, planning
for life cycle needs, and dealing with unexpected emergencies without
incurring unnecessary debts (Lusardi and Mitchell, 2011; Lusardi, 2019).
In India, this form of financial literacy is vital for increasing financial
inclusion and financial stability among disadvantaged households. A
financially literate person may make good use of financial products and
services (Joshi, 2013; ADB, 2022). Likewise, financially knowledgeable
consumers can endure adverse economic times because they have saved
enough money, purchased insurance, and diversified their investments
(Lusardi & Mitchell, 2014).

This study attempts to understand the state of financial literacy in

India and household behaviour toward savings and investment. The main
objective of the study is to estimate the financial literacy across states,
sectors, educational levels, and income groups. The study examines the
relationship between financial literacy and saving/investment behaviour,
and the determining factors of financial literacy in India. The paper is

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organised as follows. Section two captures the trends and perspectives on
financial literacy from the literature. Section three examines the empirical
evidence of financial literacy and the relationship between financial
literacy and financial behaviour. Section four deals with the determinants
of financial literacy in India and section five concludes the paper.

Definitions of Financial Literacy

Literature on financial literacy has grown significantly over the years
covering a wide spectrum of issues ranging from measurement to its
role in financial inclusion. There is no formal definition of financial
literacy; it has been used interchangeably in various studies with terms
such as financial competence, financial empowerment, debt literacy,
financial knowledge, and economic literacy (Musah et al., 2022). Various
definitions used in major studies emphasise on knowledge and the
ability to make financial decisions to attain a desired outcome, such as
lifetime financial security, as well as the skills required achieving those
outcomes. In general, financial literacy is characterized as familiarity
and understanding of rewards and risks involving financial decisions.
It is primarily concerned with personal finance that enables individuals
to take effective action to increase general well-being and prevent
financial distress. The term “financial literacy” originally emerged from
NatWest Bank-commissioned report for the National Foundation for
Educational Research (NFER) in 1992 (Coben, Dawes and Lee, 2005).
It entails intimate knowledge of financial concepts such as savings
account, compound interest, financial planning, credit card mechanics,
advantageous savings methods, consumer rights, time value of money
as well as the knowledge of making proper decisions about certain
personal finance areas such as real estate, insurance, investing, saving,
tax planning, and retirement.

As part of global efforts to enhance financial literacy, the

measurement of financial literacy assumes significance. Various
dimensions of financial knowledge of individuals have been employed to
measure the level of financial literacy. The World Bank has traditionally

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relied on cross-country consumer financial awareness surveys, whereas
the OECD mostly used cross-country high-level financial literacy criteria.
In the simplest form, it refers to the working knowledge of money and the
ability to make intelligent decisions concerning the use and management
of money (Schagen and Lines, 1996; Hilgert, Hogarth and Beverly, 2003).
It is observed that financial decisions would need a working knowledge
of fundamental economic principles as well (Lusardi and Mitchell, 2008).
At the same time, others stress on practical experience as the foundation
for financial literacy and other aspects of financial understanding (Moore
2003). Lewis (2006), Huston (2010) and Remund (2010) echo similar
stand by putting emphasis on the basic knowledge of individuals about
various financial tools and their application in business and personal life.
Lusardi and Mitchell (2008) list some more attributes of financial literacy
such as the understanding of how interest compounding works, the
fundamentals of risk diversification, and the distinction between nominal
and real values. Similarly, Mandell (2007) underlines the importance
of the ability to evaluate fresh and complex financial instruments and
make defensible decisions about those instruments to employ in their
long-term interests.

In nutshell, financial knowledge can be distinguished from general

information, which many people believe is necessary for financial literacy.
In fact, financial literacy is a result of actual financial performance rather
than a subject that is taught and measured in laboratory settings. It is
the product of both formal and informal learning that occurs inside as
well as outside of the classroom. Researchers have observed that when
projecting hypothetical consequences of investment tasks, finance-
specific information is more effective than general knowledge (Hung,
Parker and Yoong, 2009). Cognitive abilities including multiple types
of knowledge often complement each other (Stanovich and West, 2000;
Jenson, 1998). Financial education is the greatest technique to acquire
financial knowledge and competencies (PACFL, 2008). As a result, the
concept of financial education should be strongly associated with the
promotion of financial literacy. In that sense, the most acceptable road

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to increasing a target population’s financial stability is a contextualized
approach to financial literacy instruction, one that blends fundamental
sensitivities to a certain region, and cultural, institutional, and ideological
antecedents. As a result, it should be acknowledged that extensive
research and analysis of specific regions are required for the formulation
and implementation of financial education courses. Table 1 summarises
the various definitions of financial literacy used by the authors globally
and in India. Figure 1 shows broad indicators for financial literacy.

Figure 1: Dimensions of Financial Literacy

Financial Knowledge

Financial Literacy Financial Attitude

Financial Behaviour

Source: Drawn by Authors.

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 Table 1: Indicators of Financial Literacy
Sl. No Author Indicators
Global
Hilgert, Hogarth, and
1 Beverley (2003)
Financial Knowledge

Financial Knowledge, Financial

2 Moore (2003)
Behaviour
Financial Knowledge, Financial
3 PACFL(2008)
Behaviour
Atkinson and Messy Financial Knowledge, Financial
4 (2012) Attitude, and Financial Behaviour
Financial Knowledge, Financial
5 World Bank (2012)
Behaviour and Financial Skill
Financial Knowledge, Financial
Behaviour, Financial Experience,
6 Dewi et al. (2020) Financial Awareness, Financial
Skills, Financial Capability,
Financial Goal
Financial Awareness, Financial
7 OECD/INFE (2012) Knowledge, Financial Attitude, and
Financial Behaviour
Rooij, Lusardi and Interest Rates, Inflation, and Risk
8 Alessie (2011) Diversification
Arrondel, Debbich and Interest Rates, Inflation, and Risk
9 Savignac (2013) Diversification
Klapper, Lusardi and Inflation, Interest Rates, Compound
10 Oudheusden (2015) Interest, and Risk Diversification
Compound Interest, Inflation,
Sayinzoga, Bulte, and
11 Lensink (2014)
Interest Rates, and Risk
Diversification
India
12 Gaurav and Singh (2012) Financial Aptitude, Debt Literacy
Financial Knowledge, Financial
13 NCFE (2013 & 2019)
Attitude, and Financial Behaviour
Continued...

