In a recently published paper, RBI has highlighted some
interesting trends in the financial savings of the Indian household. The financial
savings of household are considered very important given that they are the key
providers of the capital to the Indian economy. Household savings have
traditionally financed the fiscal deficit of the governments and also provided
a stable source of short to midterm funding to the corporates. Study of trends
in household finances is therefore considered most important to understand the
growth dynamics of Indian economy.
The key highlights of the paper could be listed as follows:
1. The net household savings declined to 6.5% of
GDP in FY19 from 7.7% in FY18. This was mostly due to higher household
expenditure and larger borrowings. In FY20 net savings have rebounded to 7.7%,
mainly due to sharp decline in financial liabilities of households.
2. Gross
financial assets of Indian households have declined materially in past two
years.
(i) Gross financial asset of households
have declined from 12% of GDP in FY18 to 10.6% of GDP in FY20.
(ii) Bank deposits of households savers have
increased from 2.8% of GDP in FY18 to 3.4% of GDP in FY20; while the household
borrowing from banks has halved from 2.8% of GDP in FY18 to 1.4% of GDP in
FY20.
(iii) The investments of households in financial
products has declined materially from 1.1% of GDP in FY18 to 0.4% of GDP in
FY20. Of this the investment in mutual funds has declined by whopping 75% from
0.8% of GDP in FY18 to 0.2% of GDP in FY20.
(iv) Small savings (excluding PPF) has
registered the sharpest increase. It has increased from 0.9% of GDP in FY18 to
1.3% of GDP in FY20.
(v) The contribution to life insurance has
come down from 2% of GDP in FY18 to 1.7% of GDP in FY20.
(vi) The currency in hand has also halved from
2.8% of GDP in FY18 to 1.4% of GDP in FY20.
Three trends that would need a deeper analysis, based on the
above set of data are (a) The efficiency of financial inclusion programs as the
borrowing from banks has come down; (b) How much of the lower share in the
investments in financial assets is consequence of value erosion, withdrawal for
expenditure and shift to non financial assets; and (c) despite massive push fro
social security from the government side, why contribution to life insurance
and PPF has shrinked.
(3) The share of NBFC lending to households has fallen
significantly in FY20. This read with (i) NSSO recent report highlighting that
household expenditure has been rising consistently resulting in lower savings;
(ii) lower social security contribution (insurance and PPF) and sharp decline
in investments, highlights the rising stress in the household sector.
(4) About 76% of household credit is provided by
commercial banks; and another ~10% by the housing finance companies.
Cooperatives, MFIs, NBFCs etc altogether provide only 14% of the total credit
to households. The low penetration may encourage investors in these
institutions, but it must raise some concerns for the policymakers.
Source for all charts and Tables: RBI Bulletin June 2020
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