The Reserve Bank of India (RBI) revealed a significant decline in net financial savings of households as a percentage of GDP in its latest data on September 21. In response to the concerns raised regarding household savings and their impact on the economy, the Ministry of Finance on Thursday, September 21, provided a statement clarifying the situation.
The RBI report noted that in 2022-23, the net financial savings of households as a percentage of GDP dropped to a near-five-decade low of 5.1 percent, compared to 7.2 percent in 2021-22. The primary driver behind this decline was a substantial increase in household liabilities, which were 76 percent higher in 2022-23 compared to the previous fiscal year, with a notable 54 percent surge in borrowings from commercial banks.
The Ministry of Finance on Thursday shed light on the "real factors" influencing household savings. "Data indicates that changing consumer preference for different financial products is the real reason for the household savings and there is no distress as is being circulated in some circles," it said.
In a 12-point rebuttal, the finance ministry said the following:
-Between June 2020 and March 2023, the stock of household gross financial assets went up by 37.6 percent, and the stock of household gross financial liabilities went up by 42.6 percent — no big difference between the two.
-Households added net financial assets of 22.8 lakh crore in FY21, nearly 17.0 lakh crore in FY22 and 13.8 lakh crore in FY23. So, they added fewer financial assets to their portfolio than in the previous year and the year before, but it is important to note that their overall net financial assets are still growing.
-They added financial assets by a lesser magnitude than in the previous years because they have now started taking loans to buy real assets such as homes.
-RBI data on personal loans provides us with evidence. Personal loans given by banks have several components. Key among them are real estate loans and vehicle loans. Both are collateralised. These two constitute 62 percent of the overall personal loans by the banking sector. The other big categories are ‘other personal loans’ and ‘credit card loans’.
-What we see in the chart enclosed is that there has been a steady double-digit growth in loans for housing since May 2021. So, financial liabilities have been incurred to buy real assets. Vehicle loans have been growing at double digits (y/y) since April 2022 and more than 20 percent (y/y) since September 2022. The household sector is not in distress, clearly. They are buying vehicles and homes on mortgages.
-Overall household savings (current prices), which include financial, physical and jewellery, have grown at a CAGR of 9.2 percent between 2013-14 and 2021-22 (eight years). Nominal GDP has grown at a CAGR of 9.65 percent during the same period.
-Hence, household savings/nominal GDP has remained constant, from around 20.3 percent to 19.7 percent as of FY22. As RBI puts it, the household sector includes unincorporated enterprises or the quasi-corporate sector.
-Households added net financial assets of Rs 13.8 lakh crore in FY23 compared to nearly Rs 17 lakh crore the year before and Rs 22.8 lakh crore in FY21. The biggest item that seems to have swung it is the net flow of credit from Non-Banking Financial Corporations (NBFC) to the household sector, which includes unincorporated enterprises.
-In FY22, NBFCs had lent only Rs 214,000 crore to the household sector. In FY23, they had lent nearly Rs 240,000 crore. That is a whopping 11.2 times. That has set off alarm bells as commentators forgot that these are ‘flow’ numbers.
-Overall, NBFC retail loans outstanding were Rs 8.12 lakh crore in FY22, and it went up to Rs 10.5 lakh crore in FY23, a growth of ‘only’ 29.6 percent.
-The two big components in NBFC retail loans are vehicle loans and ‘other retail loans’. Vehicle loan outstanding increased by about 12.5 percent, from 3.4 lakh crore loans in FY22 to 3.82 lakh crore loans in FY23. Other retail loans went up from 3.95 lakh crore to 5.22 lakh crore. These are microfinance loans, loans to Self-Help Groups, advances to individuals against gold and other loans.
-So, 36 percent of NBFC’s outstanding retail loans are for the purchase of vehicles. That is not a sign of distress on the part of households but of confidence in their future employment and income prospects. That has been amply brought out in the recent Consumer Confidence Survey of RBI, and the C-Voter Survey of Consumer Optimism conducted in July and August, respectively.
(Edited by : Amrita)
First Published: Sept 21, 2023 4:14 PM IST
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