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Continued...
Thomas and Subhashree Financial Knowledge, Financial
14 (2020) Attitude
Ghosh and Günther Financial Knowledge, Financial
15 (2018) Attitude, and Financial Behaviour
Interest Rates, Inflation, and Risk
16 Aggrawal et al.(2015)
Diversification
Kiliyanni and Sivaraman Financial Knowledge, Financial
17 (2016) Attitude, and Financial Behaviour

Source: Authors’ compilation from various sources.

Pattern of Financial Literacy in India

Besides the individual experience of people engaged in various banking
and financial transactions on their own, financial literacy in India has
been mainly steered through policies and programmes on financial
inclusion by the union and the state governments. There have been several
advancements in India’s financial inclusion landscape since the launching
of the country’s first National Strategy for Financial Inclusion (NSFE)
in 2013. The latest in the series was the NSFE 2020-2025 launched in
August 2020 which advocated a 5C (Content, Capacity, Community-led,
Communication and Collaboration) for spreading financial education in
the country. In addition, the Government of India has introduced several
programs/initiatives such as Pradhan Mantri Jan-Dhan Yojana (PMJDY),
Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY), Pradhan Mantri
Mudra Yojana (PMMY), Pradhan Mantri Shram Yogi Maan Dhan Yojana
(PM-SYM), Atal Pension Yojana (APY), Pradhan Mantri Suraksha Bima
Yojana (PMSBY), and Pradhan Mantri Kisan Maan Dhan Yojana (PM-
KMY) for increasing financial inclusion in the country. These programs
not only integrate excluded populations into the mainstream but also
give them access to a variety of financial services offered by national
commercial banks, private commercial banks and financial institutions.
According to the World Bank’s Findex 2021 Report, the number of adults
in India possessing a formal bank account has climbed from 35 per cent in
2011 to 53 per cent in 2014, and 80 per cent in 2017 (World Bank, 2021).

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 The Reserve Bank of India (RBI) is involved in financial literacy
efforts and campaigns. RBI conducted a survey titled “Financial Literacy
and Inclusion Survey” in 2019 to evaluate the levels of financial
literacy among the adult population3 and to examine variations across
geographical regions/states, locations, and various socio-economic
categories of the responding population. The first round of the survey was
conducted in 2013 and RBI used the same methodology to define financial
literacy as proposed by OECD. Ghosh and Gunther (2018) undertook
a survey in 2016 to examine financial literacy in India. They defined
financial literacy in India using financial knowledge, financial attitude,
and financial behaviour by using four financial attitude questions, seven
financial behaviour questions, and four financial knowledge questions.
They assigned the weight of 27 per cent each to financial attitude and
financial knowledge, with the remaining going to financial behaviour.
Likewise, Gaurav and Singh (2012) used only two indicators of financial
aptitude and debt literacy to define financial literacy whereas Aggrawal et
al. (2015) used the methodology proposed by Rooij, Lusardi and Alessie
(2011) to define financial literacy in India.

Overall, financial literacy can be estimated based on financial

knowledge, financial behaviour, and financial attitude. Accordingly, our
study uses financial behaviour to estimate the extent of financial literacy.
Financial behaviour covers the indicators capturing whether household
members have deposit accounts, credit/debit cards, and an e-wallet. We
consider four levels of financial literacy- illiterate, elementary, moderate,
and advanced in our paper to gauge the progress in financial education
in the country. If the household members have only deposit accounts in
commercial banks/RRB/Co-operative banks, then they are considered in
the elementary range of financial literacy. If the household members have
both deposit accounts in a commercial bank/RRB/Co-operative bank and
hold a credit/debit card, then they are considered in moderate level of
financial literacy. If the household members have all the three e.g. deposit
accounts, credit/debit cards, and e-wallets, then they are considered at
advanced level of financial literacy. If the household members do not

8
have any of those e.g. bank account, credit card and e-wallet, then they
are considered financially illiterate. The proportion of individuals in
different categories of financial literacy by states and union territories
in rural and urban areas are presented in Appendix A & B. Based on the
above mentioned three indicators- deposit accounts, credit/debit cards and
e-wallets, finally, a Financial Literacy Index (FLI) for different states of
India is estimated using the formula employed for computation of Human
Development Index (HDI).The formula is expressed as the following:

FLI = Average of three indicators calculated as:

The Financial Literacy Index ranges from 0 to 1. FLI value close

to ‘1’ indicates a good performer and ‘0’ depicts the worst performer.
Further, FLI has been categorised into low, medium, and high for
capturing spatial variations in financial literacy. If the FLI value is less
than or equal to 0.33 is considered a low performer, the value ranging
from 0.34 to 0.53 as medium performer, and the value is greater than or
equal to 0.54, is considered a high performer.

