DOI: 10.59571/mpi.v3si1.7
While digital innovations are transforming financial services, making them available, accessible, and affordable, they can also lead to irresponsible consumer borrowing. India witnessed significant growth in unsecured personal loans, which pose a systemic risk to the financial system but could also impact borrowers' financial well-being. RBI responded by increasing risk weightage for unsecured personal loans to curtail unsecured personal loan growth. Interest rate change is a supply-side intervention that yields immediate effects. However, have you wondered if any long-term sustainable intervention can mitigate systemic risk in the financial system? Since financial well-being results from financial resources and appropriate capacity/ skills, i.e. financial literacy, to manage those resources, enhancing financial literacy may provide an alternative mechanism to ensure responsible borrowing.1 In today's digital context, financial literacy must be supplemented with digital skills, which is termed digital financial literacy (DFL). A recent research paper articulates what digital financial literacy is and analyses its components.2 This essay unpacks the elements of digital financial literacy and explores the policy implications in the Indian context, which is relevant to policymakers, financial institutions and NGOs working in the area of financial literacy.
2 The article 'Financial Literacy in the Digital Age—A Research Agenda' by Tiina Koskelainen, Panu Kalmi, Eusebio Scornavacca, and Tero Vartiainen, featured in Volume 57, Issue 1 of The Journal of Consumers Affairs, highlight how fintech, digital behaviours, and behavioural interventions are reshaping finance, stressing the need to measure digital literacy, modernize education, creating effective digital learning tools, and encouraging public–private partnerships to build inclusive, digitally competent consumer finance capabilities
Published by SPJIMR in 2025. This is an open access article under the CC BY license Management Practice Insights Vol 3
Special Issue
The transformative power of information technology in global finance is undeniable. Technology is crucial in democratising finance and enabling alternative money management methods. The global impact of digital payments is not just significant but profound. According to World Bank Findex statistics, digital payments have grown by 22% between 2014 and 2021, reaching a penetration rate of 57%.3 This data underscores the widespread adoption and relevance of digital finance globally. This change is primarily driven by mobile phone penetration, putting the power of financial transactions in the hands of users and reducing reliance on physical cash or cards. In some countries, the penetration of mobile payments is driven by private players, e.g., WeChat Pay and Alipay in China or M-Pesa in Kenya. In
a
India, the Unified Payments Interface (UPI) has revolutionised retail payments using mobile technology. These technological advancements augment the complexity of digital banking and necessitate sufficient financial literacy and skills, both termed digital financial literacy.
While we all intuitively agree that financial resources and skills are required for individual empowerment, Naila Kabeer's empowerment framework, which is embedded in 'Sens theory of Capability, provides the theoretical underpinning.4,5 The framework articulates empowerment as three interrelated components: achievements, agency or capacity, and resources. Resources are both financial and non-financial. The ability to set objectives and carry out actions in the direction of achieving objectives is the second aspect of the agency. The third dimension, achievement, expresses how resources and capacity interact to achieve objectives. In our discussion, achievement is economic empowerment, which addresses an individual's knowledge, skills and confidence to address their financial well-being.6 To ensure financial wellbeing, it is necessary to have access to resources on the supply side, i.e., the availability of loans, savings products and payment systems. On the demand side, it is the possession of financial literacy and digital skills, both termed DFL.7 Capability combines resources and individual capacities; thus, digital financial literacy is the foundation of financial capability.8,9 This underscores the inspiring role of DFL in achieving financial wellbeing. DFL equips individuals with the knowledge and skills to use digital financial systems effectively, thereby contributing to financial empowerment. UPI and the digital footprint created by UPI have enabled financial institutions to provide access to capital. 10 However, DFL has received relatively lower importance.
