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:

1. The household financial savings may be reducing but it does not imply fall in total savings.
2. 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.

1. 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. 
2. Sectors such as trade, hotels, transport and communications grew during the same period.
3. 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.
4. 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.
5. 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:

1. Gross financial assets declined marginally as a share of GDP from 11.1% to 10.9% between 2021-22 and 2022-23.
2. Though loans for housing, education and vehicles have increased, other components of personal loans have risen even faster. 
   1. 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.
   2. The share of education loans fell from 3.32% to 2.37%,
   3. Vehicle loans have remained constant at around 12%.
   4. 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%. 
   5. These categories of loans do not necessarily indicate its use for asset creation and may indicate its use to finance consumption. 

The road ahead:

1. The data reveals that though housing loans have increased, other forms of loans used for consumption increased even faster. 
2. The possible reasons shall include:
   1. Households are borrowing more to maintain consumption in the face of income loss after COVID and high inflation.
   2. Realisation of pent-up demand during the pandemic in the form of debt-financed consumption, with households optimistic about future repayment.
3. 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.