Table 2: Financial Literacy Index (FLI) across States

Low (<=0.33) Medium (>=0.34 to <=0.53) High (>=0.53)

Rural India
Arunachal Pradesh, Andhra Pradesh, Chhattisgarh, Chandigarh,
Assam, Bihar, Gujarat, Haryana, Jammu & Delhi, Goa,
Jharkhand, Manipur, Kashmir, Karnataka, Madhya Himachal
Meghalaya, Pradesh, Maharashtra, Pradesh, Kerala,
Nagaland, Uttar Mizoram, Orissa, Punjab, Pondicherry
Pradesh Rajasthan, Sikkim, Tamil
Nadu, Telengana, Tripura,
Uttaranchal, West Bengal

Continued...

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Continued...
Urban India
Assam, Bihar, Andhra Pradesh, Arunachal Chandigarh,
Manipur, Meghalaya, Pradesh, Chhattisgarh, Goa, Himachal
Mizoram, Nagaland, Delhi, Gujarat, Haryana, Pradesh,
Uttar Pradesh Jharkhand, Kerala, Madhya Karnataka
Pradesh, Maharashtra,
Orissa, Pondicherry, Punjab,
Rajasthan, Sikkim, Tamil
Nadu, Telengana, Tripura,
Uttaranchal, West Bengal
Source: Authors’ estimation based on data from NSS 77th round of the All India Debt and
Investment Survey.

Table 2 illustrates the distribution of states as per their FLI values

in rural and urban India. The FLI values for all states and union territories
are given in Appendix C. The common finding across rural and urban
areas in the majority of the states displays a pattern that the level of
financial literacy falls in the medium range. In other words, people
in large areas have an operational bank account along with a debit or
credit card. Chandigarh, Goa, and Himachal Pradesh are among the top
performers in financial literacy as people living in both rural and urban
areas of these states are at relatively advanced stage of financial literacy.
In Delhi, Kerala, and Pondicherry, people in rural areas possess a high
level of financial literacy while their counterpart in urban areas of the
state has a medium level of financial literacy. In Karnataka, urban areas
exhibit a high level of financial literacy while rural areas in the state fall
at the medium level. This could be because Karnataka is one of the most
important centers of the information technology (IT) industry in India
and most of the IT firms are located in urban areas of the state.

At the same time, a worrying trend has been observed for some
states for whom the level of financial literacy in both rural and urban
areas is low. Those states include Assam, Bihar, Manipur, Nagaland, and
Uttar Pradesh. In some states like Arunachal Pradesh and Jharkhand, the
level of financial literacy in rural areas is low while for the urban areas it
is medium. Similarly, a reverse trend is observed in the case of Mizoram

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as rural areas of the state have medium level of financial literacy while
their urban counterpart has a low level of the same.

Urban areas are hubs of economic activity; hence people have higher
levels of education and relatively higher income compared to the rural
population. As commercial hubs, branch banks are inevitably more in
numbers in urban areas. More than 90 per cent of the urban population
of Chandigarh possesses a high level of financial literacy. Goa has more
than 60 per cent of its urban population as highly financially literate
while it is 40 per cent and 20 per cent for Karnataka and Himachal
Pradesh respectively. It also reveals an interesting fact that the majority
of the urban population is on the upper threshold of a medium level of
financial literacy. In Delhi, more than 95 per cent of the urban population
possesses moderate level of financial literacy and the value of financial
literacy is close to 0.54, whereas more than 60 per cent of the urban
population in Pondicherry are at a moderate level. This implies that the
urban population in Delhi and Pondicherry shows an upward tendency
in achieving financial literacy. Figure 2 illustrates the level of financial
literacy based on the size of urban population.

Figure 2: Urban Population and Financial Literacy

Source: Authors’ estimation based on data from NSS 77th Round of the All India Debt and
Investment Survey.

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Education is commonly believed to be positively associated with the
financial knowledge of individuals. Table 3 presents financial literacy
according to the level of education. Data in the table substantiates the
commonsensical perception of the relationship between education and
financial literacy. The proportion of financially illiterate individuals
(that is those who do not have either of the following; deposit bank
account, debit/credit card, and e-wallet) declines consistently as the
level of education goes up. For instance, 43.2 per cent of illiterate
persons are found financially illiterate as well. Overall, the level of
financial illiteracy shows a consistently declining trend with the rise in
the level of education. In other words, only 0.12 per cent of illiterate
individuals are found at an advanced level of financial literacy while
29.6 per cent of graduates and above are highly literate.
Table 3: Financial Literacy by Education
Financial Literacy (%)
Education Elementary Moderate Advanced Illiterate
Illiterate 48.31 8.37 0.12 43.19
Primary 44.17 16.74 0.61 38.48
Secondary 41.99 35.92 6.32 15.78
Diploma 24.71 48.65 20.22 6.42
Graduate &
Above 21.01 44.43 29.56 5.00
All 42.8 20.8 4.23 32.17
Source: Authors’ estimation based on data from NSS 77th Round of the All India Debt and
Investment Survey.

Trends in elementary and moderate levels of financial literacy

display similar patterns as mentioned above. Elementary level of financial
literacy goes down with the rise in education. About 48.3 per cent of
illiterates fall in the intermediate category while the figure falls to 21
per cent for graduates and above. Likewise, 8.4 per cent of illiterates are
moderately financially literate while 44.4 per cent of graduates and above
possess a moderate level of financial literacy. It implies that increasing the

12
level of education provides the necessary knowledge of using relatively
advanced financial tools and services.

On the whole, the majority of individuals possess an elementary

level of financial literacy (42.8 per cent) whereas 20.8 per cent of people
are moderately literate. One cannot overlook the fact that despite varying
levels of education in different parts of the country, 32.2 per cent of them
are still financially illiterate and only 4.2 per cent of them have advanced
levels of financial literacy. It signals the need of streamlining financial
education for achieving financial inclusion and efficient mobilization of
domestic financial services.

