The Reserve Bank of India (RBI) data on changes in the financial assets and liabilities of households suggests that the boom of 2003-07 was accompanied by rising levels of indebtedness of the household sector. In 2003-04, the increase in the household sector’s financial liabilities was Rs.69,982 crore. In 2006-07, financial liabilities of households rose by Rs.2,82,606 crore, four times the 2003-04 level. With a credit boom going on at the time and credit cards to be had for the asking, the rise in liabilities is not surprising.
The question is: Was the increase in borrowing by the household sector commensurate with an increase in its assets? In 2003-04, the increase in household financial assets was Rs.3,89,473 crore, which meant that incremental financial liabilities were only 18% of the increase in financial assets that year. In 2006-07, however, with financial assets at Rs.7,64,671 crore, the increase in financial liabilities was 37% of the increase in financial assets. Note that this doesn’t really tell us whether households’ debt-to-assets ratio was deteriorating, simply because there’s no data on the increase in household non-financial assets, like housing and gold, over the period. In fact, housing prices, too, had risen sharply over the period.
Interestingly, the increase in financial liabilities of households fell dramatically from Rs.2,82,606 crore in 2006-07 to Rs.1,88,181 crore in the following year, no doubt as a result of the financial crisis and the troubles banks were in during that year. Incremental financial liabilities continued to fall in 2009-10, but moved up in 2010-11 before falling slightly last fiscal. Incremental financial liabilities in 2011-12 were Rs.2,74,165 crore, lower than in 2006-07.
On the assets side of the household balance sheet, the increase in financial assets went down in 2008-09 and also last fiscal. Importantly, household investment in shares and debentures contracted by Rs.6,508 crore in 2011-12, even more than the contraction of Rs.2,333 crore in 2008-09. Before 2008-09, household investment in shares and debentures had last seen a contraction in 1976-77.
The chart shows that households borrowed only Rs.28.30 against every Rs.100 added to their financial assets in 2011-12, much less than during the boom years of 2005-07.