INTERNATIONAL JOURNAL OF MANAGEMENT RESEARCH AND REVIEW

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1 INTERNATIONAL JOURNAL OF MANAGEMENT RESEARCH AND REVIEW FINANCIAL LITERACY OF MICRO, SMALL AND MEDIUM ENTREPRENEURS G.S.Nalini* 1 1 Assistant Professor, Govindammal Aditanar College for Women, Tiruchendur ABSTRACT Though India is one of the fastest growing economies, it is shameful that there is still large scale poverty. India has little over 1 billion population; out of which around 400 million people are living below the poverty line. Financial Inclusion is a great step to alleviate poverty in India. Financial inclusion is the availability of banking services at an affordable cost to deprived and low income groups. Financial literacy is a primary step for financial inclusion which makes people seek and receive financial services and products. The data required for the study was collected from both primary and secondary sources. The primary data was collected from the Micro, Small and Medium Entrepreneurs using Interview Schedule. The total number of samples was 100. Though banks are offering various services, the Micro, Small and Medium Entrepreneurs avail only few of the services viz. savings and loan. Hence, the banks should take necessary steps to promote the financial literacy among Micro, Small and Medium Entrepreneurs by relaxing procedures and establishing customer care. And the government should accomplish Technology Upgradation Fund Scheme to facilitate their business development. Key Words: Financial Literacy, Financial Inclusion, Poverty Alleviation. FINANCIAL LITERACY OF MICRO, SMALL AND MEDIUM ENTREPRENEURS INTRODUCTION Financial Inclusion is a great step to alleviate poverty in India. Financial inclusion is the availability of banking services at an affordable cost to deprived and low income groups. The first ever index of financial inclusion find the extent of reach of banking services among 100 countries, India has been ranked 50. Though India has crossed 6 decades of post independent era, 60% of people are still not accessible to even basic financial services like saving, credit, insurance and formal source facilities. Financial literacy refers to an individual s ability to make informed judgements and effective decisions about the use and management of money. It encompasses an understanding of how to use credit effectively, manage money, minimize financial risks and derive long-term benefits of savings. Access to affordable financial service enlarges livelihood opportunities and empowers the poor to take charge of their lives, such empowerment aids social growth and also sustainable growth of the economy. The Government of India and Reserve Bank of India have taken various steps over the years towards achieving greater financial inclusion, commencing from the nationalization of banks in 1969 to the introduction of the no frills account scheme in *Corresponding Author 189

2 Banks are for people with the money. Hence, poor are unbankable, they are outside the banking and financial sector with lack of opportunities for financial products and services. Increasing poverty, lack of awareness and lack of financial knowledge create opportunity for unorganized banking sectors namely indigenous bankers, money lenders, chit funds and pawn brokers who often use the financially illiterate people to satisfy their own ends of wealth creation. In the economy at large, it creates unequal distribution of wealth and income and other socio-economic imbalances in various parts of the country. Thus, even though we have made great strides in the development of our financial markets, large sections of the population do not avail the basic financial services in India. Financial Inclusion ensures sustainable development of the country. As per Indian economy, financial illiteracy in rural India is one of the major reasons for the underdevelopment of Banking and Financial Industry, therefore initiatives can be undertaken by banks like opening no frills account, adopting business correspondent, establishing financial literacy and counselling centre, grievance redressal cell and bio-metric atms. Micro, Small and Medium Enterprises (MSMEs), which account for 45% of India s manufacturing output and 40% of exports, are the backbone of the nation s economy. The growth of MSMEs holds the key role to resolve the problems of poverty and unemployment in the country. Most of the entrepreneurs engaged in Micro, Small and Medium Enterprises are financially illiterate. One of the most important consequences of limited literacy may be limited financial market participation. The Micro, Small and Medium Entrepreneurs have not yet been fully recognized the significance of financial literacy. Thus, this study attempts to make the Micro, Small and Medium Entrepreneurs realize the importance of financial literacy. REVIEW OF LITERATURE Following were the research works carried out by the researchers concerning financial inclusion and small scale industries. Ghorude.K.N (2009) indicated that India s problems are diverse, pervasive and multidimensional, further microfinance bristles with problems, difficulties and constraints. Being single instruments, it may not be able to solve the problem of object poverty merely by distributing loans to a certain section of the population. Attaining the objectives of inclusive growth has to necessarily encompass the social, economic and political inclusion. Developing micro entrepreneurship with organizational and community based support is one way of strengthening inclusive growth. Muthiah Manoharan.P and Krishnaveni Muthiah (2010) stated that limited access to affordable financial services such as savings, loan, remittance and insurance services to the vast majority of the population in the rural area and unorganized sector is believed to be a constraint to the growth impetus in these sectors. The study was conducted in ten villages of Vadipatti panchayat of Madurai District, Tamilnadu, India, the head of the family of 100 households were interviewed personally. The behavioral pattern shows that many people were not comfortable using formal financial services. The reasons were difficulty in Copyright 2011 Published by IJMRR. All rights reserved 1

