Household Financial Savings Improved In FY20, Shows RBI Data
Net financial assets of Indian households saw an uptick in 2019-20, after witnessing a decline in the previous year, the RBI said.
The net financial assets of Indian households saw an uptick in 2019-20, after witnessing a decline in the previous year, showed data detailed by the Reserve Bank of India in its monthly bulletin for June.
“Net financial assets of Indian households moderated in 2018-19, reflecting higher consumption expenditure by households,” the central bank said. “In 2019-20, however, they have gathered pace touching the levels reached in 2017-18, i.e., 7.7 per cent of GDP.”
“This improvement has occurred due to moderation in household bank borrowings being sharper than that in bank deposits, except in the fourth quarter of 2019-20 due to Covid-19-related economic disruptions.”
The RBI clarified that the household financial savings rate of 6.5% of GDP for 2018-19 published by the National Statistics Office in January 2020 now works out at 7.2% of GDP based on the updated data on life insurance policies and small savings data published in Union Budget 2020-21.
The data shows that gross financial assets of households as a percentage of GDP declined marginally in 2019-20. However, household financial liabilities fell too, allowing net assets to rise.
Going forward, a spike in net financial assets of households is likely in the first quarter of 2020-21 on account of a sharp drop in lockdown-induced consumption. Lags in the pickup of economic activity may cause the financial surplus of households to taper off in subsequent quarters. With construction activity at a standstill, there’s a possibility of a shift by households from physical to financial assets.RBI Bulletin
Household financial savings are the steadiest source of finance to the Indian economy and the decline in FY19 had sparked concerns.
As such, a rebound comes as welcome relief, particularly at a time when public sector borrowing requirements are set to soar.
“The household sector is the most sustainable and self-reliant source of financing for the Indian economy. Its role is likely to become critical in the context of the policy effort gathering critical mass to lift the Indian economy from the vice-like grip of a slowdown and, more recently the life-threatening COVID-19 pandemic,” the RBI said.
The RBI data also detailed the components of household financial assets and liabilities.
Household Assets
- Commercial bank deposits accounted for 52.6%.
- Currency accounted for 13.4%.
- Life insurance holdings accounted for 23.2%.
- Mutual fund holdings accounted for 7%.
“Deposits with banks, which had declined persistently starting from Q3 2016-17, recorded an uptick starting from Q4 2018-19 as banks competed aggressively to raise resources, especially private banks,” the RBI said. “The steady increase in insurance and mutual fund products pointed to a growing appetite for alternative financial instruments. The share of currency in total outstanding assets has broadly remained constant.”
Household Liabilities
- Borrowings from commercial banks have the highest share in households’ financial liabilities. At the end of Q4 2019-20, outstanding loans availed by households from commercial banks accounted for 75.9% of total financial liabilities.
- Borrowings from HFCs accounted for 10.2% of liabilities, while other financial institutions accounted for 7.2%.
- Cooperative banks and credit societies accounted for 4.9%.
“On the liabilities side, a significant decline in the share of borrowings from the banking sector in total liabilities during 2019-20 reflected the economic slowdown and risk aversion of banks,” the RBI said. “Covid-19 related uncertainties, have resulted in an outflow from mutual funds and a flight to currency holdings.”