Table 4: Financial Literacy by Income

Financial Literacy (%)
Income Groups Elementary Moderate Advanced Illiterate
Quintile-1 (Bottom) 51.33 15.79 1.38 31.49
Quintile-2 46.22 17.45 1.63 34.71
Quintile-3 44.86 19.67 2.48 32.99
Quintile-4 39.86 23.74 4.24 32.16
Quintile-5 (Top) 31.62 27.39 11.42 29.57
Total 42.80 20.80 4.23 32.17
Source: Authors’ estimation based on data from NSS 77th Round of the All India Debt and
Investment Survey.

The relationship between income and financial literacy is presented

in Table 4. We have formulated quintiles depending on the level of
income. Quintile 1 indicates the lowest income group while quintile 5
is the highest income group. Quintiles 2, 3, and 4 belong to the middle-
income group. The proportion of elementary financial literacy shows
a consistent declining trend as we move up the income quintile. For
example, 51.3 per cent of individuals in quintile 1 have an intermediate
level of financial literacy while the corresponding share is 31.6 per cent
for quintile 5. On other words, moderate and advanced level of financial

13
literacy show a consistent rising trend. About 15.8 per cent of people in
quintile 1 are moderately literate which increases to 27.4 per cent in the
case of quintile 5. The positive relation between income and financial
literacy could be probably attributed to the increased familiarity of
individuals involving a rise in the variety of financial transactions as an
increase in income is often associated with increase in the expenditure.
It may also enhance exposure of individuals to cashless transactions,
e.g. Debit cards, credit cards, e-wallets, etc. paving the way for higher
financial literacy.

From Tables 3 and 4, it is clear that there has been steady progress
in financial literacy across states by all major attributes e.g. education,
income and employment types. However, a lot remains to be done as
close to 30 per cent of individuals across various income quintiles appear
to be financially illiterate.

Table 5: Financial Literacy by Employment Types

Financial Literacy (%)
Household Types Elementary Moderate Advanced Illiterate
Self-Employed 45.63 19.64 3.12 31.61
Regular 31.54 29.39 10.65 28.42
Casual 45.19 17.62 2.19 35.00
Total 42.80 20.80 4.23 32.17
Source: Authors’ estimation based on data from NSS 77th Round of the All India Debt and
Investment Survey.

There is a close relationship between income and the nature of

employment. In simple words, those who have regular employment tend
to have a stable source of income which, in turn, would push financial
literacy up, as discussed above. Households have been classified as self-
employed, regular, and casual according to the nature of employment of
their members or primary breadwinner. It is evident from Table 5 that
the majority of households who are either self-employed or casually
employed have an intermediate level of financial literacy; 45.6 per cent
and 45.2 per cent respectively. For these two categories, only 3.1 per

14
cent and 2.2 per cent of households are found with advanced level of
financial literacy. Likewise, 31.6 per cent of self-employed households
and 35 per cent of causally employed households are financially illiterate
indicating that self-employed and irregularly employed households still
lack required financial skills. These trends highlight the uneven flow of
income for people in those categories, besides it might be indicative of
irregularity of income. Casual workers generally work temporarily or on
daily wages. They also tend to move from one place to another in search of
job opportunities and hence they are unable to maintain bank accounts or
debit/credit cards. Consequently, they mostly end up transacting in cash.

Regularly employed households have a stable source of income

which is also marked by certainty. Therefore, they can plan their
expenditure and ration the same accordingly. They are primarily the
ones who engage in savings and investment; hence tend to have higher
levels of financial literacy as compared to self-employed and casual
households. Although 31.5 per cent are still having elementary level of
financial literacy, about 40 per cent regularly employed households are at
least moderately literate and above. In relative terms, regularly employed
households are better placed as compared to the other two categories of
employment across various levels of financial literacy.

Financial Literacy and Investment Behaviour

As mentioned above, it is desirable that people must develop financial
knowledge and abilities to make appropriate investing decisions (Seraj,
Alzain and Alshebami, 2022). The maturity of financially literate
people would reflect in the quality of decisions pertaining to various
investment decisions (Kumari, 2020; Stolper and Walter, 2017). The
practice of managing difficult circumstances while investing is known
as investment decision-making. In this cognitive process, people choose
the best options from among all conceivable outcomes. Very often,
people are unable to make investment decisions based on their financial
means. Thus, choosing the optimal investment type is thus a challenging
aspect of making investment decisions (Raut, 2020). Behavioural finance
discusses how investors react to diverse market information sources.

15
Investors occasionally make erroneous financial decisions and may not
always make sensible decisions. The behavioural finance underlines the
importance of investor behaviour is causing various market oddities (Putri
et al., 2022). This could be regarded as an aptitude or attitude. However,
it is also important to know whether attitudes translate into behaviour.
Individuals generally invest in mutual funds, shares of companies or
cooperative societies, and bonds/debentures of companies. Table 6
depicts whether the level of financial literacy explains the investment
behaviour of individuals or not.

Table 6: Investment Behaviour across Levels of Financial Literacy

Type of Financial Assets (%)

Level of
Financial Debentures/ Shares in
Mutual Shares in
Literacy Bonds in Co-operative
Fund Companies
Companies Society
Elementary 28.7 50.3 1.2 19.8
Moderate 66.5 27.5 0.2 5.8
Advanced 75.5 22.1 0.4 1.9
Illiterate 8.5 69.5 0.0 22.1
All 68.4 26.4 0.4 4.8
Source: Authors’ estimation based on data from NSS 77th Round of the All India Debt and
Investment Survey.

