A month ago, the RBI released the disaggregated household gross financial assets (FAs) and financial liabilities (FLs) data for March 2021 to March 2023. We combined these three years’ data with that of the two preceding years — March 2019 and March 2020 — and endeavoured to draw some policy conclusions for the banking sector in particular.

During the five-year period under study, FAs (gross) and FLs registered compound annual growth rates (CAGRs) of 15.2 per cent and 12.8 per cent, respectively. The gross FAs/GDP ratio was the highest in March 2021 but subsequently declined. The FLs/GDP ratio moderated after March 2021. The year-on-year (y-o-y) increases in FAs declined subsequent to attaining a peak in March 2021. In respect of FLs, the y-o-y increases were rather consistent.

This analysis focuses on two variables of commercial banks — deposits and advances.

Bank deposits

The saving ‘culture’ of the Indian households is widely acclaimed. The largest chunk of household deposits is channelled through scheduled commercial banks (SCBs).

Facts: As per RBI data, the household deposits with SCBs increased steadily at a CAGR of 9.8 per cent from ₹81 trillion in March 2019 to ₹118 trillion in March 2023, with a huge jump in March 2021. The y-o-y changes fell sharply after the March 2021 peak (12.9 per cent) to 7.6 per cent in March 2022 but improved marginally to 9.2 per cent in March 2023. As a ratio to FAs as well as to GDP, household deposits with SCBs witnessed a declining trend, especially in the post-March 2021 years.

Factors: The two basic determinants of savings/deposits are income and rate of interest. Growth in real per capita Gross National Disposable Income in 2021-22 and 2022-23 remained rather low to yield robust deposit growth. More importantly, households’ priorities to allocate their income had undergone major structural shifts in the post-pandemic period. Apart from life insurance funds growing at 12.7 per cent each in March 2021 and March 2022 (y-o-y), an increasing number of individuals bought health insurance policies. Health insurance premiums are ‘contractual’ payments to be paid on policy renewal, and the premiums are not cheap. Thus, the precautionary motive for saving persisted, but moved away from banks to insurers.

During 2021-22 and 2022-23, the nominal as well as real domestic term deposit rates of banks were not remunerative. In order to make up for their lost income during the pandemic as also make faster and bigger gains, a large number of retail savers invested in the stock market either directly or indirectly through mutual funds (MFs), mainly via systematic investment plans (SIPs), which are also ‘contractual’ payments. SIPs eroded the recurring deposits of banks.

The MF industry’s assets under management (AUM) grew from ₹22 trillion at September-end 2018 to ₹46.6 trillion at September-end 2023, an over two-fold increase in just five years. A buoyant stock market during 2021-22 and 2022-23 buttressed investors’ risk appetite. Some banks deliberately reduced their high-cost bulk deposits and focussed on increasing their low-cost and stable current and saving account (CASA) deposits.

Bank loans

Facts: RBI data reveals that the household borrowings from SCBs increased steadily from ₹45 trillion in March 2019 to ₹76 trillion in March 2023 (CAGR: 13.7 per cent). The y-o-y changes increased consistently, moving up sharply in March 2023. As a ratio to FLs, an uptrend was noticed. The ratio of borrowings to GDP hit a peak of 28.4 per cent in March 2021, but thereafter moderated, although in March 2023, it was a shade below 28 per cent.

Factors: ‘Personal loans’ (PLs) dominated the non-food credit (NFC) portfolio of banks. Over the five-year period, the CAGR of PLs stood at 15.4 per cent as against 8.8 per cent of NFC (Chart 2). In 2022-23, PLs constituted nearly 30 per cent of NFC (28.6 per cent in 2021-22). Housing (including priority sector housing), credit card outstanding, education loans and vehicle loans commanded almost 67 per cent of the total PLs in 2022-23. By CAGR, credit card outstanding (22 per cent) led the pack , followed in succession by vehicle loans (15.1 per cent), housing loans (13.3 per cent) and education loans (6.1 per cent).

According to the National Housing Bank data, outstanding individual housing loans of SCBs and housing finance companies which stood at ₹746.7 billion at March 2002 grew to ₹25,111.8 billion at March-end 2022.

Anecdotal evidence suggests that many individuals prematurely withdrew their term deposits from banks to invest in the stock market. Even housing loans were taken to speculate on property price escalation. Thus, speculation motive has entered the minds of the Indian households.

Based on RBI data: No doubt these sectors generate income and employment, but indirectly; nevertheless, from banks’ perspective, since they are medium- to long-term loans with ‘contractual’ repayment schedules, the credit default risk becomes higher especially when mostly private sector employees availed of such loans (especially housing and vehicle), and when several private corporates were laying off personnel. Moreover, the post-pandemic employment condition is still in a churn.

Simultaneously, unsecured loans which are much riskier than secured loans were increasing at a rapid rate during the five-year period (CAGR: 16.6 per cent). In 2022-23, unsecured loans outstanding against the public and private sector banks stood at ₹33.3 trillion constituting almost a quarter of their total loans outstanding.

The foregoing observations imply that the banking sector must adopt a cautious approach towards loan deployment. Banks have to leash unsecured loans as well as PLs, as, macro-economically speaking, availability of easy loans potentially increases the indebtedness of the society at large.

PLs like housing and vehicle loans generate liquidity risk as their ‘pre-owned’ markets lack adequate width and depth. Further, too much emphasis on CASA deposits may precipitate in asset-liability management risk as banks fund medium- to long-term projects for which term deposits of longer maturity are necessary. Moreover, mobilisation of term deposits from households will improve the overall gross domestic savings, which sharply declined from a peak of 38.3 per cent in 2007 to 29 per cent in 2022 (World Bank data). It will also reduce banks’ reliance on bulk deposits.

Real rate of interest offered on bank deposits should be positive. In this respect, the Chakravarty Committee (1985) had recommended that “the maximum deposit rate applicable to deposits with maturity of five years and above should be fixed at long-term price expectation plus a positive real interest rate of not less than 2 per cent per annum.” All these risks may become contagious if appropriate and timely risk-mitigation measures are not implemented.

Das is a former senior economist with SBI and Rath is a former central banker. Views are personal.