The Reserve Bank of India’s (RBI) Quarterly Estimates of Households’ Financial Assets and Liabilities has recently shown a rise in net financial assets of Indian households to 7.7% of the Gross Domestic Product (GDP) in the financial year (FY) 2019-20.
Understanding Net Financial Assets
Net Financial Assets are defined as the difference between Gross Financial Assets (GFA) (deposits and investments) and Financial Liabilities (borrowings). The report indicates an increase in these assets from Rs. 13.73 lakh crore in FY 2018-19 (7.2 % of GDP) to Rs. 15.62 lakh crore (7.7% of the GDP) in FY 2019-20. Meanwhile, the GFA rose marginally from Rs. 21.23 lakh crore in FY 2018-19 to Rs. 21.63 lakh crore in FY 2019-20.
Decline in Financial Liabilities
The study also pointed out a noticeable downturn in financial liabilities from Rs. 7.5 lakh crore to Rs. 6.01 lakh crore in the same period, which was a significant factor in the rise of net financial assets. The theory suggests that during periods of slowdown and income uncertainty, households tend to save more which might explain this trend.
Impact of Lockdown
Additionally, the first quarter of FY 2020-21 is predicted to witness a further surge in net financial assets of households due to reduced consumption induced by lockdown measures.
Reduction in Household Borrowing
Alongside the rise in net financial assets, there has been a decline in bank borrowings by households. This could be indicative of a slowed-down economy and risk avoidance by banks. As individual income levels are either static or dwindling, this could be a direct effect of the economic slowdown.
Changes in Savings
In terms of value, the GFA has increased marginally from Rs. 21.23 lakh crore in FY 2018-19 to Rs 21.63 lakh crore FY 2019-20. However, the rate of growth in overall savings has not been proportionate. Household savings in bank deposits as a percent of GDP went down to 3.4% in FY 2019-20 from 3.8% in FY 2018-19.
This decrease in household savings is attributed to the banks lowering their interest rates following an acute reduction in the repo rate by the RBI over the last 18 months. Between January 2019 and March 2020, the repo rate was slashed by 210 basis points from 6.5% to 4.4%. In May, 2020 RBI reduced it further to 4%.
Investment in Small Saving Schemes
On the other hand, small saving instruments offering higher rates than bank deposits have witnessed greater inflow of household savings, increasing their share as a percent of GDP from 1.1% to 1.3%. Similarly, savings into life insurance funds and mutual funds as a percent of GDP dropped from 2.2% in FY 2018-19 to 1.9% in FY 2019-20.
Potential Issues and Way Forward
A potential downside could be households resorting to their savings due to delays in economic revival post Covid-19 lockdown. This could reduce the financial surplus (savings) of households and consequently affect investment, potentially exacerbating the economic slowdown. To counteract this, the government could focus on resolving these post-lockdown issues to boost economic activity. One possible move could be to infuse cash into the public to stimulate demand and thereby increase production.
