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Explained: Why household savings going up might not be good news

RBI data shows that in the year ended March 2020, the net financial assets jumped from Rs 13.73 lakh crore in FY’19 (7.2 % of GDP) to Rs 15.62 lakh crore (7.7% of the GDP) last year.

Written by Sandeep Singh , Edited by Explained Desk | New Delhi | Updated: June 19, 2020 9:24:46 pm
household saving, net household savings, household savings up, net household savings up, Express Explained, Indian Express Net financial asset is the difference between gross financial assets (deposits and investments) less financial liabilities (borrowings).

Net financial assets of Indian households rose to 7.7 per cent of the GDP in FY’20. Though it may appear to be a positive development, a closer look at the numbers suggest that it is on account of decline in bank borrowings by households which in turn is a reflection of slowdown in the economy and weaker sentiments.

What are net financial assets?

Net financial asset is the difference between gross financial assets (deposits and investments) less financial liabilities (borrowings). RBI data shows that in the year ended March 2020, the net financial assets jumped from Rs 13.73 lakh crore in FY’19 (7.2 % of GDP) to Rs 15.62 lakh crore (7.7% of the GDP) last year. While the gross financial assets (GFA) rose marginally Rs 21.23 lakh crore in FY’19 to Rs 21.63 lakh crore last year, the financial liabilities (FL) witnessed a sharp decline from Rs 7.5 lakh crore to 6.01 lakh crore, thereby contributing to the rise in net financial assets. In terms of percentage of GDP, the GFA declined from 11.1 per cent to 10.6 per cent and the financial liabilities fell deeper from 3.9 per cent of GDP to 2.9 per cent in FY’20.

What does decline in financial liabilities mean?

According to RBI, 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. Economists say that since there is an economic slowdown and income levels of individuals are either going down or not increasing, the financial sector will practice higher caution in extending loan and that is what is leading to a decline in financial liabilities of households. It is reflective of a slowdown in the economy.

Are households saving more?

In terms of percentage of GDP the GFA declined from 11.1 per cent to 10.6 per cent. In value terms it has increased marginally from Rs 21.23 lakh crore in FY’19 to Rs 21.63 lakh crore last year. While overall savings have not grown in proportion, a closer look at the data shows that there has been shift in preference of deposit instruments by individuals over the last few years.

While household savings in bank deposits as a per cent of GDP stood at 3.8 per cent in year ended March 2019, it decline to 3.4 per cent in March 2020 as banks reduced their interest rates following sharp cut in repo rate by the Reserve bank of India over the last 18-months. A repo rate is the rate at which RBI lends to commercial banks. Between January 2019 and March 2020, RBI cut the repo rate by 210 basis points from 6.5 per cent to 4.4 per cent. In May, the reduced it further to 4 per cent.

Small saving instruments that continued to offer higher rates than bank deposits witnessed a higher deployment of household savings as their share as per cent of GDP increased from 1.1 per cent to 1.3 per cent in the same period.

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Savings into life insurance funds and mutual funds as a per cent of GDP also declined from 2.2 per cent in FY’19 to 1.9 per cent in FY’20. 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. However, since lockdown announcement in march 2020, there has been a sharp rise in currency with the public. RBI data shows that the current with public increased from Rs 23.41 lakh crore on March 27, 2020 to Rs 25.12 lakh crore in the week ended May 22, 2020.

Is household savings expected to rise?

RBI article “Quarterly Estimates of Households’ Financial Assets and Liabilities” says several studies show households tend to save more during a slowdown and income uncertainty. RBI 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 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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