Household financial savings improve on sharp decline in borrowings: RBI

Savings more precautionary than productive, consumer demand unlikely to improve soon

In a year when the economy grew the slowest in 11 years, Indian households bolstered their net financial savings by sharply reducing their borrowings, preliminary data released by Reserve Bank of India in its annual report show. 

Net financial savings of households stood at 7.6 per cent of the disposable income in the country in 2019-20. This is a significant jump from 6.4 per cent in 2018-19, which was lowest since 2011-12. 

The apparent improvement, however, masks the nature of these savings. Most of these are of precautionary nature, stemming from an aversion to spend, rather than from increased incomes, officials told Business Standard. FY20 saw the lowest growth in per capita incomes in a decade, and a rise in financial savings in this scenario points to a gradual drop in future consumer spending, experts said. 

In simple terms, households were less leveraged than the past few years, but their existing savings likely went more into bank deposits, which currently do not prove to be an efficient source of investment finance due to risk aversion by banks, making these savings less productive than usual. 

A big indicator of that is that households removed their exposure to funds that finance the government and increased it towards insurance and retirement funds in FY20.

Covid-19 may push households furthermore into precautionary savings and suck out the improvement in liabilities, experts said. 

 

“Despite an imminent fall in incomes in FY21 and the trend of deleveraging, net financial savings by households may still improve this year, but by default as people build up precautionary savings in the form of more cash, bank deposits and even retirement corpus to cope with an uncertain future,” said Soumya Kanti Ghosh, chief economist at SBI.  

“Thus, revival in consumer demand will be difficult than we perceive,” he said. 

Net financial savings are the remainder from gross savings and liabilities. Gross financial savings of households remained at 10.5 per cent of the gross national disposable income (GNDI), close to the average of the decade. But financial liabilities, which represent money owed by households towards financial institutions, dropped to a four-year low of 2.9 per cent of GNDI in FY20.

The first-of-its-kind quarterly analysis of household financial savings by RBI’s Department of Economic Policy and Research provides some evidence into this. It showed in June that financial liabilities of households were negative in the beginning of FY20, suggesting that the public shunned new borrowings in the June  quarter of the previous year, and that has now resulted into improvement in net financial savings for the entire financial year.

Gross financial savings of households include monies saved in banks, provident funds, pension schemes, shares, insurance and in the form of currency, among other categories. These savings form the pool of domestic finance for investments which are crucial to job creation, and are currently critical as they will be crucial in deciding the pace of economic revival.

RBI assessment of financial savings of household shows that claims on government dropped to zero in FY20 from being 1 per cent of disposable income in FY19, while contribution to insurance funds improved from 1.3 to 1.7 per cent of GNDI in a year. 

The annual report of the central bank sounded a cautionary note along with the data that indicated an improvement in net financial savings.

“This improvement has occurred on account of sharper moderation in household financial liabilities than that in financial assets. COVID-19 related economic disruptions, however, caused a sharper decline in household financial assets in Q4:2019-20,” said the report. 

The National Statistical Office (NSO) will release final data on FY20 savings in January 2021, and the RBI’s estimate is a preliminary one based on limited data.