It is quite clear from Table 6 that mutual funds and shares in

companies are the preferred investment assets for the households. Around
68.4 per cent of investments take place through mutual funds while
investment in shares of companies stands at a distant second position
(26.4 per cent). Another notable trend is that a large number of individuals
do not prefer to invest either in bonds/debentures of companies or in
shares of co-operative societies, only 0.4 per cent in the former while 4.8
per cent in the latter. Investment pattern in mutual funds is particularly
striking. The proportion of investment in mutual funds is directly related
to the level of financial literacy, as investment increases with a rise in
the level of financial literacy. For instance, 28.7 per cent of individuals

16
having elementary level of financial literacy invest in mutual funds while
the corresponding figure for moderate and advanced level stands at 66.5
per cent and 75.5 per cent respectively. Investments in mutual funds are
closely linked with volatility in the financial market. This underscores
the importance of knowledge of current economic and financial trends
for taking investment decisions. Perhaps that prompts the people with
advanced level of financial literacy tend to invest in mutual funds as they
are able to understand the risks involved with those decisions. Muller
and Weber (2010) empirically verified the positive association between
level of financial literacy and investment in mutual funds.

On the other hand, it is observed that shares of companies, followed

by co-operative societies are the most sought-after investment destination
for households having elementary levels of financial literacy or even for
those who are financially illiterate. In fact, 69.5 per cent of financially
illiterate individuals invest in shares of companies while 50.3 per cent of
those having an elementary level of financial literacy do so. Likewise,
19.8 per cent of elementary and 22.1 of financially illiterate households
invest in shares of cooperative societies. While there could be multiple
reasons behind such investment decisions, safety of investments and
assured return often dominate household investment decisions. People
believe that reputed companies and cooperative societies are less likely
to be bankrupt or less likely to suddenly stop their operations. Hence,
financially illiterate or moderately literate households who are found
risk averse have a natural tendency to invest in shares of companies or
cooperatives.

Financial Literacy and Financial Assets

People generally invest to build assets that can be leveraged in
circumstances of need. People plan to manage the situations that
will unfold in the later part of their lives. Accordingly, they seek to
build financial assets which can be monetised in times of need. The
influence of financial literacy on those decisions is amply supported
by the available data. It has been demonstrated that financial literacy
has an impact on borrowing, debt management, and investment, as well

17
as savings behaviour. Additionally, studies demonstrate a correlation
between financial literacy and wealth. People with relatively advanced
level of financial knowledge are more likely to make retirement plans.
This is probably because they are better at mathematics and are more
likely to understand the value of interest compounding (Mitchell and
Lusardi, 2015; Lusardi, 2019). Table 7 presents interesting findings
on the link between financial literacy and financial assets. Overall, a
whopping majority of individuals in India are found preparing themselves
to meet the needs of the future even if it requires foregoing present
opportunities. Besides, they also plan for their retired lives and some
unforeseen emergencies which is why people invest in provident funds
and pension funds. About 56.5 per cent people with varying understanding
of financial matters have life insurance whereas 27.1 per cent maintain
saving deposits and 14.8 per cent have investments in pension funds or
provident funds. More than half of individuals across levels of financial
literacy have life insurance policies. The figure is relatively higher for the
financially illiterate and those at an intermediate level of financial literacy,
66.6 per cent and 62 per cent respectively, than for moderately literate
(52.5 per cent) or those having an advanced level of financial literacy
(59.2 per cent). This can be understood in the light of risk averseness,
contingency, and inability to meet sudden expenses combined with the
need to build financial assets in a piecemeal fashion which they wish to
leverage as and when required.

Table 7: Financial Assets across Levels of Financial Literacy

Financial Assets (%)
Level of Financial PF/Pension
Literacy Deposit Fund Life Insurance Others
Elementary 30.4 6.5 62.0 1.0
Moderate 29.3 16.1 52.5 2.0
Advanced 18.8 20.6 59.2 1.4
Illiterate 25.9 3.8 66.6 3.7
All 27.1 14.8 56.5 1.6
Source: Authors’ estimation based on data from NSS 77th Round of the All India Debt and
Investment Survey.

18
 Savings deposit is a primary but important financial asset that
people preferred to opt for particularly those who are financially illiterate.
As expected, 30.4 per cent of those having an elementary level of financial
literacy and 25 per cent of financially illiterate ones have saving deposits.
It might be indicative of low level awareness about other financial assets
or high risk aversion. Regarding the preparation for retired lives, it is clear
that mainly those, who have advanced or moderate levels of financial
literacy, have assets in either pension or provident funds; 20.6 per cent
and 16.1 per cent respectively. This is plausible if we take into account
the fact that regularly employed individuals have a stable flow of income
which help them plan for their retired lives. In similar logic, provident
fund is the only or the most feasible treasure of savings for the workers
in the organised sector.

Financial Literacy and Access to Loans

Individuals and businesses often need loans to meet essential expenditure
and working capital requirements, and tackle unforeseen contingencies.
Usually, the type of loan, sources and the terms and conditions involving
those loans will correspond to the level of financial knowledge of the
borrowers. In terms of debt behaviour, persons at higher levels of
financial literacy are less likely to have credit card debt and are more
likely to pay off their credit card balance in full each month rather than
simply the minimum required (Lusardi and Tufano, 2015; Lusardi,
2019). Individuals with higher levels of financial literacy are also more
likely to renegotiate their mortgages and employ lower-cost borrowing
alternatives (Lusardi, 2019). Literature finds correlation between poor
debt behaviour and financial literacy. Moore (2003) finds that those with
the least financial literacy are more likely to have expensive mortgages.
Substantiating it further Lusardi and Tufano (2015) observe that the
least financially literate people experience greater transaction costs,
pay higher fees, and choose high-cost borrowing techniques. Mottola
(2013) corroborates it with the finding that individuals with low financial
literacy are more likely to participate in expensive credit card behaviour
and depend heavily on non-institutional organisations.

