The Ministry of Statistics & Programme Implementation recently released the National Accounts Statistics 2024, with data up to 2022-23. Using the database, the implications of household (HH) savings and liabilities for the financial sector are studied here.

Net HH Financial Savings (NHHFS) is important because it mostly finances the two deficit sectors — general government sector and non-financial corporations. Three post-pandemic years — 2020-21, 2021-22 and 2022-23 — are considered for the analysis, with all values taken at current prices.

Some Macro Ratios

During 2020-21 to 2022-23:

* The ratio of Gross HH Savings to Gross Domestic Product (GDP) fell from 26.4 per cent to 24.2 per cent. The decline originated solely from Gross HH Financial Savings (GHHFS) whose ratio to GDP fell from 15.4 per cent to 11.0 per cent.

* In contrast, the ratio of Gross HH Savings in Physical Assets (GHHSPA) to GDP jumped from 10.8 per cent to 12.9 per cent.

* The ratio of Gross HH Financial Liabilities (GHHFL) to GDP shot up from 3.7 per cent to 5.8 per cent.

* Consequently, the ratio of NHHFS to GDP more than halved from 11.7 per cent to 5.3 per cent.

Financial Savings

GHHFS was quite diversified and mostly comprised currency, deposits with banks, shares and debentures including mutual funds (MFs), investment in small savings, insurance funds, and provident/pension funds, which together constituted 96 - 97 per cent of the respective totals in the three study years.

The share of currency declined gradually from 12 per cent in 2020-21 to 10 per cent in 2021-22 and to eight per cent in 2022-23. This reflected the success of non-cash modes of payments, which, in turn, acted as a check on currency hoarding or unaccounted money. As the public demand for currency notes eases further, RBI’s printing cost will reduce.

However, the rising volumes of non-cash modes increased technological risks for banks in the form of cyber (financial) crimes. Banks need to make huge investments in technology and skilled personnel.

The share of deposits with banks declined sharply from 37 per cent in 2020-21 to 29 per cent in 2021-22 due to low term deposit rates, but smartly revived to 33 per cent in 2022-23 following higher interest rates. Huge deposits mobilised from Pradhan Mantri Jan-Dhan Yojana beneficiaries acted as a catalyst, underscoring the importance of financial inclusion.

However, banks’ obsession with mobilisation of low-cost current, savings and shorter maturity term deposits may lead to asset-liability mismanagement, as banks also fund medium- to long-term projects for which longer maturity term deposits are necessary. The latter in turn will lend stability to HHs’ bank deposit holdings.

The share of shares, debentures including MFs vaulted from three per cent in 2020-21 to eight per cent in 2021-22 and seven per cent in 2022-23. Low interest rates on bank deposits, a healthy capital market, demographic dividend, increasing financial/digital literacy, diversified products availability and promotional measures by broking firms and MFs instilled confidence in HHs to switch from bank deposits to capital market-related products.

However, the ‘shift’, which reflects the ‘speculative motive’ to save, makes HHs’ savings portfolios vulnerable to market risk/volatility. It also competes with banks’ deposit mobilisation, as, for example, MFs’ systematic investment plans are close substitutes of recurring deposit schemes of banks.

The share of tax-deductible small savings stayed around 8-9 per cent. These savings compete with bank deposits, and interest rates offered thereon influence bank deposit interest rates.

The share of insurance funds hovered around 18-19 per cent. The database showed that life insurance funds constituted almost the whole of insurance funds. This may not be correct, as post-pandemic, HHs stormed into health insurance also.

This, coupled with the resolve of the Insurance Regulatory and Development Authority of India to enhance health insurance coverage to all, will make savings in insurance an integral part of GHHFS.

The share of provident and pension funds rose from 16 per cent in 2020-21 to 21 per cent in 2021-22 and 2022-23.

Increasing share of insurance funds, and provident/pension funds indicates the ‘precautionary motive’ of HHs to save.

Physical Assets

GHHSPA was principally in the form of owning residential properties, a good development which is also incentivised by the government in many ways including fiscal concessions and targeted schemes like Pradhan Mantri Awas Yojana.

Per the National Housing Bank data, ‘outstanding individual home loans’ of the Scheduled Commercial Banks (SCBs) and Housing Financing Companies, a ‘proxy’ for savings in housing assets, continuously increased to ₹22,207 billion in 2020-21, ₹25,112 billion in 2021-22 and ₹28,650 billion in 2022-23.

However, many HHs do speculate in the housing market, especially in urban/metro areas. It also creates default risk for banks particularly when the employment situation is under stress.

Gold and Silver Ornaments

The share of savings in the form of gold and silver ornaments remained almost static at 0.2 per cent of GDP mainly due to their heightened price, good returns from stocks and the upper-middle class switching to diamond and other precious stones/metals.

However, the traditional notion of gold as an ‘idle’ saving is waning as gold ornaments can be easily monetised via gold bonds, exchange traded funds and bank/non-bank loans.

Financial Liabilities

Bank advances, which constituted the bulk of GHHFL, rose, year-on-year, by 25 per cent to ₹6,051 billion in 2020-21, by 27 per cent to ₹7,696 billion in 2021-22 and by a whopping 54 per cent in 2022-23 to ₹11,884 billion. As ratio of GDP, bank advances outstanding against HHs rose serially from 3.0 per cent in 2020-21 to 3.3 per cent in 2021-22 and 4.4 per cent in 2022-23.

The related RBI data revealed that within HH loans from SCBs, housing and vehicle loans together commanded nearly six-tenth of the total non-food credit in all the three years.

Certainly, multiplier effects of these sectors are beneficial; nevertheless, from banks’ perspective, since they are medium- to long-term loans with ‘contractual’ repayment schedules, credit default risk escalates, especially when mostly the private sector employees, vulnerable to layoffs, avail themselves of such loans.

Further, housing and vehicle loans generate liquidity risk as their ‘pre-owned’ markets are thin.

To conclude, the saving ‘culture’ of the Indian HHs is widely acclaimed which, despite NHHFS declining to a five-year low, will not fade quickly.

The writer is a former senior economist, SBI. Views expressed are personal