Study on Risk Associated with Financial Inclusion without Adequate Financial Literacy Program

Abstract

xviii newlineABSTRACT newlineYadaiah, a man in his late fifties from rural Telangana, opened a savings account under newlinethe Pradhan Mantri Jan-Dhan Yojana (PMJDY) in 2015. Over the span of eight years, newlinehe has neither availed himself of any credit facilities nor invested in insurance products, newlinedespite being eligible and having access to them. In contrast, Harihar Jha, a 19-yearold newlinestudent from Gaya, Bihar, who recently opened a PMJDY savings account, has newlinealready begun investing in equities through a Demat account. These two examples newlineillustrate the stark variations in banking and financial behavior among account holders newlinewith similar access, pointing toward deeper issues within financial inclusion. Such newlinedisparities are both symptomatic and risk-bearing, warranting closer investigation. newlineThe 2008 global financial crisis led policymakers to identify systemic vulnerabilities newlineand strengthen institutions by aligning domestic banking systems with the Basel newlineframework, which provided risk metrics for financial institutions. However, this newlineinstitutional approach overlooked a critical element: the individual account holder, who newlinearguably forms the weakest link in the financial chain. The entire financial system newlineoperates for, and depends upon, this individual. Therefore, strengthening this link newlinenecessitates targeted financial education and an effective Financial Literacy Index. newlineThis research presents a scientific analysis of risks faced by individual account holders, newlineparticularly post-financial inclusion, by introducing three empirically developed risk newlineparameters: financial risk, cyber-digital risk, and fraud risk. The study further newlineexamines the effectiveness of the Financial Literacy Index in measuring and addressing newlinethese risks, especially in relation to the depth of banking involvement, financial newlineassimilation, and financial activity. A comparative analysis between Jan-Dhan newlinexix newlineaccount holders and non-Jan-Dhan account holders highlights significant risk newlinedifferentials and behavioral patterns. The findings suggest that financial underengagement newlinei