Household financial savings declined to a 50 year low! What SBI Research says

According to the data released by the RBI in its monthly bulletin of September this year, the net financial savings of households halved in the last two financial years, from 11.5 percent in FY 2020-21 to just 5.1 percent in FY 2022-23. -- Writes Krishnanand.

New Delhi: The claim that the net financial savings (NFS) of Indian households declined to a five-decade low in the last financial year may be misleading as it does not take into account the household investment in physical assets, particularly in the housing sector, said a report from SBI Research.

According to the data released by the RBI in its monthly bulletin of September this year, the net financial savings of households halved in the last two financial years, from 11.5 percent in FY 2020-21 to just 5.1 percent in FY 2022-23.

These financial savings of Indian households, which also includes small proprietorships and firms, are the most important source of funds for the two deficit sectors – the general government sector and non-financial corporations.

A sharp decline in net financial savings could be worrisome as during the same period, the net financial liabilities of Indian households more than doubled, from 7.6 percent of the country’s GDP in FY 2020-21 to 15.8 percent. It shows that Indian households are borrowing more to meet their expenses and saving less.

In fact, this sharp rise in the household financial liabilities is the biggest reason for the sharp decline in net financial savings (NFS) of Indian households as in order to calculate the net financial savings, total financial liabilities of Indian households are deducted from the gross financial savings (GFS) of Indian households.

What happened to household savings in 4 years?

The gross financial savings of Indian households increased by Rs 6.7 lakh crore from the pre-pandemic period i.e. FY 2019-20 when the Covid-19 global pandemic had not hit the world.

The gross financial saving of households, which includes currency, bank deposits, insurance funds, provident and pension funds, claims on the government, investment in shares and debentures, and small savings excluding investment in PPF, was estimated at Rs 22.9 lakh crore in FY 2019-20.

During the first Covid year, FY 2020-21, it increased to Rs 30.6 lakh crore, the highest during the last four financial years as people saved money as a precautionary measure during the pandemic. However, in the second Covid year, the gross financial savings declined to Rs 26 lakh crore but further increased to Rs 29.6 lakh crore in the FY 2022-23, which ended in March this year.

The data shows that the gross financial savings of Indian households were up by Rs 6.7 lakh crore in the last financial year in comparison with the pre-pandemic year which was FY 2019-20.

Why did net financial savings decline?

If there is an increase in the gross financial savings both in absolute terms and also as a percentage of the country’s GDP then it should also reflect in the net financial savings to some extent. However, as against the increase of Rs 6.7 lakh crore in the gross financial saving during the last four years, the net financial savings declined by Rs 1.5 lakh crore during the same period.

The main reason behind this discrepancy in the saving patterns is a sharp rise in the financial liabilities which also includes loans from commercial banks. For example, financial liabilities of Indian households more than doubled during this period, from Rs 7.6 lakh crore in FY 2019-20, the pre-pandemic period, to Rs 15.8 lakh crore in the last fiscal, a sharp jump of Rs 8.2 lakh crore.

It was limited to a modest increase during the two Covid years, Rs 7.8 lakh crore in FY 2020-21 and Rs 9 lakh crore in FY 2021-22.

Why is there a spike in financial liabilities?

The data analysed by SBI Research showed that the loans taken by Indian households from scheduled commercial banks have more than doubled during this period, from Rs 4.8 lakh crore in FY 2019-20 to Rs 11.9 lakh crore, an increase of Rs 7.1 lakh crore.

Loans have been converted into physical assets?

According to SBI Research, a majority of new retail loans taken by Indian households in the last two years have gone into housing, education and vehicle purchases.

Soumya Kanti Ghosh, Group Chief Economic Adviser of State Bank of India, says if we juxtapose this increase in borrowing from commercial banks with the increase in bank credit, we find that 55 percent of the retail credit to the households in the last 2 years have gone to housing, education and vehicle purchase.

“Thus, it is entirely possible that a low interest rate regime resulted in a paradigm shift of household financial savings to household physical savings in the last 2 years,” Ghosh said in a statement sent to ETV Bharat.

Ghosh said over the years, 80-90 percent of the physical savings of Indian households were in dwellings, other buildings and structures and most of the rest in machinery and equipment.

He said the savings in physical assets which accounted for more than two-thirds of household savings in FY 2011-12, had declined to 48 percent in FY 2020-21. However, the trend is again shifting and the share of physical assets is expected to reach around 70 percent in FY 2022-23, due to decline in share of financial assets.

“We believe that the total household savings (both financial and physical) for FY 2022-23 would still surpass the FY 2021-22 levels despite the decline in financial savings as household savings in physical assets has jumped Rs 6.5 lakh crore in FY 2021-22 over FY 2020-21 and as per current trends has jumped further by upto Rs 5 lakh crore in FY23,” noted the economist.

Ghosh said this clearly indicates that the shift from financial savings to physical savings was also triggered by a low interest rate regime in the pandemic.