There are mixed interpretations of the latest data from the Reserve Bank of India (RBI) on household financial assets and liabilities. Some analysts have concluded from a sharp fall in financial asset inflows and a surge in borrowing that Indian households are in trouble. Households are cutting back on savings and borrowing to maintain consumption amid lackluster income growth since the coronavirus pandemic, they said. The economic department of the State Bank of India and the finance ministry strongly refuted this explanation.
They pointed out that the stock of household financial assets is still growing (from Rs 228 billion in FY21 to Rs 281 billion in FY23, a growth of 22.7%). Households borrowed mainly to purchase vehicles and properties, although liabilities (up 32% from Rs 7,700 crore to Rs 10,300 crore) were also growing. This shows they are confident about their revenue prospects. But objective analysis of the data set reveals a mix of positive and worrying trends. On the positive side, one cannot read too much into the decline in funds flows in fiscal 2021. Household inflows into financial assets declined between FY21 (Rs 3,060 crore) and FY23 (Rs 2,960 crore), but the fact is that the FY21 numbers were lower due to large emergency savings inflows into banks during the COVID-19 pandemic Push up, which includes direct bank transfer center to Jan Dhan bank account. If we skip that year and extend the comparison to FY20, traffic would increase by 27%. The breakdown by instrument of financial savings also shows a positive trend in the three years to FY2023 – 39% growth in the stock of assets for family pensions, 37% growth in equity and mutual fund assets, and insurance. But it’s hard to be optimistic about other data points.
Households have been on a borrowing spree since FY20, with new loans more than doubling from Rs 774 crore to Rs 1,580 crore. The finance ministry noted that about two-thirds of bank personal loans and one-third of non-bank financial company loans are for the purchase of property or vehicles. This still leaves a large portion of borrowings likely to be used to finance consumption. This is an indicator of revenue pressure. The sharp rise in NBFC lending suggests that as access to credit through digital lending improves for unbanked and subprime borrowers, they may resort to loans to meet consumer needs. Indian households have been strongly inclined to lock their savings in physical assets rather than channeling capital into financial assets for productive enterprises. After nine years of policy promotion, the ratio of physical savings and financial savings among domestic savers has changed from 75:25 in fiscal year 2012 to 48:52 in fiscal year 2021. There seems to have been a dramatic decline over the past few years.
Overall, policymakers should not look for silver linings in the data but do what they can to nudge domestic savers back into financial assets. Ensuring that rising interest rates are passed on to savers and fixed income investors more quickly is critical. We also need to be alert to the systemic risks that the continued retail lending boom may bring to banks and non-bank financial institutions.