Figure 1: Economic Empowerment Framework
Source: Author's creation based on multiple sources11,12
Before we discuss digital financial literacy, let us first unpack what financial literacy is. Financial literacy combines financial knowledge, confidence and the ability to use and manage financial resources effectively to achieve financial well-being.13 Financial literacy is the foundation of financial behaviours and plays a significant role in financial well-being.14 Financial literacy has three dimensions. The first is numeracy, the ability to perform mathematical calculations and ascribe significance to numerical values. Second is financial knowledge, which is reflected in understanding financial terms such as interest rate, compound interest, risk, etc. Moreover, the third component is self-efficacy or confidence to
15,16
make decisions based on financial knowledge. ‘Self-efficacy’ indicates an individual's confidence in accomplishing a task. In the realm of financial literacy, it is the belief or assessment that a person makes about their ability to mobilise mental resources (knowledge), calculate the benefits and related risks (numeracy), possess the motivation, and translate it into necessary action (self-efficacy) to achieve the required financial objective.17,18,19 Higher financial literacy manifests in solid financial knowledge and confidence to make effective financial decisions.20
Digital literacy in financial services comprises of mobile phone and money proficiency.21 Digital literacy has three dimensions: mobile technology access, mobile phone proficiency and mobile money proficiency.22 In the Indian context, mobile money proficiency must be studied in relation to the most popular digital payment solution, the Unified Payment Interface (UPI). Considering the ubiquitous presence of UPI in India, we contextualise mobile money proficiency as digital payment proficiency by including UPI.
The capacity to understand, apply (fundamental arithmetic operations such as addition, multiplication,Numeracy
The capacity to handle debt, compute interest, and spread risks is essential. Financial literacyFinancial
The capacity to think and act independently, free from theConfidence to
Capability to execute digital
Digital
Payments
utilising mobile money services-
Proficiency
(to be read as UPI in India).
Ability to independently use mobile phones for digital transactions,
Digital Skills
Source: Developed by the author based on multiple sources
Source: Developed by the author based on research by Koskelainen and team23
With the advent of digital technology, financial literacy needs to be looked at in a digital context.24 It requires appropriate supplementation by digital literacy.25 Thus, financial literacy and digital literacy can be collectively termed 'Digital Financial Literacy'.26,27
Financial literacy is necessary in this era of increasing financial optionality, as it empowers individuals to navigate the complex financial landscape, avoid potential pitfalls, and secure their financial future, thereby ensuring their financial well-being.28 India, a country of 1.4 billion people, is driven by a young, consumption-oriented demographic, fuelling its growth. Private consumption as a percentage of
29
nominal GDP in Dec 2024 was 64.8%. India's UPI infrastructure, technological advancement in analytics and artificial intelligence (AI), and, most importantly, fintech–financial institution collaborations have played a pivotal role in the growth of unsecured credit, which in
30,31,32
turn supports consumption growth. However, unsecured retail credit can have overarching impacts on borrowers and financial institutions during economic shocks and poses a systemic risk in the financial system. To address the systemic risk posed by high unsecured loans, the Reserve Bank of India (RBI) increased the risk weightage of unsecured lending from 100% to 125% in November 2023. This increase in risk weightage impacted lenders' capital requirements and, in turn, increased consumer lending rates. This move was possibly a pre-emptive measure to manage perceived risks in the financial sector in case of a potential economic downturn.
