Households switch from ‘essentials only’ to discretionary spending pattern: RBI study

Preliminary estimates for Q2 (July-September) FY21 indicate that household financial savings regressed closer to the pre-pandemic levels to 10.4 per cent of gross domestic product (GDP) after touching the unprecedented high of 21 per cent in Q1 (April-June) FY21, as per an article in Reserve Bank of India’s latest bulletin.

This reversion is mainly driven by the increase in household borrowings from banks and NBFCs (non-banking finance companies), accompanied by a moderation in household financial assets in the form of mutual funds and currency, said RBI officials Sanjay Kumar Hansda, Anupam Prakash, Anand Prakash Ekka and Ishu Thakur in the article.

Nonetheless, households’ financial savings rate for Q2 FY21 at 10.4 per cent ruled higher than that of 9.8 per cent witnessed in Q2 FY20.

Preliminary indications suggest that household financial savings rate may have gone down further in Q3 (October-December):2020-21 with the intensification of consumption and economic activity, the authors said.

Spending trend

The authors observed that with the gradual reopening/ unlocking of the economy, households switched from an ‘essentials only’ spending pattern to discretionary spending, which resulted in the reversal of household financial savings from the peak it attained in Q1 (April-June) FY21.

“Following the phased-in easing in the stringency of lockdown restrictions...some constituents of consumption, particularly discretionary, picked up after a quarter long dormancy, which, in turn, led to the moderation in financial savings of households.

“The trend reversal in household financial savings is also corroborated by the reduced contraction in private final consumption expenditure as also the lower surplus in the current account in Q2 FY21,” as per the article.

Household financial savings have moderated despite an increase in the savings in the form of deposits as household borrowings from banks and NBFCs have picked up.

Referring to the RBI proposing a revised regulatory framework for NBFCs, based on a four-layered structure that would allow big NBFCs to be regulated like banks, the authors noted that when implemented, this may impact the distribution of household portfolio between banks and non-banks.

A significant decline in household savings in the form of currency and mutual funds has also contributed to the moderation in household financial savings. Savings in the form of insurance funds have remained elevated, despite moderation in accretion in Q2 FY21.

The authors underscored that while real GDP contraction of 24.4 per cent in Q1 FY21 was accompanied by household financial savings rate of 21 per cent, a moderation in GDP contraction to 7.3 per cent in Q2 coincided with the reduction in household financial savings rate to 10.4 per cent.

Although the share of various instruments (bank deposits, life insurance funds,mutual funds and currency) on the asset side of household portfolio has broadly remained unchanged during Q1 FY19 to Q2 FY21, the share of currency holding, which increased during Q1 FY21 – reflecting flight to cash under extreme uncertainty – has reversed to its pre-pandemic levels with the resumption of economic activity in Q2, the article said.

The reduction in cash holding rate of households mainly reflected the lower uncertainty with the unlocking of the economy and resumption of economic activity. The process was also facilitated by greater use of digital modes for conducting transactions in the wake of the pandemic.

Shift towards NBFCs

On the liabilities side, the share of household liabilities from the banking and HFCs (housing finance companies) sector have come down while that of NBFCs has increased from Q1 FY21 onwards.

The authors assessed that the shift in favour of NBFCs in times of economic crisis and pessimism on future stream of income flow could be attributed to the increased risk aversion and tighter eligibility criteria for bank loans vis-à-vis NBFCs.

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