Latest data from Reserve Bank of India (RBI) on household financial assets and liabilities has been subject to varying interpretations. Some analysts have concluded from the sharply lower flows into financial assets and the spike in borrowings, that Indian households are in distress. They say that households are pruning savings and borrowing to keep up consumption because of lacklustre income growth since Covid. State Bank of India’s economics wing and the Finance Ministry have strongly refuted this interpretation.
They point out that the stock of household financial assets is still growing (up 22.7 per cent from ₹228-lakh crore in FY21 to ₹281-lakh crore in FY23). Though liabilities (up 32 per cent from ₹77-lakh crore to ₹103-lakh crore) are growing too, households are borrowing mainly to buy vehicles and property. This demonstrates their confidence about income prospects. But an objective analysis of the dataset reveals a mix of positive and worrying trends. On the plus side, one cannot read too much into the decline in financial flows from FY21. Household flows into financial assets fell between FY21 (₹30.6-lakh crore) and FY23 (₹29.6-lakh crore) but the fact is that the FY21 figure was boosted by the flood of emergency savings into banks during Covid, including the direct transfers by the Centre to Jan Dhan bank accounts. If we skip that year and stretch the comparison to FY20, the flows are up by 27 per cent. The instrument-wise break-down of financial savings also shows positive trends in the three years to FY23 — a 39 per cent increase in the stock of household pension assets, 37 per cent expansion in equity and mutual fund assets, 27 per cent growth in insurance. But it is difficult to take a sanguine view of the other data points.
Households have been on a borrowing binge from FY20, with new loans more than doubling from ₹7.74-lakh crore to ₹15.8-lakh crore. The Finance Ministry points to about two-thirds of bank personal loans and a third of NBFC loans going to property or vehicle purchases. That still leaves a large part of the borrowings probably used to fund consumption. This is a pointer to income pressures. The sharp rise in NBFC loans suggests that with access to credit improving for unbanked and sub-prime borrowers through digital lending, they are perhaps taking recourse to loans to meet consumption needs. Indian households have always had a high propensity for locking up savings in physical assets, rather than financial assets which channel capital into productive enterprises. It took nine years of policy nudges to shift domestic savers from a 75:25 mix of physical and financial savings in FY12 to a 48:52 mix in FY21. The last couple of years seem to have seen a dramatic slide-back.
Overall, rather than look for silver linings in the data, policymakers should do what they can to nudge domestic savers back to financial assets. Ensuring quicker transmission of rising rates to depositors and fixed income investors is critical. Vigilance is also needed on possible systemic risks for banks and NBFCs from the ongoing retail loan boom.