Determinants of Financial Literacy and Financial
Inclusion in North-Eastern Region of India:
A Case Study of Mizoram

by

Bhartendu Singh¹
Raj Rajesh
Ramesh Golait
K. Samuel L.

Abstract

The present study evaluates the determinants of the status of financial inclusion and financial literacy in the under-banked North-Eastern Region of India based on field survey-data in the State of Mizoram. The survey indicated that there was limited financial awareness in the study region, about 32 per cent of the respondents were not aware of any financial products except the savings bank account. About 20 per cent of the respondents reported lack of knowledge of the basic payment options and about 43 per cent of the respondents reported knowledge but lack of usage of these options. About half of the respondents were found to be unaware of the financial institutions other than banks, viz., non-banking financial companies, microfinance institutions and small finance banks. It was also found that use of life insurance products was low among respondents. The financial inclusion score and financial literacy score for the study region were generated using the OECD/INFE (Organisation for Economic Co-operation and Development/ International Network on Financial Education) Toolkit for measuring financial literacy and financial inclusion. The average financial literacy score estimated in the study was 14.37 on a scale of 0 to 21 (i.e., 68.43 per cent) and the average financial inclusion score was 3.35 on a scale of 0 to 7 (i.e., 47.86 per cent). Several factors based on the literature were identified and tested in terms of their effect on financial inclusion and financial literacy using suitable econometric techniques, including a logistic regression framework. Among the identified factors, the place of residence (block), employment type and nature of family (joint versus nuclear) of the respondents were seen to strongly influence their financial inclusion and financial literacy status.

JEL Codes: G2, G18, G29, G21, G23

Keywords: Financial institutions and services, government policies and regulations, banks, financial institutions

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Acknowledgement

The authors are profoundly grateful to the Local Board for Eastern Area, RBI for conceptualisation of the study. The authors take this opportunity to extend their thanks to the participants of the Department of Economic and Policy Research (DEPR) Study Circle seminar of RBI for useful comments on an earlier draft of the study. Authors are also grateful to an anonymous external referee for very detailed suggestions and generous comments on the study. The authors would also like to thank Dr. Deba Prasad Rath, Principal Adviser, DEPR for insightful suggestions and encouragement. Authors would also like to thank Dr. Pallavi Chavan, Director, DRG, DEPR, and her team members for their comments and support throughout the study. Nonetheless, the views expressed in this study are those of the authors alone and not of the organisations they are attached to. The authors only are responsible for errors and omissions, if any.

Bhartendu Singh
Raj Rajesh
Ramesh Golait
K. Samuel L.

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Executive Summary

Financial inclusion relates to the access to financial products and services. It is not limited to the basic access to deposits, but extends to the access to various financial services, including investments, credit, payments and insurance. Financial literacy provides basic knowledge and skills to analyse and understand financial products and services and assists in taking informed financial decisions. Financial inclusion without financial literacy may lead to exploitation as consumers may not be in a position to choose the right products and may end up taking uninformed decisions. On the other hand, financial literacy without financial inclusion is akin to providing skills without an opportunity to apply the same. In the long run, however, financial literacy takes people closer towards financial inclusion as there is a high likelihood that an aware person will seek access to finance and also achieve it.

Against this backdrop, the present study was conceived to look into various factors impacting financial literacy and financial inclusion in the north-east taking Mizoram as the site of the study. The study is based on primary data collected through a structured questionnaire. Total 523 respondents were selected from eight blocks, covering four districts, of Mizoram. The factors² identified for the study are based on extensive review of the literature and the existing financial situation in Mizoram.

The survey indicated that there was a limited financial awareness in the study region. About 32 per cent of the respondents were not aware of any financial products except the savings bank account. About 20 per cent of the respondents reported lack of knowledge of the basic payment options and about 43 per cent of the respondents reported knowledge but lack of usage of these options. About half of the respondents were found to be unaware of the financial institutions other than banks, viz., non-banking financial companies, microfinance institutions and small finance banks. It was also found that use of life insurance was low among respondents.

The financial inclusion score and financial literacy score for the study region was generated using the OECD/INFE (Organisation for Economic Co-operation and Development/ International Network on Financial Education) Toolkit for measuring financial literacy and financial inclusion. The average financial literacy score estimated in the study was 14.37 on a scale of 0 to 21 (i.e., 68.43 per cent). The average financial inclusion score was found to be 3.35 on a scale of 0 to 7 (i.e., 47.86 per cent).

