Household Deposit Trends Throw Up Red Flags
Fewer avenues to spend and a desire to hold on to easily accessible funds for any unforeseen health expenses are widely believed to have led to forced precautionary savings by households during the pandemic.
While this trend is borne out by detailed data on bank deposits released by the Reserve Bank of India, the quantum of change in household deposits may hide signs of stress in the economy.
Household deposits grew 12.9% in FY21, according to data published by the RBI. While this was the fastest pace since FY18—when this growth first began to falter—it was slower than the five-year average of 13.2% preceding FY18, according to data collated by Kotak Institutional Equities.
It was also significantly below the five-year average household deposit growth of 24.2% between FY07 and FY12.
The household sector includes individuals, unincorporated enterprises and non-profit institutions serving households.
Household deposit growth was also outpaced by private corporate deposits, which grew 26.5%—the highest in almost a decade—in FY21.
"The slower growth in retail deposits and solid growth in private corporate sector gives two opposing signals of the current economic condition," said the Sept. 27 Kotak report
The private sector saw accelerated deposit growth for the third consecutive year providing further evidence that the impact of the pandemic was not negative, it said.
On the other hand, the reduced consumption expenditure should have ideally accelerated savings in households as seen in other geographies, but the slower growth suggests that the impact on account of Covid-19 has been painful, the note explained.
"It's probably a reasonable assumption to make that the wealth impact is currently within a smaller share of households that have witnessed limited income loss or which have a higher share of financial assets that have appreciated meaningfully," the report said.
Within household deposits, savings accounts led the growth, rising 17.5% on an annual basis. While current accounts deposits grew 12.8% from March last year, term deposits grew 9.3%.
The bulk of the retail deposit growth is within savings accounts suggesting that the interest rate differential between term and savings accounts was not material, the research note said.
Southern States, Urban Areas Lead
Across different regions, southern states saw the sharpest rate of growth in household deposits at 15.8% over a year earlier.
Among major Indian states, Karnataka, Maharashtra and Andhra Pradesh saw the highest growth rates. While household deposits grew 20.8% in Karnataka, Maharashtra and Andhra Pradesh saw them grow 18.3% and 17.2%, respectively.
Metropolitan branches of banks, with more than half the total deposits, accounted for 59.6% of incremental deposits during FY21, compared with 43.2% in the previous year, according to the RBI.
The strong growth in urban markets suggests that the salaried segment has outperformed even more than the self-employed, the Kotak report said.
To be sure, household deposits still make up the bulk of all deposits and their share continues to move up, but at a slower pace than private corporate deposits.
Household deposits saw their share rise to 64.1% by March 2021, from 63.5% in March 2020. Private corporate deposits saw the sharpest addition among all categories, comprising 12.7% of aggregate deposits compared with 11.3% in March 2020.
Household Finances: Headwinds Ahead?
While households are expected to remain cautious, the savings rate will likely fall substantially in 2022, according to projections by Oxford Economics. It's, however, likely to still remain above the 2019 levels.
Indian households have hoarded savings through the Covid crisis, but in the longer run, traditional drivers will determine the savings outlook, according to Priyanka Kishore, head of India and south-east Asia economics at Oxford Economics.
Empirically, the savings rate has a strong positive relationship with the real per capita income growth. "The anticipated slowdown in income growth over 2019-2030 will likely push India's savings rate back towards its pre-pandemic level of 24-25% in the next two to three years," said Kishore in a Sept. 23 research note.
That said, not all factors point to a fall in the savings rate in the long run, Kishore said. "Weak social safety nets will keep the onus on households to ensure that they save enough to plan their retirement."