Household savings
02 Oct 2023 7 mins Download PDF
Household savings
Why in the News?
The RBI Monthly Bulletin in September has revealed that households’ net financial savings had fallen to 5.1% from 11.5% in 2020-21.
- Financial liabilities of households rose faster than their assets which might be an indication of rising indebtedness and increasing distress.
Government’s claim:
- The household financial savings may be reducing but it does not imply fall in total savings.
- This is because households took advantage of low interest rates after the pandemic to invest in assets such as vehicles, education and homes.
The optimistic claim:
There are evidences to support that the Household savings have shifted from financial to physical assets.
- There has been an increase in household construction post-COVID, marked by 15% (when measured in 2011-12 prices) growth in the construction sector, and 10% between 2021-22 and 2022-23.
- Sectors such as trade, hotels, transport and communications grew during the same period.
- Housing loans from Scheduled Commercial Banks (SCBs) grew at double-digit rates between 2018-19 and 2022-23, with loans from housing finance companies growing almost 17 times between 2019-20 and 2022-23.
- Liabilities in other non-financial assets such as education and vehicle loans from SCBs increased significantly between 2021-22 and 2022-23, at 17% and around 25% growth respectively.
- Households have taken advantage of the low interest rates set by the RBI in the wake of the pandemic and increased their liabilities to purchase non-financial assets such as houses rather than spend for consumption needs.
The pessimistic claim:
Another contrasting picture can be seen from the below evidence points:
- Gross financial assets declined marginally as a share of GDP from 11.1% to 10.9% between 2021-22 and 2022-23.
- Though loans for housing, education and vehicles have increased, other components of personal loans have risen even faster.
- The share of housing loans in total non-food personal loans from SCBs fell from 51.08% in 2018-19 to 47.4% in 2022-23.
- The share of education loans fell from 3.32% to 2.37%,
- Vehicle loans have remained constant at around 12%.
- While outstanding credit card loans increased from 3.8% to 4.7%, loans against gold jewellery increased from 1.07% to 2.16%, and the category of “Other Personal Loans” showed the largest rise from 24% to 27.42%.
- These categories of loans do not necessarily indicate its use for asset creation and may indicate its use to finance consumption.
The road ahead:
- The data reveals that though housing loans have increased, other forms of loans used for consumption increased even faster.
- The possible reasons shall include:
- Households are borrowing more to maintain consumption in the face of income loss after COVID and high inflation.
- Realisation of pent-up demand during the pandemic in the form of debt-financed consumption, with households optimistic about future repayment.
- Given the U.S. Federal Reserve’s commitment to maintaining higher interest rates to combat inflation, it shall cause significant stresses for households to meet increasing liabilities.
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