19
 As India is striving to achieve financial inclusion, it is imperative to
understand whether increased financial literacy has helped people access
credit. (Figure 3 clearly illustrates that more than three-fourth of the total
loan (78.9 per cent) by the sample households is availed from institutional
sources and the rest from non-institutional sources. Interestingly, loans
from institutional sources are directly related to the level of financial
literacy. Around 93.7 per cent of those having advanced financial
knowledge avail loans from institutional sources and the corresponding
figures for moderate and elementary levels of financial literacy stood at
81.9 per cent and 66.8 per cent respectively. Even a sizeable fraction of
financial illiterates (57.1 per cent) avail loans from institutional sources.
The link between financial literacy and access to loans is indicative
of the fact that higher level of financial literacy is closely associated
with possession of required documents and access to verifiable income.
Institutional sources evaluate loan applications diligently and grant
loans if they feel that such a loan would not turn into a non-performing
asset. Among other things, lack of such documents or not facing those
requirements perhaps makes 42.9 per cent of financial illiterates avail
loans from non-institutional sources. As financial illiterates do not have
operational bank accounts, they would have no choice except approaching
non-institutional sources.

Figure 3: Loans from Institutional Agencies & Non-institutional

Figure-3: Loans from Institutional Agencies & Non-institutional
Agencies across
Agencies thetheLevel
across ofFinancial
Level of Financial Literacy
Literacy
100 93.7
90 81.9
78.9
80
66.8
70
57.1
60
50 42.9
40 33.2
30 21.1
18.1
20
10 6.3

0
Elementary Moderate Advanced Illiterate Total

Institutional Agencies Non-institutional Agencies

Source: Authors’ estimation based on data from NSS 77th Round of the All India Debt and
Investment Survey.

20
Determinants of Financial Literacy
The study uses the National Sample Survey (NSS) 77th round of unit-level
data of ‘All India Debt & Investment Survey (January-December, 2019)’.
The primary goal of the Debt & Investment Survey was to collect basic
quantitative information on the assets, liabilities, and banking facilities
such as whether household members have deposit accounts, credit/debit
cards, and an e-wallet. Furthermore, the survey also collected information
on the investments in shares and related instruments, and particulars of
cash loans payable by the household to institutional/non-institutional
agencies. The all India survey was conducted in 5,940 villages covering
69,455 rural households and 47,006 urban households, covering 302,654
persons from rural and 192,919 persons from urban areas.

Discussion in the preceding sections indicates several interesting

observations about financial literacy of households and their associated
financial behaviour. While financial literacy itself a major factor
that explain the choice of financial services and transactions by the
households, it is worth examining the factors that determine the variations
in financial literacy empirically. In this section, we examine the possible
factors that affect the level of financial literacy using NSS 77th round
data. We use a logit model to assess the variations in financial literacy.
Age, gender, household types, income groups, sector, and state zones
are considered as independent variables. For estimating these variables
simply logit regression semi-log has been employed.

If any member of the household has a bank account, credit/debit

card, or e-wallet, then the household is considered to be financially literate
and assigned a value of one, and zero othetwise. The logit model is used
in cases where a choice is to be made between two options, as is our
case, where a person is financially literate or not. In our analysis, we are
interested in estimating the magnitude of impact on the financially literacy
due to a change in an independent variable. Since the direct interpretation
of β in the logit model is difficult, we may predict the marginal effect of
X on the probability of making choice ‘1’ (evaluated at the mean of X)

21
Pi = E (Y = 1 | Xi) = β1 + β2Xi…………………………….(1)

Where ‘Pi’ represents the probability of an individual being

financialy literate. ‘Y’ takes the value ‘1’ if the household is financially
literate, otherwise ‘0’.

‘Xi’ represents independent variables such as age, gender, household

type, income group, sector and state zone

The marginal effect of X on the probability of making choice 1

corresponds to the impact of a change in an independent variable in
leading to the financial literacy on the margin in our case for instance.
This is an indicator of the magnitude of impact on financial literacy given
a marginal increase in the independent variables.

β can be interpreted as a marginal effect in terms of the log odds

ratio. If we increase X by one unit, the log of the odds ratio will change
by β units.

Age: This refers to the age of the head of household

Gender: This is defined according to the sex of the head of the household
or of those in whose name bank accounts are operational. It can be either
male or female.

Household Types: This refers to the nature of employment of the head

of household or of those in whose name bank accounts are operational.
Accordingly, three categories have been developed; self-employed,
casually, and regularly employed households. The self-employed
household has been taken as the benchmark category.

Income Groups: We have formulated five quintiles depending on the

level of income. Quintile 1 indicates the lowest level of income; it is also
the benchmark category. Quantile 5 indicates the highest income group
while Quintiles 2, 3, and 4 belong to the middle-income group.

22
Sector: This refers to the regional aspect that is whether the household
lives in rural or urban areas. The rural sector has been set as a benchmark
category.

State Zones: India is a vast country; therefore, it has been divided into
six geographical zones, namely North, East, West, South, Central, and
North-East zones. North Zone has been taken as the benchmark category.

The nature of the independent variables is listed in Table 9. Table 8

provides the summary statistics of the variables and Table 9 shows the
logit regression results.