3 understanding language, various documents and conditions that come with financial services etc. Sendhilvelan.M and Karthikeyan.K (2006) concluded that with a view to ensuring financial inclusion of all segments of the population, in both rural and urban areas banks should give wide publicity to the facility of no frills account. Further efforts must be made to move from the concept of anytime, anywhere banking to anytime, anywhere and to everyone banking. Chandawarkar.M.R and Kulkarni.P.K (2006) expressed that SSIs play an important role in the industrialization of our country, because they provide immediate large scale employment, need shorter gestation period, need lower investments and facilitate an effective mobilization of resources of capital and skill which may be otherwise unutilized. They encourage entrepreneurship and are considered harbingers of economic growth and development. Amilan.S (2006) indicated that with the increasing competition on account of globalization, the size of the SSI units and state of technology employed by them have assumed significance. Therefore, several policy initiatives are taken by the government to provide timely adequate credit for the SSI units for accessing technological advancements and to render marketing assistance. Vighneswara Swamy and Vijayalakshmi opined that the objective of financial inclusion is to extend the scope of activities of the organized financial system to include within its ambit people with low incomes. Through graduated credit, the attempt must be to lift the poor from one level to another so that they come out of poverty. There is a need for coordinated action between the banks, the Government and others to facilitate access to bank accounts amongst the financially excluded. Usha Thorat (2007) reported that banks are entering into agreements with India post for using post offices as agents for branchless banking. Setting up of financial literacy centres and credit counselling on a pilot basis, launching a national literacy campaign, forging linkages with informal sources with suitable safeguards through appropriate legislation, evolving industry wide standards for IT solutions, facilitating low cost remittance products are some of the initiatives currently under way for furthering financial inclusion. Chowdari Prasad and Yerram Raju concluded that financial inclusion is not an old wine in new bottle, either in India or elsewhere. It has been found to be wanting across the globe as a conscious policy to reach the unbanked areas and sections of the society. In India conscious strenuous efforts are being made through planning for development. Financial inclusion is not merely opening of no frills account by all the bank branches as per targets on ritualistic basis. Eventually, all the agencies involved should collaborate to work for development in order to achieve in eradication of poverty. Financial inclusion would result in reduction of poverty in a planned manner. Copyright 2011 Published by IJMRR. All rights reserved 191

4 PROBLEM FOCUS Financial literacy has assumed greater importance in recent years as financial market has become increasingly complex and the common man finds it very difficult to take informed decisions. In olden days, though people earned less, they tried to save at least a little. In recent days, the earning capacity of the people has increased quite well. But, the saving habit is found less. It is abundantly clear that many citizens, not having sufficient financial knowledge, that are needed to make them productive and successful person in the society. Financial literacy is not just for investors. It is essential even for an average family trying to balance its budget and save for the children s education and the parents retirement. Hence, financial literacy is essential for the Micro, Small and Medium Entrepreneurs to manage their business efficiently by conserving the cost and time. Banks are offering various financial services to the Micro, Small and Medium Entrepreneurs but they fail to access many of the services such as microfinance, e-banking, mobile banking, bank guarantee and bancassurance etc. In addition to that they are confronted with various problems while availing financial services viz, demand for collateral security, lack of technical knowledge, inadequate knowledge about financial products, time delay, complex procedural formalities, inadequate credit etc. This study attempts to overwhelm all the difficulties faced by the Micro, Small and Medium Entrepreneurs while availing financial services and in turn enhance the level of financial literacy among Micro, Small and Medium Entrepreneurs. OBJECTIVES To know the extent of financial literacy of Micro, Small and Medium Entrepreneurs. To analyse the difficulties faced by the Micro, Small and Medium Entrepreneurs. To enhance the financial literacy of Micro, Small and Medium Entrepreneurs. METHODOLOGY The data required for the study was collected from both primary and secondary sources. The primary data was collected from the Micro, Small and Medium Entrepreneurs using Interview Schedule. The secondary data had been collected from the published journals and various websites. The samples were selected by administering convenience sampling technique. The total number of samples was 100. The study was conducted among Micro, Small and Medium Entrepreneurs in Tiruchendur area of Tamil Nadu. A Pilot study was administered before going for data collection. The Interview Schedule was used in the pilot study among 10 Micro, Small and Medium Entrepreneurs. From the pilot study, some necessary changes were made in the interview schedule. The various statistical tools used to analyse the primary data collected from the selected samples were percentage analysis, mean score analysis and correlation. For easy understanding data were tabulated. The present study had undertaken from a period of December 2010 to March RESULTS AND DISCUSSION The findings which were arrived from the analysis on financial literacy of Micro, Small and Medium Entrepreneurs were presented below: Copyright 2011 Published by IJMRR. All rights reserved 192

