The Finance Ministry on Thursday brushed aside concerns in certain quarters over the sharp fall in net financial savings of households in recent years, asserting that there was “no distress” among households on this count.

The “real reason” (for the altered household savings situation) is the changing consumer preference for different financial products and there is no distress as is being circulated in some circles, the Ministry said in a post in social media platform X. 

Data released on Monday in the latest RBI monthly bulletin showed that net financial savings of the household sector fell to 5.1 per cent of GDP in FY23 from 7.2 per cent of GDP in FY22 and 11.5 per cent in FY21. 

At the same time, annual financial liabilities of households rose 5.8 per cent compared with 3.8 per cent of GDP in 2021-22.

The latest RBI data point on net financial savings being a 50-year low has raised concerns in several quarters that this was a clear pointer to severe income crunch and consequent negative impact on consumption among households.

The Ministry explained how the savings patterns of households may have changed in recent years using 12 bullet points. 

Shift in preference

The broad point conveyed was that there has been a shift from financial savings to physical savings among Indian households. This may have been accentuated by increased resorting to loans (for real estate and vehicle purchase) to take advantage of the low interest rate regime during the pandemic.

The Ministry highlighted that the Stock of Household Gross Financial Assets went up 37.6 per cent, and the Stock of Household Gross Financial Liabilities went up 42.6 per cent between June 2020 and March 2023, reflecting no big difference between the two. 

More real assets

Secondly, households added net financial assets of ₹22.8-lakh crore in FY21, nearly ₹17-lakh crore in FY22 and ₹ 13.8 lakh crore in FY23. So, they added less financial assets to their portfolio than in the previous year and the year before, but their overall net financial assets are still growing, the Ministry said.

“They added financial assets by a lesser magnitude than in the previous years because they have now started taking loans to buy real assets such as homes,” it said.

The biggest item that seems to have swung it (addition in net financial assets) is the net flow of credit from NBFCs to the household sector, which includes unincorporated enterprises.

Growth in loans

The Ministry noted that RBI data on personal loans “provides us with evidence” that households are taking loans to buy real estate such as homes. 

Personal loans given by banks have several components. Key among them are real estate loans and vehicle loans. Both are collateralised. These two constitute 62 per cent of the overall personal loans by the banking sector. The other big categories are other personal loans and credit card loans, it said.

Pointing out that there has been a steady double-digit growth in loans for housing since May 2021, the Ministry said, “Financial liabilities have been incurred to buy real assets. Vehicle loans have been growing at double digits (y/y) since April 2022 and more than 20 per cent (y/y) since September 2022. The household sector is not in distress, clearly. They are buying vehicles and homes on mortgages.”

The Ministry’s post in platform X highlighted that overall household savings (current prices), which include financial, physical and jewellery, have grown at a Compound Annual Growth Rate (CAGR) of 9.2 per cent between 2013-14 and 2021-22 (eight years) and the nominal GDP has grown at a CAGR of 9.65 per cent during the same period.

SBI Ecowrap report

An Ecowrap report released by SBI Research on Thursday said that it is “completely misleading” to look at this only as a 50-year low for financial savings, as household savings must be looked into a sum total of physical and financial savings.

Though household financial savings moderated, household financial assets have jumped, according to the SBI Research note.

The decline in net financial savings of households has resulted in a concomitant increase in household savings in gross physical assets, it highlighted.

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