India's household savings have long been a cornerstone of its economic growth story, fuelling investments in infrastructure, technology, and entrepreneurship. This savings culture has played a pivotal role in India's journey to becoming one of the world's fastest-growing economies. However, recent data has sparked discussions and raised questions about the trajectory of these savings. What do the numbers tell us, and what are the broader implications for India's economy?
In the latest issue of the Reserve Bank of India's bulletin, a revealing statistic took center stage: India's net household financial savings rate dipped to 5.1% of GDP in the fiscal year 2022-23, marking its lowest point in years. This figure is not just a data point; it's a reflection of changing dynamics within India's financial landscape.
A closer look at the numbers reveals a continuous decline, beginning with the pandemic year's peak of 11.5% in 2020-21, descending to 7.2% in 2021-22, and further plummeting to 5.1% in 2022-23. Notably, this downward trajectory persisted even when compared to the pre-pandemic "normal" year of 2019-20, which stood at a more robust 8.1% of GDP.
The question that emerges is whether this decline is an ominous sign of growing household indebtedness or a natural outcome of changing consumer preferences in structuring their asset portfolios.
It's essential to break down the components of this shift in household finances to comprehend the broader picture. The primary contributor to this decline has been an increase in financial liabilities, which surged by about 2 percentage points of GDP in 2022-23, compared to 2021- 22 and 2019-20.
The bulk of household borrowing traditionally came from banks, constituting over 75% of borrowing, while non-bank finance companies (NBFCs) played a smaller role. However, a significant shift has occurred in the borrowing landscape. Bank borrowing witnessed a decline, notably from over 86% in 2021-22 to about 77% in 2022-23, indicating that households are less reliant on banks for their financial needs. Concurrently, borrowing from NBFCs escalated from a mere 2.4% in 2021-22 to a substantial 15.2% in 2022-23, signifying a significant shift in the credit market.
This transformation in borrowing behaviour is not merely a financial statistic. It reflects the evolving dynamics of credit access and risk assessment. Banks have become more stringent in their lending criteria, leaving potential borrowers who don't meet these criteria in search of alternatives. This is where NBFCs have come into play, offering less restrictive lending norms and expanding their market share.
The rise of financial liabilities among households is a multi-faceted story. It speaks to the shifting sands of the financial landscape in India. While banks have made efforts to clean up their balance sheets, the risk hasn't disappeared. It has simply shifted from banks to NBFCs. This raises concerns about the overall financial stability of the sector and the potential consequences of increased household indebtedness.
Nonetheless, a critical challenge in assessing India's household sector's financial health lies in the absence of disaggregated data. The household sector comprises both business and non business households, each facing distinct economic constraints and opportunities. Any assessment of the sector's financial health must account for these differences.
It's worth noting that the decline in India's net household financial savings rate, even when compared to the pre-pandemic year, doesn't necessarily indicate a sudden drop in household savings or domestic savings rates. In 2021-22, both savings rates were marginally higher than in 2019-20, highlighting the resilience of Indian households in the face of economic challenges.
Yet, to sustain the robust economic growth rates that India aspires to achieve, a return to the high savings rates observed during the first decade of this century is likely necessary. These high savings rates were instrumental in supporting growth and investments in various sectors of the economy.
But what do these statistics mean for the broader Indian economy? The answer is multifaceted. On the one hand, a decline in household savings may not necessarily spell a financial crisis. It could be indicative of shifting dynamics within the financial sector, where borrowers are exploring new avenues for credit.
However, there are broader implications to consider. An increased reliance on NBFCs for borrowing may be a sign that banks have become more conservative in their lending practices. While this can reduce the risk on the bank's balance sheet, it can also result in creditworthy borrowers being turned away.
Moreover, the rise in household indebtedness is not without risks. As households accumulate more debt, the potential for defaults and financial stress looms. It's a risk that affects both the household sector and the financial institutions that lend to them.
India's economic growth has been a standout in recent years, with projections for the current fiscal year indicating a pace that outstrips most major economies. However, sustaining this growth is not solely dependent on private consumption. It's essential to maintain investment spending in areas such as infrastructure, technology, and manufacturing.
In this context, the evolving landscape of India's household savings warrants a more nuanced understanding. The shifting preferences in borrowing, the role of NBFCs, and the financial health of households all intertwine in a complex narrative. While this decline in savings rate
may not signal a financial crisis, it does underscore the importance of closely monitoring these developments and adapting to the changing financial landscape.
Written by Dinesh Manjunath, Rahul Nair
Sh. Dinesh Manjunath is the Ex-Head (Strategy, Products & Business Development) of Sohar International Bank and the Ex-Chief Consultant of Indus Funds. He is currently contributing as the Principal Advisor and Mentor at House of Startups India.
Rahul Nair is the Manager at House of Startups India and a Delhi-based lawyer who graduated from the National University of Advanced Legal Studies, Kochi.