5 Profile of the Respondents: Majority (86%) of the respondents were male, the respondents of 50% belonged to the age group of and the majority (79%) of the respondents were married. The respondents of 31% had no formal education, 54% of the respondents had invested below Rs.2,00,000, 41% of the respondents had an experience of above 10 years and 43% of the respondents had an annual income of Rs.50,000-1,00,000. Holding bank Account: Majority (%) of the respondents had a bank account because of realizing its importance. Type of account: The respondents of 47% were holding savings bank account. Table 1 Availed Banking Services Services Yes No Microfinance - Overdraft facility Debit card Credit card 33 (37%) 80 (89%) 15 (17%) E-banking - Mobile banking - Bank guarantee - Standing instruction 17 (19%) Bancassurance - Trading of shares Financial advice Source : Primary data 15 (17%) 10 (11%) 57 (63%) 10 (11%) 75 (83%) 73 (81%) 75 (83%) 80 (89%) Table 1 shows that out of respondents who were holding bank account, 100% of the respondents had not availed microfinance, e-banking, mobile banking, bank guarantee and bancassurance services. The respondents of 63% had not availed overdraft facility and only 37% of them had availed it. Majority (89%) of the respondents had availed debit card and only 11% of them had not availed debit card service. Majority (83%) of the respondents had not availed credit card service and only 17% of them had availed the same. Majority (81%) of Copyright 2011 Published by IJMRR. All rights reserved 193

6 the respondents had not availed standing instruction service and only 19% of them had availed it. Majority (83%) of the respondents did not trade shares through banks and the rest of them were involved in it. Majority (89%) of the respondents had not availed any financial advice from the bank and only 11% of them had availed it. Borrowing loan from the bank: Majority (72%) of the respondents had borrowed loan from the banks for their upliftment. Reason for availing loan: The respondents of 58% had borrowed loans for expanding their business. Borrowing fund from the informal lenders: The respondents of 51% had borrowed fund from the informal lenders. It is clear that the bank loan was not sufficient for them. Table 2 Problems Faced by Micro, Small and Medium Entrepreneurs Statements HA A DA HDA Mean Score Demand for collateral security Lack of technical knowledge Inadequate knowledge towards banking products Time delay Complex procedural formalities Inadequate credit High rate of interest for loans High transaction cost Improper services Impolite approach Source : Primary data HA: Highly Agree A: Agree DA: Disagree HDA: Highly Disagree Table 2 explains that few problems were highly agreed and few problems were agreed by the Micro, Small and Medium Entrepreneurs. The Micro, Small and Medium Entrepreneurs highly agreed on demand for collateral security (3.21), lack of technical knowledge (3.31) and inadequate knowledge towards banking products (3.07). They agreed some problems such as time delay (2.93), complex procedural formalities (2.91), inadequate credit (2.84), high rate of interest for loans (2.81), high transaction cost (2.75), improper services (2.42) and impolite approach (2.34). Thus, the main problem encountered by the Micro, Small and Medium Entrepreneurs was the demand for collateral security by the banks. Copyright 2011 Published by IJMRR. All rights reserved 194

7 Table: 3 Expectations of Micro, Small and Medium Entrepreneurs Expectations Mean Score Rank Customer service 3.78 I Low interest rate 3.45 II Low transaction cost 3.10 III Minimum paper work 2.67 IV Extending operating time 1.98 V Source : Primary data Table 3 exhibits the expectations of the Micro, Small and Medium Entrepreneurs from the bank. Majority of the respondents preferred customer service (3.78) than low interest rate (3.45), low transaction cost (3.10), minimum paper work (2.67) and extending operating time (1.98). Table: 4 Age and Expectations of Micro, Small and Medium Entrepreneurs Expectations Below 40 years Age Above 40 years Low interest rate 2 2 Customer service 1 1 Low transaction cost 3 3 Minimum Paper work 4 4 Extending operating time 5 5 Source : Primary data Spearman s Rank Correlation : r = 1-6 D 2 /N(N 2-1) Value : 1 Table 4 depicts that there is a perfect correlation between the ranks given by the respondents who belonged to the age group of below 40 years and above 40 years on their expectations from the bank. Hence, the two group of respondents opinion was the same. Attitude towards changing the bank: Majority (71%) of the respondents were not interested to change their bank. SUGGESTIONS The following were the suggestions recommended from this study to various beneficiaries like Banks, Micro, Small and Medium Entrepreneurs and the Government. Copyright 2011 Published by IJMRR. All rights reserved 195

