Net financial assets of households climb to 7.7 per cent of GDP in FY20: RBI study

The net financial assets of Indian households gathered pace in FY20 to 7.7 per cent of GDP against 6.5 per cent in FY19, according to an article in Reserve Bank of India’s monthly bulletin.

The authors reasoned that this improvement is the result of moderation in households’ bank borrowings being sharper than that in bank deposits, except in the fourth quarter of 2019-20 due to Covid-19-related economic disruptions.

“Net financial assets of Indian households moderated in FY19 (to 6.5 per cent of GDP from 7.7 per cent in FY18), reflecting higher consumption expenditure by households.

“In 2019-20, however, they gathered pace, touching the levels reached in 2017-18 ― 7.7 per cent of GDP,” said Anupam Prakash, Anand Prakash Ekka, Kunal Priyadarshi, Chaitali Bhowmick and Ishu Thakur of RBI’s Department of Economic and Policy Research.

Net financial assets is the difference between gross financial assets and financial liabilities.

Financial assets are held by households in currency, bank deposits, debt securities, mutual funds, insurance, pension funds and small savings. Financial liabilities are primarily held in the form of loans and borrowings from banks, non-banking financial companies (NBFCs) and housing finance companies (HFCs).

“Going forward, a spike in net financial assets of households is likely in the first quarter of 2020-21 on account of a sharp drop in lockdown-induced consumption.

“Lag in pick-up of economic activity may cause the financial surplus of households to taper off in subsequent quarters. With construction activity at a standstill, there is a possibility of a shift by households from physical to financial assets,” the authors said.

Households’ gross financial liabilities turned negative (-0.4 per cent of GDP) in Q1 2019-20 owing mainly to contraction in borrowings from commercial banks, but picked up pace thereafter and peaked (to 5 per cent of GDP) in Q4 2019-20, reflecting, apart from the seasonal uptick, higher borrowings induced by Covid-19-related hardships.

The authors said several studies show that households tend to save more during a slowdown and income uncertainty. The gross financial assets increased from 6.7 per cent of GDP in Q1 2019-20 to 14.5 per cent of GDP in Q4 2019-20.

According to the article, currency and deposits with banks accounted for the bulk of total financial assets (66 per cent), followed by insurance and mutual funds.

Borrowings from commercial banks have the highest share in households’ financial liabilities. At the end of Q4 2019-20, outstanding loans availed by households from commercial banks accounted for the bulk of their total financial liabilities (75.9 per cent), followed by HFCs, NBFCs, cooperative banks and credit societies.

The RBI officials observed that the household sector is the most sustainable and self-reliant source of financing for the Indian economy. Its role is likely to become critical in the context of the policy effort gathering critical mass to lift the Indian economy from the vice-like grip of a slowdown, and more recently, the life-threatening Covid-19 pandemic.

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