What does a drop in household financial savings imply for India?

Banks loans are by far the largest component, accounting for over 75% of household borrowing.
Banks loans are by far the largest component, accounting for over 75% of household borrowing.


Though household debt has risen, the overall savings rate hasn’t suddenly fallen. But it must rise for faster economic growth

The household financial savings data recently published in the latest issue of the Reserve Bank of India (RBI) bulletin created quite a stir. It indicated that India’s net household financial savings rate had declined to only 5.1% of GDP in 2022-23, the lowest in decades. Some analysts interpreted this as a symptom of rising indebtedness among households. Others interpreted the data as a worrying indication of a declining savings rate, noting that India’s high growth in the first decade of this century had been enabled by a high savings rate in that period. To calm market sentiments, the finance ministry found it necessary to issue a clarification that the decline in our financial savings rate is not a symptom of any distress in the household sector, but merely a reflection of changing household preferences in the composition of their asset portfolio.

Graphic: Mint
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Graphic: Mint

To understand what is really going on, it is necessary to look closely at the data. As shown in the table, there was a decline of over 2 percentage points of GDP in net household financial savings (net financial assets) to 5.1% in 2022-23 on top of a 4.3 percentage point decline from the pandemic year peak of 11.5% in 2020-21 to 7.2% in 2021-22. This is not just a symptom of post-covid volatility, because the net financial savings rate in 2022-23 is also 3 percentage points lower than the 8.1% of GDP recorded in 2019-20, the last pre-pandemic normal year. This decline in the rate of net financial savings is almost entirely attributable to a rise of approximately 2 percentage points of GDP in financial liabilities in 2022-23 compared to 2021-22 as well as 2019-20. We then need to look at the composition of financial liabilities of households and see how that has changed.

Banks loans are by far the largest component, accounting for over 75% of household borrowing. Borrowing from non-bank finance companies (NBFCs) are a distant second, followed by housing finance and insurance. Between 2020-21 and 2022-23, there was a large decline in the share of household borrowing from banks, declining from over 86% in 2021-22 to about 77% in 2022-23. The share of housing finance also declined. However, there was a sharp increase in the share of borrowing from NBFCs, which rose from 2.4% in 2021-22 to 15.2% in 2022-23, a more than six-fold increase in a single year (see table; its component percentages may not add up to 100 because of rounding off and excluded minor components).

So the decline in net household financial savings is primarily a reflection of the increase in financial liabilities of the household sector. This, in turn, is a reflection of the shift in household borrowing from banks (and housing finance to a less extent) to NBFCs. We also know that growth of bank credit has been high, but much of the enhanced credit flow has gone to NBFCs, real estate and personal loans, not industry. The non-performing asset ratios of commercial banks in both the private and public sector have also improved a great deal. Bringing together these pieces of the puzzle, it would appear that there has been high growth in demand for loans from households. However, banks have adhered to stringent lending norms, leaving many unsatisfied borrowers in the household sector who have not qualified for bank loans. These less creditworthy borrowers have turned to NBFCs, whose lending norms are less stringent. The NBFCs themselves have borrowed heavily from banks as intermediaries, and on-lent large sums to the household sector.

Thus, banks have cleaned up their balance sheets and shifted risk to NBFCs, but the risk exposure of the financial sector as a whole is no less. Indeed, it is higher, since the indebtedness of the household sector has gone up.

Unfortunately, undertaking a robust assessment of the financial health of India’s household sector is very challenging because the available data lumps together two completely different groups of economic agents. On one side, you have business households which own and run various micro, small and medium enterprises that can broadly be clubbed together as the ‘unorganized sector.’ On the other side, there are the non-business households. The two groups are subject to very different types of constraints, risks, opportunities and incentives. Thus, any assessment of the financial health of the household sector without data dis- aggregated at least for these two broad groups is unavoidably speculative.

That said, the decline in India’s net household financial savings rate—even compared to 2019-20, the last pre-pandemic normal year—doesn’t reflect a sudden decline in either the household savings rate or domestic savings rate. At 19.7% and 30.2% of GDP respectively, both were a bit higher in 2021-22 than in 2019-20. A savings rate of 30.2% is also higher than in most emerging market and developing economies. But it is lower than the rates achieved in most years of the past two decades, especially compared to several during the first decade of this century, when the savings rate had risen to 35-36%. Sustaining economic growth rates of 7-8% would not be possible unless the economy gets back to those high savings rates.

These are the author’s personal views.

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