Higher risk factor

Increasing exposure to financial assets makes households vulnerable

A key finding of the Reserve Bank of India’s Annual Report is that the household asset-allocation pattern is undergoing a change. A larger share of such savings is now being parked in financial assets, exposing households to greater risks. The RBI’s preliminary estimates indicate that household financial savings, net of financial liabilities, rose to 8.1 per cent of Gross National Disposable Income, or GNDI, in 2016-17. This was on the back of a rise to 7.8 per cent in 2015-16 and 7.2 per cent in 2014-15. Currency holdings and provident fund holdings declined while investments in deposits, insurance, and shares and debentures rose. The financial liabilities of households also rose due to an increase in retail loans. Overall, individuals held Rs 9.8 lakh crore in fund assets by end-July 2017, a year-on-year (YoY) increase of 40 per cent. This was 48 per cent of all mutual fund assets, 3 per cent more than a year ago. Fund assets under management swelled by a huge Rs 4.8 lakh crore, an increase of 31 per cent YoY. Household investments in equity schemes jumped 50 per cent.

This change in attitude has been a key driver for the stock market. While funds have focused on index heavyweights, retail investors buying direct equity have pushed up mid-cap and small-cap stock prices as well. Yields in corporate debt have also reduced because debt funds have deployed their rising corpus. A combination of low interest rates, a moribund real estate market, and a decelerating economic growth rate have led to a lack of alternative investment avenues. Until recently, of the average Indian household’s assets, 77 per cent was in real estate, 11 per cent in gold, 7 per cent in other durable goods (such as a personal vehicle or inventory for a shop), and just 5 per cent in financial assets. But households’ physical savings have declined from 12.4 per cent of GNDI in 2014-15 to 10.7 per cent in 2015-16. Indeed, the value of household savings has fallen, due to problems in the real estate sector.

Of course, the willingness to deploy savings in financial assets is an encouraging sign since that fuels economic growth. However, larger financial exposures also raise risk because households get more exposed to scams, corporate defaults, and stock market crashes. What’s more, the average retail investor is usually unaware of such risks. These are serious concerns. The stock market is at high valuations even if comparison to historical data, such as the market capitalisation to GDP ratio, suggests that stocks may have room to rise further. The rising trend of non-performing assets also indicates that India Inc is struggling to service debt obligations. If economic recovery does not happen, the underlying risks will worsen. This is a good time, then, for policymakers to create safer investment avenues, such as pension funds that can invest in long-term infrastructure projects. The government and regulators also need to work together to create more financial awareness across the retail segment because too often they get swayed by short-term market movements and lose perspective on the long-term asset allocation. This must be backed by robust mechanisms to redress grievances.