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In the last two years, at least 55 per cent of the retail credit to households have gone to housing, education and vehicle purchase, revealed a report by SBI Ecowrap. It believes low-interest rate regime in India during the pandemic resulted in a "paradigm shift" of households' savings from financial to physical assets.
"It may be noted that there is a significant long-run relationship between Housing Loans and household’s savings in physical assets. Every Re 1 increase in Housing loans has resulted into a Rs 2.12 increase in household’s savings in physical assets for the 14-year period ended FY22," said Dr. Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India.
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The net financial saving of the household sector fell to a 50-year low to 5.1% of GDP in FY23 from 11.5% in FY21 and 7.6% from FY20 (pre-pandemic). "However, this is completely misleading as household savings must be looked into as a sum total of physical and financial savings," said Ghosh.
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The decline in net financial savings of households has resulted in a concomitant increase in household savings in gross physical assets, noted the report.
In fact, savings in physical assets which accounted for more than two-thirds of household savings in FY12, had declined to 48% in FY21. However, the trend is again shifting and the share of physical assets is expected to reach 70 per cent in FY23, due to a decline in share of financial assets.
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" We believe that the total household savings (both financial +physical) for FY23 would still surpass the FY22 levels despite the decline in financial savings as household savings in physical assets has jumped Rs 6.5 trillion in FY22 over FY21 and as per current trends it is expected to jump further by upto Rs 5 trillion in FY23 and hence will outstrip the increase in household indebtedness," said Ghosh.
SBI believes this indicates that the shift from financial savings to physical savings was triggered by not just a low-interest rate regime in the pandemic but also by a recovery in real estate sector and the increase in property prices.
The RBI House Price Index shows a modest acceleration since FY21, which may be acting as a motivator for buying homes.
Are households utilising their savings for capital formation?
The household sector investment gradually recovered to reach 11.8% in FY22. It is pertinent to note that there has been an increase in capital formation as % of household gross savings to 60% in FY22 from a low of 53.2% in FY16 (exception: 47.8% in FY21). Thus, households have now started utilizing more of their savings for capital formation. This number is expected to increase further to a decade-high of 68% in FY23, said the report.