Table 8: List of Variables Used in Logit Regression

Variables Nature of Variables

Dependent Variable
Financial Literacy Categorical (Yes=1, No=0)
Independent Variables
Age Continuous
Gender (Benchmark being Male): Categorical (Yes=1, No=0)

Household Types (Benchmark being Self-Employed):

Regular Categorical
Casual Categorical
Income Groups (Benchmark being Lower Quintile):
Quintile -2 Categorical
Quintile -3 Categorical
Quintile -4 Categorical
Quintile -5 Categorical
Sector (Benchmark being Rural) Categorical (Yes=1, No=0)
State Zones (Benchmark being North Zone)
East Zone Categorical
Continued...

23
Continued...
West Zone Categorical
South Zone Categorical
Central Zone Categorical
North East Zone Categorical
Source: Authors’ Compilation.

Table 9: Summary Statistics of the Variables

Variables Observation Mean Std. Dev. Min Max

Financial Literacy 4,95,573 0.69 0.46 0 1
Age 4,95,573 30.74 19.68 0 110
Gender 4,95,453 0.49 0.50 0 1
Household Types 4,95,573 1.77 0.85 1 3
Income Groups 4,95,573 3.29 1.43 1 5
Sector 4,95,573 1.39 0.49 1 2
State Zones 4,95,573 3.04 1.64 1 6
Source: Authors’ estimation.

Table 10: Logit Regression Results

Variables Coefficient p-value

Age 0.0699 0.000***
Gender (Benchmark being
-0.3201 0.000***
Male):
Household Types (Benchmark being Self Employed):
Regular 0.1376 0.000***
Casual -0.0908 0.000***
Income Groups (Benchmark being Lower Quintile):
Quintile-2 0.0228 0.069*
Quintile-3 0.0260 0.035**
Quintile-4 0.0403 0.001***
Quintile-5 0.0827 0.000***
Continued...

24
Continued...
Sector (Benchmark
0.0294 0.000***
being Rural)
State Zones (Benchmark being North Zone)
East Zone 0.0553 0.000***
West Zone 0.1159 0.000***
South Zone 0.3099 0.000***
Central Zone 0.2397 0.000***
North East Zone -0.3838 0.000***
Constant -0.9746 0.000***
Number of observations: 4,95,453
Prob > chi-square: 0.0000
Pseudo R square: 0.2064
Source: Authors’ estimation.

Age exhibits a positive relationship with financial literacy and the

figure is significant. This implies that people tend to gain experience and
expertise in relevant matters as they grow older. Besides, one also gains
awareness with experience. The result shows a negative relationship
between a female with financial literacy (we have already mentioned
that male has been taken as the benchmark category) and the figure is
significant. This implies that females tend to have low access to financial
knowledge and thus they tend to have lower levels of financial literacy.
Besides, they also generally do not have decision-making powers in
matters of education and finance. Regularly employed households
exhibit a positive relationship with financial literacy. On the other hand,
the relationship between casually employed households and financial
literacy is negative. This implies that employment stability contributes to
enhancing levels of financial literacy and lack of job security lessens the
scope of financial literacy. All the quintiles of income display a positive
relationship with financial literacy and the coefficients are significant for
each of the quintiles. This affirms our perception that increased income
necessitates opting for financial services beyond having just a bank
account. To manage their transactions, people opt for using debit or credit
cards and also prefer to use e-wallets. Further, people in urban areas tend

25
to be more financially literate. The relationship between urban life and
financial literacy is positive. Urban life is characterised by a heightened
division of labor and the structure of work puts severe constraints on
leisure time. People cannot always go to the bank and withdraw cash.
Therefore, they are forced to have debit/cards or e-wallets as these
sorts of financial services save time and effort. Each of the East, West,
Central, and South zones tends to have more chances of having financial
literacy. The relationship in each of the above-mentioned zones with
financial literacy is positive and the coefficients are significant for all
of them. This implies that there are necessary financial infrastructure in
these zones and that people have an awareness of financial matters. The
North-East zone though is an exception in this regard. The relationship
between North-East zone and financial literacy is not only negative but
the figure is also significant. This means that people in the North-East
zone of India do not perform well in terms of financial literacy. This
could well be because of a lack of necessary institutional infrastructure
in the region and a lack of awareness on the part of individuals.

Conclusion
Financial literacy is an important indicator of household welfare, as a
means to economic empowerment of people, especially in rural areas.
Our study reveals interesting trends with respect to the level of financial
literacy and its role in saving and investment patterns. People in large
areas of India have an operational bank account along with debit/card.
Chandigarh, Goa, and Himachal Pradesh are among the top performers in
terms of financial literacy as people living in both rural and urban areas
of these states possess high levels of financial literacy. At the same time,
a worrying trend of low level of financial literacy in both rural and urban
areas is observed. States like Assam, Bihar, Manipur, Nagaland, and
Uttar Pradesh need to catch up with the other states and national average.
The study shows that there is a positive association between the level of
financial literacy and investment in mutual funds. The study also shows
that financial literacy has an impact on borrowing, debt management,
and investment options.

26
 Given the differences in financial literacy among states, the focus
should be on establishing financially sound infrastructure to bridge the
gap and help aid in the integration of targeted sections of the population
into the mainstream. In this context, financial institutions need to
collaborate with the government on financial literacy initiatives. Thus,
there is a need to design financial literacy programs for vulnerable
populations like low-income groups, women, and the elderly people and
these programs should address their unique financial challenges.