Out of 27 factors considered for the study as possible determinants of financial inclusion and financial literacy, the place of residence (block) was found to have large effect on both. Besides this, the type of employment and type of family (joint versus nuclear) also moderately influenced financial literacy. The subjects studied by the respondents as part of academic curriculum were also found to have moderate effect on financial inclusion. The financial literacy and financial inclusion were found to have a negligible effect on each other.

The relatively lower level of economic development, particularly financial development in the north-eastern region (NER), as reflected in relatively lower credit intermediation, is a major concern from policy perspective. In this context, the study highlights the need to conduct a greater number of financial literacy workshops, especially for the people belonging to the vulnerable groups at regular intervals in the region. Moreover, the development and outcome of such workshops need to be closely monitored by the funding agencies.

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Determinants of Financial Literacy and Financial Inclusion
in North-Eastern Region of India: A Case Study of Mizoram

Introduction

Financial literacy provides basic knowledge and skills to analyse and understand financial products and services and assists in taking informed financial decisions. Financial inclusion relates to the access to financial products and services. It is not limited to the basic access to deposits, but extends to the access to various financial services, including investments, credit, payments and insurance. Financial inclusion without financial literacy may lead to exploitation as consumers may not be in a position to choose the right products and end up taking uninformed decisions. On other hand, financial literacy without financial inclusion is akin to providing skills without an opportunity to apply the same. In the long run, however, financial literacy takes people closer towards financial inclusion as there is a high likelihood that a financially aware person will seek access to finance and also achieve it.

The Organisation of Economic Cooperation and Development (OECD) defines financial literacy as a combination of financial awareness, knowledge, skills, attitude and behaviour necessary to make sound financial decisions and ultimately achieve individual financial well-being. People achieve financial literacy through a process of financial education. According to the Reserve Bank’s ‘Committee on Financial Inclusion’ (Chairman: Dr. C. Rangarajan) (RBI, 2008), financial inclusion is the process of ensuring access to financial services, timely and adequate credit for vulnerable groups such as weaker sections and low-income groups at an affordable cost.

Financial literacy and financial inclusion are associated with each other. While there may be a positive correlation between the two, it is interesting to know if these two share a causal relation. It has been found in few studies that people who are financially included are not necessarily financially literate and many otherwise financially literate people are actually not financially included. Different studies in different places have arrived at contradictory findings, like there are studies which concluded that financial education results into higher savings for an individual in his/her lifespan later (Bernheim et al., 1997; Lusardi, 2003). However, some other studies could not find conclusive evidence that financial education improves personal financial decisions (Mandell, 2006; O’Connell, 2008). In the light of these contradictory results, it is interesting to know the other factors that have positive or negative impact on financial inclusion and financial literacy.

The North Eastern Region (NER) of India, comprising eight States namely, Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Tripura and Sikkim, is characterised with a unique socio-cultural segment and predominantly semi-urban and rural areas encompassing hilly geographic terrain. The NER, home to 3.8 per cent of the national population, occupies about 8 per cent of India’s total geographical area, and is strategically important with over 5,300 km of international borders. Economic activity and banking parameters of the NER States, however, have remained unfavourable vis-à-vis all-India figures. At the same time, there remains a significant diversity in the level of development among the north-eastern States.

The Government of India, Reserve Bank of India and the respective State governments have been making special efforts for an all-round development of the region. Recognising the critical role of financial sector in economic development, and to investigate the issues limiting the success in achieving financial inclusion in NER, the Reserve Bank constituted a committee on ‘Financial Sector Plan for NER’ (Chairperson: Smt. Usha Thorat, 2006). Further, to address the issues related to development of the Micro, Small and Medium Enterprises (MSMEs) sector in NER, a separate sub-group was constituted under the Prime Minister’s task force on MSMEs (Chairman: Shri T.K.A. Nair) in 2009.

It was also emphasised in the literature that financial inclusion and development of NER holds the key to balanced regional economic prosperity (Rajan, 2016). The relatively low level of economic development, in general, and financial development in particular, of NER, as reflected in relatively lower credit intermediation, is a major concern from policy perspective.

In this context, the rest of the study is organised as follows: Section 2 lays out the objectives and rationale for choosing the State of Mizoram for the study. Section 3 highlights the socio-economic profile of the State. Section 4 presents the literature review. Section 5 provides the banking landscape of Mizoram economy. Section 6 presents empirical results and Section 7 concludes the study.

