Fiscal 2023 witnessed a significant dip in household savings, down to a six-year low and marking a shift since the pandemic towards higher borrowings. According to government data (available with the lag of a year), the net financial savings of Indian households dropped to Rs 14.16 lakh crore in 2022-23—about 5.3 per cent of the Gross Domestic Product (GDP) compared to 7.2 per cent in the previous year.
Falling household savings is detrimental to the larger economy. The government depends on these savings—bank deposits, cash in banks and equity investments—to finance its capital investments on physical assets such as infrastructure. A dip then can squeeze the funds flow.
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What led to this fall? A research note from Crisil states that a sharp rise in borrowings by individuals from banks and other financial institutions brought down net savings. While gross financial savings grew at 10.3 per cent on-year on average between fiscal 2021 and fiscal 2023, household financial liabilities rose at the rate of over 30 per cent.
Gross financial savings comprise household cash balance, deposits and other financial market instruments. Financial liabilities, on the other hand, include households’ borrowings from banks and non-banks.
Crisil observes that since fiscal 2018, there has been a marked rise in financial liabilities. “Household financial liabilities, at 5.8 per cent in fiscal 2023, touched a peak after the global financial crisis. They have been rising well since fiscal 2018. This gels with trends in retail credit growth, which rose at an average 18.9 per cent between fiscals 2018 and 2023, well over the 10 per cent nominal GDP growth,” states the Crisil research note.
What were the reasons for the rise in retail credit? Crisil is of the view that a push from banks and other financial institutions led to a surge in retail credit since fiscal 2018. This eased a bit in 2020 and 2021, only to rebound. The entry of new players—non-banking financial companies (NBFCs) and fintechs—eased credit availability and access. Improving bank balance-sheets also contributed to rising supply of credit, the ratings firm stated.
The Crisil report puts across some numbers to support the trend of rising retail credit. Total retail credit rose to 19.4 per cent of the GDP in fiscal 2023, from 12.1 per cent in fiscal 2017. Within this, bank retail credit rose to 15.5 per cent of the GDP from 10.5 per cent, and that of NBFCs went up to 3.9 per cent from 1.6 per cent. Overall, retail credit share in the GDP is estimated to have risen further to around 23 per cent in fiscal 2024.
“The initial rise in retail credit was driven by NBFCs, which outpaced banks and housing finance companies between 2015 and 2018,” the report said. Among banks, private sector banks led the initial thrust on retail credit, followed by public sector peers. Regulatory changes in the early 2010s, wherein customers were required to share their data with credit bureaus, coupled with technological advances made it easier for lenders to sanction personal loans.
After the Covid pandemic subsided, the improved health of banks and NBFCs enabled them to ramp up lending. With corporate credit sluggish, personal loans got a big push.
The other associated trends are that the appetite is growing for short- and long-term loans. Home loans accounted for the largest share of bank retail loans at 47.4 per cent as of fiscal 2024, but their share has reduced relative to 53.1 per cent in fiscal 2017. Also, the young are borrowing more and technology is providing easier credit access.
Meanwhile, a bulk of the household savings goes into physical assets, accounting for 60.1 per cent of the total household savings in fiscals 2021-2023, compared with net financial savings at 38.8 per cent. In fiscal 2023, the share of physical assets was higher at 70.2 per cent while net financial savings dropped to 28.5 per cent. “This was facilitated by lower home loan rates, positive real returns on real estate investments after a near-decade-long stagnation, and stamp duty reductions offered by some states,” the Crisil report stated.
While bank deposits have traditionally been the preferred investment instrument for households, the share of deposits in gross financial savings reduced after the pandemic as other instruments yielded higher returns. Nominal returns were the highest for equities in FY21-FY23, followed by gold, the report said. For FY24, the report said, early indicators show that household savings may have revived, while growth in household liabilities could have likely moderated.
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