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 Appendix
Appendix A: Financial Literacy in Rural India (%)

State Elementary Moderate Advanced Illiterate

A & N Islands 41.9 38.9 0.5 18.7
Andhra Pradesh 45.4 24.8 3.9 26.0
Arunachal
32.1 24.3 1.4 42.2
Pradesh
Assam 30.4 27.0 0.8 41.8
Bihar 42.1 12.4 1.2 44.3
Chandigarh 41.8 26.0 10.1 22.1
Chattisgarh 54.9 20.8 0.5 23.8
D & N Haveli 47.0 25.8 0.0 27.2
Daman & Diu 45.5 34.5 7.9 12.0
Delhi 47.2 25.2 10.6 17.1
Goa 39.3 23.7 6.5 30.6
Gujarat 48.6 15.4 1.1 34.9
Haryana 48.7 19.0 3.5 28.9
Himachal Pradesh 53.5 26.2 4.8 15.5
Jammu &
55.3 21.6 2.9 20.2
Kashmir
Jharkhand 51.1 13.2 0.6 35.0
Karnataka 53.4 25.3 2.3 19.1
Kerala 33.3 41.5 3.8 21.5
Lakshadweep 13.9 49.1 1.2 35.8
Madhya Pradesh 56.0 10.1 1.1 32.9
Maharashtra 48.1 18.4 2.8 30.7
Manipur 17.1 29.7 0.5 52.7
Meghalaya 16.5 28.0 0.0 55.4
Mizoram 32.2 22.1 4.3 41.4
Nagaland 8.2 20.9 2.7 68.3
Continued...

31
 Orissa 48.2 21.0 0.7 30.1
Pondicherry 35.2 40.9 4.9 19.0
Punjab 50.8 22.5 2.1 24.6
Rajasthan 48.5 17.6 1.7 32.1
Sikkim 20.2 41.6 3.1 35.1
Tamil Nadu 33.7 39.6 2.2 24.5
Telengana 45.0 26.4 3.6 25.0
Tripura 59.9 14.0 0.8 25.3
Uttar Pradesh 49.1 7.3 0.6 42.9
Uttaranchal 39.6 30.3 3.9 26.3
West Bengal 56.0 14.1 0.6 29.3
All India 47.5 17.6 1.6 33.4
Source: Authors’ Compilation.

Appendix B: Financial Literacy in Urban India (%)

State Elementary Moderate Advanced Illiterate

A & N Islands 28.0 60.8 2.3 8.9
Andhra Pradesh 27.5 30.9 11.8 29.8
Arunachal Pradesh 36.4 33.6 4.9 25.1
Assam 22.4 35.9 7.3 34.4
Bihar 31.6 20.5 6.8 41.1
Chandigarh 28.9 31.5 19.8 19.7
Chattisgarh 29.3 35.4 7.1 28.1
D & N Haveli 23.2 37.8 10.1 29.0
Daman & Diu 31.5 34.7 12.8 21.0
Delhi 32.2 25.1 14.2 28.5
Goa 31.3 36.3 13.9 18.5
Gujarat 39.9 23.3 10.3 26.5
Haryana 37.1 21.9 10.1 30.9
Himachal Pradesh 29.0 30.5 18.5 21.9
Jammu & Kashmir 41.1 32.9 8.9 17.1
Jharkhand 40.8 23.4 7.3 28.5
Continued...

32
Continued...

Karnataka 30.4 30.2 17.1 22.3

Kerala 33.3 39.3 5.9 21.5
Lakshadweep 13.2 52.1 2.7 31.9
Madhya Pradesh 44.3 22.6 5.5 27.6
Maharashtra 29.9 26.3 14.1 29.7
Manipur 17.7 38.9 2.8 40.5
Meghalaya 18.9 45.7 3.0 32.3
Mizoram 23.5 40.1 3.7 32.6
Nagaland 11.9 37.5 10.3 40.3
Orissa 25.4 38.9 7.1 28.6
Pondicherry 20.1 44.1 10.9 24.9
Punjab 34.5 29.0 10.1 26.4
Rajasthan 35.7 24.5 9.6 30.2
Sikkim 22.5 47.0 4.7 25.8
Tamil Nadu 20.8 42.5 10.4 26.2
Telengana 17.0 28.2 19.8 34.9
Tripura 50.5 29.9 2.6 17.1
Uttar Pradesh 36.8 18.5 5.7 39.0
Uttaranchal 24.3 30.8 13.8 31.0
West Bengal 39.1 27.3 5.2 28.4
Total 32.3 28.1 10.2 29.4
Source: Authors’ Compilation.

Appendix C: Financial Literacy Index in Rural and Urban

India (%)

State Rural Urban

Andhra Pradesh 0.49 0.41
Arunachal Pradesh 0.32 0.38
Assam 0.31 0.32
Bihar 0.28 0.27
Chandigarh 0.68 0.58

Continued...
33
Continued...
Chhattisgarh 0.41 0.38
Delhi 0.73 0.45
Goa 0.53 0.53
Gujarat 0.35 0.43
Haryana 0.45 0.39
Himachal Pradesh 0.58 0.55
Jammu & Kashmir 0.50 0.49
Jharkhand 0.33 0.38
Karnataka 0.49 0.53
Kerala 0.54 0.42
Madhya Pradesh 0.35 0.37
Maharashtra 0.42 0.44
Manipur 0.24 0.22
Meghalaya 0.20 0.29
Mizoram 0.40 0.30
Nagaland 0.18 0.30
Orissa 0.37 0.37
Pondicherry 0.59 0.44
Punjab 0.45 0.43
Rajasthan 0.38 0.39
Sikkim 0.44 0.36
Tamil Nadu 0.48 0.42
Telengana 0.49 0.45
Tripura 0.40 0.43
Uttar Pradesh 0.27 0.28
Uttaranchal 0.50 0.42
West Bengal 0.37 0.36
Total 0.37 0.40
Source: Authors’ Compilation.

34
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35
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