2. Objectives and Rationale for Choosing Mizoram for the Study

The objectives of this study are set out as follows:

1. To understand the architecture and ecosystem of Mizoram’s economy using secondary data;
2. To estimate the financial inclusion score of the State;
3. To analyse the factors, which determine financial inclusion in the State;
4. To estimate the level of financial literacy in the State;
5. To analyse the factors, which determine financial literacy in the State;
6. To assess public awareness about various government schemes (such as Direct Benefit Transfer (DBT), Pradhan Mantri Mudra Yojana (PMMY), PM Jan Dhan Yojna (PMJDY), etc.).

As per CRISIL (2018) Inclusix Score, North East Region (NER) is the least financially included region of India. Mizoram stood 31st among all the States in India by CRISIL Inclusix Score, though it is one of the most urbanised States of India. At the time of the survey conducted by CRISIL, out of eight districts, seven were ranked below 440 among all the districts of India. The capital of the State, Aizawl, stood at 294th in rank.

Interestingly, Mizoram is found to enjoy high branch penetration and above-average credit and deposit penetration as compared to other States. Further, as per the Census of India 2011, it is the second-most literate State in India whereas as second-least financially literate State as per National Centre for Financial Education Report, 2013.

The banking development in NER, including Mizoram, is a phenomenon post-bank nationalisation in 1969. Prior to it, no bank branch of commercial bank existed in Mizoram. In the year 1972, when it was accorded the status of a Union Territory, the whole of the State was served by a single branch of State Bank of India (SBI). Even today, the banking penetration remains highly skewed in terms of location. Furthermore, unlike other States, only one regional rural bank (RRB) serves whole of the State.

The studies focusing on financial inclusion and financial literacy in the State are less in number. All these aspects make the State an interesting case study to understand the factors influencing financial inclusion and financial literacy in a hilly State with a difficult geographical terrain.

3. Socio-Economic Profile of Mizoram

The State is situated in the southern corner of NER. The word ‘Mizoram’ is a combination of two words of local language, viz., Mizo and Ram. The word “Mizo” means ‘native inhabitants’ while “Ram” means ‘land’, thus “Mizoram” means ‘land of the Mizos’. It was known as Lushai Hills District of Assam till 1954 and then was renamed as Mizo Hills District of Assam until 1972, when it was carved out and given the status of a Union Territory. It continued as a Union Territory until 1987, when it was declared as the 23rd State of India on February 20, 1987 by the 53rd Amendment of the Indian Constitution.

3.1 History and Geography of Mizoram

Mizoram is a land-locked State sharing its borders with three Indian States, viz., Tripura (277 Kms) in the northwest, Assam (123 Kms) in the north and Manipur (95 Kms) in the northeast. It shares its boundary with two neighbouring countries, viz., Myanmar (404 Kms) in the east and south and Bangladesh (318 Kms) in the west. It had three districts when it was given the status of a State (1987), viz., Aizawl, Lunglei and Lawngtlai. In the year 1998, five new districts were created, viz., Kolasib, Mamit, Serchhip, Champhai (carved out of Aizawl) and Saiha (carved out of Lawngtlai). Recently on June 03, 2019, three new districts were added, viz., Hnahthial (carved out of Lunglei), Khawzawl (carved out of Champhai) and Saitual (carved out of Aizawl and Champhai).

About 95 per cent of population in State is of diverse tribal origins, mostly from Southeast Asia, who were settled over waves of migration since 16th century but mainly in 18th century. It has the highest concentration of tribal people among all States in India, and they are currently protected under the Indian constitution as a Scheduled Tribe. The tribes adopted Christianity over the first half of 20th century. Now, it is one of the three States of India with a Christian majority (87 per cent). Its people belong to various denominations, mostly Presbyterian in north and Baptists in south.

It is a highly literate agrarian economy; however, it suffers from slash-and-burn jhum or shifting cultivation, and poor crop yields. In recent years, the jhum farming practices are steadily being replaced with a significant horticulture and bamboo products industry. The State has about 871 kilometres of national highways, with NH-54 and NH-150 connecting it to Assam and Manipur respectively. It is also a growing transit point for trade with Myanmar and Bangladesh. It is a land of rolling hills, valleys, rivers and lakes. As many as 21 major hill ranges or peaks of different heights run through the length and breadth of the State. As per the State of Forest Report, Mizoram has the highest forest cover as a percentage of its geographical area, i.e., 84.5 per cent.

The fabric of social life in the Mizo society has undergone tremendous changes over years. Before the British moved into the hills, the village and the clan formed units of Mizo society for all practical purposes. Mizos are giving up their old customs rapidly and adopting new modes of life, which is greatly influenced by the western culture. Many of their present customs are mixtures of their old traditions and western pattern of life.

