Financial Services News

Have household savings reduced?  – The Hindu


For representative purposes.

For representative purposes.
| Photo Credit: Getty Images

The release of the Reserve Bank of India’s (RBI) Monthly Bulletin in September revealed that households’ net financial savings had fallen to 5.1% from 11.5% in 2020-21. Financial liabilities of households rose faster than their assets, with many writers highlighting this trend as an indication of rising indebtedness and increasing distress. The government, however, countered these claims. The Finance Ministry explained that while household financial savings may be reducing, it did not imply total savings were falling, since households took advantage of low interest rates after the pandemic to invest in assets such as vehicles, education and homes. These are two contrasting narratives, one of pessimism and distress, the other of optimism. What does data tell us about the state of the economy?

The optimistic claim

There is evidence to support the government’s narrative of a shift from financial to physical assets. Post-COVID, there has been an increase in household construction. Between 2020-21 and 2021-22, the construction sector was the fastest growing sector, growing at nearly 15% (when measured in 2011-12 prices), and 10% between 2021-22 and 2022-23. Only the trade, hotels, transport and communications sector grew faster in the latter period. Housing loans from Scheduled Commercial Banks (SCBs) grew at double-digit rates in all years between 2018-19 and 2022-23, with loans from housing finance companies growing almost 17 times between 2019-20 and 2022-23.

Liabilities in other non-financial assets have also increased. Education and vehicle loans from SCBs increased significantly between 2021-22 and 2022-23, growing at 17% and around 25% respectively. This has led to significant changes in the composition of household savings. The share of physical assets — excluding gold and silver — is almost 60% of households’ total net savings, with the share of financial savings reducing from 39.6% in 2017-18 to 38.77% in 2021-22. That is, by taking advantage of the low interest rates set by the RBI in the wake of the pandemic, households may have increased their liabilities not to fuel consumption, but to purchase non-financial assets such as houses.

The pessimistic claim

Other evidence points to a slightly different picture. The fall in household net financial savings was driven largely by a rise in liabilities. Gross financial assets declined marginally as a share of GDP between 2021-22 and 2022-23 from 11.1% to 10.9%. Gross liabilities, remaining steady at roughly 3.8% of GDP between 2019-20 and 2021-22, increased to 5.8% of GDP in 2022-23. This rise in liabilities would not imply households have reduced savings if increasing loans financed the construction and purchase of homes. However, there is evidence to the contrary. While loans for housing, education and vehicles have no doubt increased, other components of personal loans have risen even faster. The share of housing loans in total non-food personal loans from SCBs — including priority sector lending — has fallen from 51.08% in 2018-19 to 47.4% in 2022-23. The share of education loans has fallen from 3.32% to 2.37%, while vehicle loans have remained constant at around 12%.

In contrast, outstanding credit card loans increased from 3.8% to 4.7% over this period, with loans against gold jewellery rising from 1.07% to 2.16%, and the category of “Other Personal Loans” — which excludes loans for purchasing consumer durables — showing the largest rise from 24% to 27.42%. While one cannot say what these loans are being used for, these categories of loans do not necessarily indicate that they are being used solely for asset creation. Households may be taking on credit card debt and taking loans against jewellery to finance consumption. The biggest contributor to the large rise in financial liabilities between 2021-22 and 2022-23 has been loans from non-banking institutions, which grew by almost ten times in just the last year, contributing to 32.1% of the total rise in financial liabilities over this period.

The road ahead

An examination of the data reveals that even though housing loans increased, other forms of loans which might possibly be used for consumption increased even faster. But does this imply distress? It is difficult to say from just one year’s data, for we do not know if this is a trend or a one-time event. One could say that households are borrowing to maintain consumption in the face of income loss after COVID and high inflation. On the other hand, it could also be that pent-up demand during the pandemic is being realised in the form of debt-financed consumption, with households optimistic about future repayment.

However, even if the optimistic narrative is true, there are grounds for concern. The U.S. Federal Reserve’s commitment to maintaining higher interest rates to combat inflation would have a knock-on effect on interest rates around the world. Rising interest rates in India would cause significant stresses for households to meet increasing liabilities. If households have invested in real estate, rising interest rates would curtail their consumption spending and reduce aggregate demand in the economy. If, however, the narrative of distress borrowing is true, households would be subjected to further stress if interest rates rise. Policy must be observant of the myriad pitfalls facing the Indian economy.

Rahul Menon is Associate Professor, Jindal School of Government and Public Policy, O.P. Jindal Global University


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