Financial literacy has three dimensions: Ÿ numeracy Ÿ financial knowledge Ÿ self-efficacy
Additionally, as per the RBI report, in the fiscal year concluding in March 2024, digital payment frauds in India experienced an increase of over five times, reaching Rs 14.57 billion (Rs 1,457 crore) compared to the preceding period.33 Digital payment methods, such as credit cards and online transactions, accounted for 10.4% of the overall fraud total, an increase from 1.1% in the fiscal year 2023.34 Though there is no causality unless proven, there is a correlation between UPI transactions and fraud. Over the last two years, UPI has experienced a remarkable increase in the value of transactions, reaching a total of Rs 200 trillion, indicating a strong association between digital fraud and transactions.35 To mitigate systemic risk, while the regulatory authorities can intervene from the supply side, demand-side intervention in enhancing digital financial literacy can help.36,37,38,39
Recognising the significance of financial literacy, various self-help groups (SHGs) facilitating organisations such as Mahila Arthik Vikas Mahamandal-Maharashtra (MAVIM) and microfinance institutions such as Mann Deshi Bank are engaged in offering financial literacy training. In pursuit of this goal, the financial regulatory authority has established the National Centre for Financial Education (NCFE), which organises seminars, workshops, and training sessions focused on financial education. Nevertheless, the current financial literacy training may not adequately improve DFL and needs strategic intervention. Some of the interventions are as follows:
Redesign/supplement financial literacy curriculum – As disbursement and collections move to digital channels, financial institutions should focus on enabling knowledge and enhancing consumer abilities. Awareness of personal data privacy, cybersecurity policies, and digital hygiene must be incorporated into the communication of the financial institution with its customers. Especially, microfinance institutions need to be mindful and incorporate it into their training programs. With digital, the availability and accessibility of an abundance of options for purchases can encourage more impulsive behaviour on the part of consumers, which could result in excessive debt. There is a chance that a new digital divide may emerge between those who fully understand the implications of the ubiquitous technologies that power digital nudging and those who do not. Hence, there is a need to ensure that the financial literacy curriculum highlights the power of digital nudging during a purchase journey and its side effects on debt. In India, organisations such as Mann Deshi Bank systematically impart DFL to their customers.40 Also, the Alliance for Financial Inclusion, a policy leadership alliance owned and led by member central banks and financial regulatory institutions with the common objective of advancing financial inclusion in the country, regionally and internationally, has a particular working group and content tailored to digital financial literacy.41
Enhancing digital literacy through a collaborative approach – Financial institutions should seek partnerships and align their programs with capacity-building organisations to strengthen the effectiveness of their outreach efforts. Policywise, government schematic interventions that provide access to capital should be coordinated with non-schematic capacity-building initiatives to optimise results and impact. Additionally, the agencies responsible for implementing the government's financial literacy programs ought to consider collaborating with private financial institutions in both the design of their educational approaches and the geographical implementation of these programs. Established financial institutions are increasingly aware that their reputational standing and support from such institutions must be solicited, possibly from their CSR funds, to enhance financial literacy programs. While initiatives from the self-regulatory bodies, such as the Association of Mutual Funds in India AMFI or Microfinance Industry Network (MFIN), have taken industrywide collaborative approaches to capacity building, it can be augmented and replicated in other financial services segments and products.
Appropriate assessment technique – Setting up a standard assessment method to measure digital financial literacy is the need of the hour. While a few NGOs and capacity-building organisations have been playing a role in enhancing digital financial literacy, the assessment of DFL has not progressed or received the required importance. There is no standardised tool to measure financial literacy or DFL. As a result, what is considered is observed financial behaviour rather than financial literacy, let alone DFL. What constitutes optimal behaviour for one individual may not hold for another. We recommend that the emphasis on assessing DFL be directed more towards knowledge and problem-solving skills rather than just observed behaviours. This adjustment would align the approach more closely with existing financial and digital literacy metrics.
Regulatory bodies, non-governmental organisations, and financial institutions must prioritise DFL. On a microeconomic level, DFL is crucial in enhancing capability development and fostering more empowered citizens. On a macro scale, DFL contributes to establishing a robust demand-side framework, which is essential for mitigating systemic risks and advancing the development objective of a nation-state.
a UPI is the single most popular National Payment Corporation of India (NPCI) product used by Indians. UPI offers interoperability of payments across all member banks and real-time payments via mobile payment app. There are 235 banks registered on UPI and 18 independent third-party mobile applications. The UPI system allows a seamless transition for ‘consumer-to-business’ (C2B), ‘consumer-to-consumer’ (C2C) or ‘peer-to-peer’, and ‘business-to-consumer’ (B2C). UPI witnessed 8.65 billion transactions in March 2023 and is the single largest payment method (around 70% of retail payments) ahead of credit cards, debit cards and wallets, making it imperative to understand and study mobile proficiency in terms of proficiency of UPI usage
Ashish Desai is Associate Professor in the Information Management and Analytics department at SPJIMR. You can reach out to him at ashish.desai@spjimr.org.
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Date article submitted: Sep 10, 2024 Date article accepted: May 23, 2025 Date article published: Jun 30, 2025
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