3.2 Architecture of the Mizoram Economy: A Sectoral Analysis

In line with the trend in structural shift in other States, the share of agriculture has declined and the share of industry and services sector in gross state value added (GSVA) has picked up (Chart 3.1). Within the agriculture sector, ‘forestry and logging’ (accounting for more than half of the agriculture and allied sector) dominates and its share has expanded in the last couple of years with a corresponding shrinkage in the share of crops, livestock and fishing and aquaculture (Chart 3.2). Mizoram is richly endowed with bamboo forests, which broadly cover half of the State’s land. It has the largest bamboo cover as a proportion of its geographical area in the country. It produces a variety of bamboo-based handicraft products and exports bamboo and teak wood to Bangladesh. The handloom production, estimated to be Rs.6 crore, generates several non-farm employment. It has great potential for export under the Look East Policy of the Government of India, given the similarity of fabrics being worn by the inhabitants of the South East Asian countries as produced by local weavers of the State.

In line with the all-India trend, despite the decline in the share of agriculture in GSVA, the State economy is primarily agrarian with 60 per cent of the population depending, directly or indirectly, on agriculture. Rest of the working population is engaged in government jobs, small businesses and transport activities. Within the industrial sector, ‘electricity, gas, water supply and other utility services’ dominates with 56.4 per cent share in the industrial sector followed by ‘construction’ with 39.8 per cent share in 2019-20 (Chart 3.3). Manufacturing constitutes around 0.7 per cent of the GSVA, while mining constitutes around 0.3 per cent of GSVA.

Within the industrial sector, the share of manufacturing, mining and construction has been shrinking in the last couple of years, while that of ‘electricity, gas, water supply and other utility services’ has been expanding. As per the sectoral composition, services sector activity dominates the State economy as it accounts for nearly half of the GSVA (Chart 3.4). The service sector is dominated by public administration, which constitutes around 30 per cent of the services sector followed by trade, repair, hotels and restaurants.

The overall GSVA growth in the State has been highly volatile in line with the growth of the constituent sectors, which have exhibited marked year-to-year variation (Chart 3.5). Mizoram remains distinct from other north-eastern States in terms of economic development, the second highest per capita income followed by Sikkim in the NER. In line with its elevated level of per capita income, its poverty level is lower than the national average (Chart 3.6).

3.2.i Agriculture

Agriculture is the mainstay of the people of Mizoram (Savant and Patnaik, 1998). About 90 per cent of the farmers in the State are small and marginal farmers³. The average size of land holding of the farmers is 1.25 hectares.

Jhum or shifting cultivation is the main agricultural practice and it is carried out annually by a large number of people living in rural areas. The productivity of this type of agriculture is comparatively lesser than the national average. The performance of area, production and yield of major food-grains in the State suggests a mixed trend (Chart 3.7). Rice, coarse cereals and pulses are the main crops.

Food grain production, at 76.9 thousand tonnes (in 2019-20), is the least amongst the NER States. It constituted merely one per cent of the total food grain production of the region. The State has total geographical area of 2,108,700 ha of which net sown area is 218,608 ha (10.4 per cent of total geographical area). The average of gross and net sown area for the last five years in Mizoram has changed in tandem with NER (Chart 3.8).

Net irrigated area in the State is 18,813 ha, which is just 8.6 per cent of total sown area. Major and medium irrigation is a challenge due to the hilly terrain. Although Mizoram receives sufficient rainfall during monsoon, only small areas of fertile land can be brought under cultivation during rabi season due to lack of enough water harvesting structures. Concerted efforts are required to increase soil moisture retention capacity, create irrigation facilities like tube wells, rainwater-harvesting structures and other water bodies for life saving irrigation during dry season. The State is blessed with an abundant rainfall, but its porous soil and inadequate irrigation infrastructure has affected its crop yield. The yield issue can be addressed by creating irrigation infrastructure and adoption of better crop technologies. Chart 3.9 shows that the State also has very low consumption of fertilisers and pesticides.

Farm mechanisation on an extensive scale is not feasible in the State due to hilly terrain, limited flat land, fragmented land holdings and poor road connectivity. Consequently, use of tractors and power tillers, adoption of new cropping pattern and efficient utilisation of available irrigation facilities are not being utilised at desired level for increasing the agricultural production in the State.

Given the by and large subsistence nature of farming, the requirements of credit by agricultural households are meagre. As per the NSSO’s survey, agricultural households in Mizoram met about 86 per cent of their loan needs from institutional sources (Chart 3.10). This contrasts with some of the other NER States such as Manipur wherein the informal sources formed a significant chunk of credit (Chart 11).