Number Theory: Making sense of the fall in household savings

This is the first of a two-part story on household finances. The second part will look at the relationship between household debt and India’s economic growth

On Monday, the Reserve Bank of India’s monthly bulletin released data on households’ financial assets and liabilities up to 2022-23. The data provided by RBI are flow, not stock numbers, and therefore measure the change in financial assets and liabilities of households in a fiscal year rather than their total assets or liabilities at a point of time. The key takeaway from the data is that there has been a sharp fall in net financial assets of households as a share of GDP with the number falling from 11.5% in 2020-21 to just 5.1% in 2022-23.

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What has led to such a fall in this number? And should this be a cause for concern ? This two-part data journalism series will try and answer this question in detail. The first part will explain the mechanics of the change in this number and why it is not worthy of pressing the panic button. The second part will put this number in context vis-à-vis India’s larger political economy story.

Fall in household savings

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  Households saved less and borrowed more in 2022-23

  Net financial assets of household are the difference between the change in their financial assets and liabilities over the course of a financial year. A comparison of the 2022-23 number shows that financial assets as a share of GDP fell sharply in 2022-23 while there was an increase in financial liabilities. To be sure, some of the fall in the former and a rise in the latter can be attributed to the pandemic. In 2020-21 and 2021-22, both of which saw economic disruptions on account of the lockdown and the second wave, households had to resort to what has been described as ‘forced savings’ as they could not have spent on many things even if they wanted to. This means that some of the spending, even if debt financed, in 2022-23 must be of the pent-up variety. However, it needs to be kept in mind that financial assets and liabilities in 2022-23 are lower and higher respectively than even the pre-pandemic years. We will return to this question in the second part of the series.
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  Do higher borrowings and lower savings necessarily mean growing distress?

  Deductive reasoning suggests that it could very well be the case. But it is important that this question is dealt with more carefully. Let us look at this from the perspective of both the stakeholders. What does it mean for the financial system? The data published by RBI reflects developments within the formal financial system, and only records household liabilities vis-à-vis financial corporations (banks, NBFCs and insurance companies) and non-financial formal sector (private corporations and government). More than three-fourth of the household liability captured in the RBI data is on account of borrowing from the banking system. Latest RBI data shows that banks are facing the exact opposite of stress in their loan books. “Scheduled Commercial Banks’ gross non-performing assets (GNPA) ratio continued its downtrend and fell to a 10-year low of 3.9% in March 2023 and the net non-performing assets (NNPA) ratio declined to 1.0 %. The provisioning coverage ratio (PCR) rose to 74.0%. Led by strong growth in net interest income and significant reduction in provisions, the profit after tax of SCBs registered a growth of 38.4% in 2022-23”, RBI’s Financial Stability Report (FSR) said in June. “Unsecured retail loans formed only 7.9% of the total banking system credit. Moreover, their asset quality has improved, with GNPA ratio declining from 3.2 % to 2.0% during this period (March 2021 to March 2023). Thus, notwithstanding few signs of potential stress in retail loans, they do not pose an imminent risk to systemic stability”, the FSR adds.
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  What does it mean for poor households?

  RBI’s data on household liabilities does not capture non-institutional lending to households. This makes it a poor indicator to ascertain the extent of financial distress among India’s poorest households. While the really poor actually borrow more from non-institutional sources such as moneylenders rather than banks – likely a reflection of the poor not being credit worthy to avail credit from formal sources – NSSO data also shows that the richer sections of Indian households have a disproportionate share in total institutional lending. Since there is no data as of now to suggest/examine a personal loan driven growing stress in the financial sector or the poor, the only short-term question worth asking is whether the 2022-23 trend in household savings is a one-off pent-up demand reflection or a long-term trend. The second part of this series will deal with the implications of this question in detail.