What does a drop in household financial savings imply for India?

Source– The post is based on the article “What does a drop in household financial savings imply for India?” published in “The Hindu” on 28th September 2023.

Syllabus: GS3 – Economy

Relevance- Issues related to savings and investment in the economy

News– The household financial savings data recently published in the latest issue of the RBI bulletin indicated that India’s net household financial savings rate had declined to only 5.1% of GDP in 2022-23, the lowest in decades.

What are the factors behind the decline in financial savings rate?

It can largely be attributed to an increase of around 2% of GDP in financial liabilities in 2022-23 compared to both 2021-22 and 2019-20.

The largest component of these liabilities by a considerable margin is bank loans. Borrowing from NBFCs comes in a distant second, followed by housing finance and insurance.

Between the years 2020-21 and 2022-23, there has been a substantial decrease in the proportion of household borrowing from banks. The share of borrowing for housing finance has also decreased during this period.

However, there has been a significant increase in the share of borrowing from NBFCs. It has surged from 2.4% in 2021-22 to 15.2% in 2022-23.

What can be inferred from decline in the financial savings rate?

The decrease in net household financial savings primarily reflects an increase in the financial obligations of the household sector.

This shift is a consequence of households moving away from borrowing from traditional banks, and seeking loans from non-banking financial companies (NBFCs).

Bank credit has experienced significant growth, a substantial portion of this expanded credit flow has been directed towards NBFCs, real estate, and personal loans rather than industrial purposes.

Furthermore, the non-performing asset ratios of both private and public sector commercial banks have notably improved.

It appears that there has been a substantial surge in the demand for loans from households. However, banks have adhered to strict lending criteria. These borrowers, who may not meet the stringent creditworthiness requirements, have turned to NBFCs.

As a result, banks have managed to clean up their balance sheets while transferring the associated risk to NBFCs.

However, it’s crucial to recognize that the overall risk exposure of the financial sector has not decreased. In fact, it has increased due to the rising indebtedness of the household sector.

Is there a substantial decrease in household savings rate?

The reduction in India’s net household financial savings rate does not signify an abrupt decline in either the household savings rate or the domestic savings rate.

In 2021-22, both rates stood at 19.7% and 30.2% of GDP, respectively. It is slightly higher than in 2019-20.

A savings rate of 30.2% also surpasses that of many other emerging market and developing economies. However, it falls short when compared to the rates achieved during most of the past two decades