8 Suggestions to the Banks The banks should come forward to offer loans to the Micro, Small and Medium Entrepreneurs without demanding collateral security to get rid of the clutches of money lenders. In order to encourage the Micro, Small and Medium Entrepreneurs to adopt new technology, banks should give them subsidized credit. The banks should constitute a customer care to redress the customers grievances related to banking services. The banks should disseminate financial literacy among Micro, Small and Medium Entrepreneurs by the way of financial literacy campaign. The banks must relax the procedures of various services which are not availed by the Micro, Small and Medium Entrepreneurs. Micro, Small and Medium Entrepreneurs should be given adequate amount of credit so as to compete with large scale entrepreneurs. As many of the Micro, Small and Medium Entrepreneurs had no formal education, the banks would offer its services in the regional language of the Micro, Small and Medium Entrepreneurs. Suggestions to the Micro, Small and Medium Entrepreneurs The Micro, Small and Medium Entrepreneurs should utilize the loan for their business purpose rather than domestic consumption. The Micro, Small and Medium Entrepreneurs should repay the loan regularly which will enhance the credit worthiness of the entrepreneurs. Suggestions to the Government The government should introduce toll free numbers to the Micro, Small and Medium Entrepreneurs for clarifying the doubts concerning financial schemes. The government should include financial literacy in the curriculum of schools and colleges, so that students can understand the significance of financial literacy which would turn the future entrepreneurs more competitive. Hitherto Government of India implemented Technology Upgradation Fund Scheme (TUFS) for Textile sector alone, it should be extended to all type of Micro, Small and Medium Entrepreneurs then only they can get subsidized credit. CONCLUSION Financial literacy is a primary step for financial inclusion which makes people seek and receive financial services and products. As many of the Micro, Small and Medium Entrepreneurs are illiterates, they find it difficult to access many financial services. Though banks are offering various services, the Micro, Small and Medium Entrepreneurs avail only few of the services viz. savings and loan. Hence, the banks should take necessary steps to promote the financial literacy among Micro, Small and Medium Entrepreneurs by relaxing procedures and establishing customer care. And the government should accomplish Technology Upgradation Fund Scheme to facilitate their business development. ACKNOWLEDGEMENT I wish to express my heartfelt gratitude to my sir Mr.V.Arulmurugan, Assistant Professor of Commerce, Pondicherry University. I owe a deep debt of gratitude to the management of Govindammal Aditanar College for Women, Tiruchendur for permitting me to carry out this research work. Copyright 2011 Published by IJMRR. All rights reserved 196

9 REFERENCES Amilan S (2006). Economic Role of SSI in Indian Economy: An analysis. Southern Economist. Oct 15. Volume 45. No.1-24: Chandawarkar MR, Kulkarni PK (2006). Small Scale Industries: A Glance. Southern Economist. May 1. Volume 45. No.1-24: Chowdari Prasad and Yerram Raju. Fiancial Inclusion in India Yet another Ritual or an Integrated Tool for Poverty Alleviation. Inclusion-in-India-CPBYR11 Ghorude KN (2009). Microfinance for Financial Inclusion and Sustainable Rural Development. Southern Economist. May 1. Volume 48. No.1: Gordon E, Natarajan K (2007). Banking Theory Law and Practice. Himalaya Publishing House. Mumbai. Muthiah Manoharan P, Krishnaveni Muthiah (2010). Financial Inclusion in the Indian Rural Area Context A Micro Level Study. Research Highlights. April. Volume 20. No.2: Narendra M (2011). Financial Inclusion Gains Urgency. THE HINDU Survey of Indian Industry Sendhilvelan M and Karthikeyan K (2006). No Frills Account: A basic drive for financial inclusion. Southern Economist. June 1. Volume 45. No. 1-24: Usha Thorat (2007). Fiancial Inclusion - the Indian Experience. Financial Inclusion Conference. London. BIS Review. Varshney PN and Mittal DK (2009). Indian Financial System. Sultan Chand & Sons. New Delhi. Vasant Desai (2002). Small Scale Industries and Entrepreneurship. Himalaya Publishing House. Mumbai. Vighneswara swamy and Vijayalakshmi. Role of Financial Inclusion for Inclusive Growth in India Issues and Challenges. 20in%20India.pdf Copyright 2011 Published by IJMRR. All rights reserved 197