Driven by reduced bank borrowings by Indian households in the year ended March 2020, the net financial assets of Indian households rose to 7.7 per cent of GDP. The net financial assets as a per cent of the GDP had moderated to 7.2 per cent in FY19 from 7.7 per cent FY18.
Data from the Reserve Bank of India (RBI) data shows that in the year ended March 2020, the net financial assets — defined as gross financial assets less financial liabilities — jumped from 13.73 lakh crore in FY19 to Rs 15.62 lakh crore last financial year. While the gross financial assets rose from Rs 21.23 lakh crore to Rs 21.63 lakh crore last year, the financial liabilities witnessed a sharp decline from Rs 7.5 lakh crore to 6.01 lakh crore, thereby contributing to the rise in net financial assets.
Pointing that the improvement in net financial assets of households has occurred due to moderation in household bank borrowings being sharper than that in bank deposits, the central bank in its article titled ‘Quarterly Estimates of Households’ Financial Assets and Liabilities’ said that the decline in bank borrowings is reflective of the slowdown in economy in 2019-20.
“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.
While gross financial assets of households as a per cent of GDP declined from 11.1 per cent in FY19 to 10.6 per cent in FY20, a closer look into the savings data shows that the total deposits with banks as a per cent of GDP declined from 3.8 per cent to 3.4 per cent in the same period. Savings into life insurance funds and mutual funds as a per cent of GDP also declined from 2.2 per cent to 1.9 per cent.
Not a healthy trend, reflects slowdown
The rise in net financial assets of households on account of a decline in share of borrowings is not a healthy trend as it reflects slowdown in the economy, decline in credit demand by households and even risk aversion by banks. It can also be seen in the credit growth data of banks in FY20, which stood at 6.8 per cent. For the personal loan category, credit growth was 15 per cent last year— lowest in at least five years.
However, deposits into small savings instruments (excluding PPF) rose from 1.1 per cent of the GDP in FY19 to 1.3 per cent in FY20. The percentage of household assets in the form of currency also declined from 1.5 per cent to 1.4 per cent in the same period.
Pointing that currency and deposits with banks accounted for bulk of total financial assets (66 per cent), followed by insurance funds and mutual funds the report said that COVID-19 related uncertainties, have resulted in an outflow from mutual funds and a flight to currency holdings.
While the financial assets as a percentage of GDP have declined in the last year, the report expects a spike in savings in current times of slowdown and income uncertainty.
The report said, “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 is a possibility of a shift by households from physical to financial assets.”
The RBI report further noted that while 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.”
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