Gross household financial savings slip to 10.9% of GDP in FY23

The risk of defaults by households due to greater exposure to higher mortgage payments and floating rate interest is limited in India despite the rapid rise in their financial liabilities, according to RBI’s latest financial stability report (FSR).

There has been a rapid rise in household financial liabilities from 3.8 per cent of GDP in FY22 to 5.8 per cent in FY23 even as financial assets moderated only marginally to 10.9 per cent in FY23 from 11.1 per cent in FY22.

With banks’ linking their home loan interest rates to an external floating rate benchmark such as the repo rate, the 250 basis points hike in repo rate between May 2022 and February 2023 has been fully transmitted to home loans.

“The increase in financial liabilities was driven by a steep rise in borrowings from financial institutions, with a large part in physical assets creation (mortgages and vehicles). Thus, the overall savings of households may still hold steady with a compositional shift in favour of physical savings. This would directly add to gross capital formation, supporting an upturn in private investment cycle and, eventually, the prospects for growth,” RBI said.

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Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India, opined that 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 two years.

He underscored that there is a significant long run relationship between housing loans and household’s savings in physical assets.

“Every ₹1 increase in Housing loans has resulted into Rs 2.12 increase in household’s savings in physical assets for the 14 year period ended FY22. The decline in net financial savings of households has resulted in a concomitant increase in household savings in gross physical assets,” Ghosh said.

The FSR said recent data shows that household net financial savings (HNFS) rose to 7 per cent of GDP in Q4 (January-March) FY23 from 4 per cent of GDP in the previous quarter, indicating normalisation of HNFS towards the pre-pandemic long-term trend.

• Also read: How serious is the fall in household savings?

HNFS falls sharply

RBI noted that household net financial savings/HNFS (gross financial assets - gross financial liabilities) fell sharply to 5.1 per cent of GDP in 2022-23 from 11.5 per cent in 2020-21, well below its long-run annual average of 7-7.5 per cent. The fall in HNFS was driven by a rapid rise in financial liabilities.

Household financial assets include bank and non-bank deposits, life insurance funds, Provident and Pension Funds (including Public Provident Fund), currency, investments, and small savings. Household financial liabilities are predominantly loans/borrowings.

“Despite the recent increase in financial liabilities, household debt in India is much lower than in other EMEs (emerging market economies)and, therefore, the risk of defaults due to greater exposure of higher mortgage payments and floating rate interest is limited in India. Thus, the current level of household debt in India does not pose systemic concern,” RBI said.

The central bank observed that gross household financial savings, which had surged to 15.4 per cent of GDP in 2020-21 (pandemic peak year), supported by large precautionary savings, fell to 11.1 per cent in 2021-22 and further to 10.9 per cent in 2022-23, reverting to its pre-pandemic trend (an average of 11 per cent during 2011-12 to 2019-20).

In terms of absolute levels, gross household financial savings expanded by 13.9 per cent year-on-year during 2022-23. Household debt moderated to 37.6 per cent of GDP in March 2023 from its peak level of 39.2 per cent in March 2021

RBI said India’s household debt (outstanding credit from banks and other financial institutions to households) to GDP ratio at 6.7 per cent is one of the lowest in the world, as also the debt service ratio (DSR).

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