Savings remain healthy at 30%; uptick in housing loans driving credit growth

The year FY23 witnessed decline in net financial savings of the household sector. But the gross financial savings remain strong. The physical savings are expected to be robust. The net financial savings of households have declined to a 43-year low of 5.1 per cent of GDP

India’s household savings, a major contributor for the economic growth, has been declining since FY12. It is currently averaging about 30 per cent of the Gross Domestic Product (GDP), opine top economists.

“The current savings rate is 30.2 per cent of GDP as of FY 22, the latest data available so far. The trend has been on decline since FY 12 when the savings rate was 34.6 per cent of GDP. The savings rate in the last decade averaged nearly 32 per cent of GDP,” said SujanHajra, chief economist and executive Director, Anand Rathi Shares and Stock Brokers.

Hajra said that domestic savings contribute to the investment in the economy. The higher savings rate facilitates the investment environment to be reliant on domestic financing with marginal dependence on external financing.

“Having domestic savings is useful; we can still finance growth with foreign funds like external commercial borrowing (ECB) and foreign direct investment (FDI but they would have other issues. Countries, which need higher levels of investment, would be dependent on savings. Further, even government borrowing is financed by banks and financial institutions (FI) through subscriptions but are ultimately funded by savings of households, corporates and others,” states MadanSabnavis, chief economist, Bank of Baroda.

According to him, 30 per cent is a high number and has provided funds to banks and other entities like insurance companies, pension funds, small savings and others which go into financing development. The savings in physical assets like houses directly add to capital stock in the country.

According to Hajra, the year FY23 witnessed decline in net financial savings of the household sector. But the gross financial savings remain strong. The physical savings are expected to be robust. The overall savings are expected to be around 30 per cent of GDP for FY23 and FY24 also.

Hajra said household savings have been the major contributor to the savings in the past few years. The share of households increased from 60 per cent in FY15 to 65 per cent in FY 22.

Also in particular, the share of financial savings in the household sector has increased significantly, except in the last year where physical savings were higher, Hajra added.

As regards the challenges for savings, Hajra said the new tax scheme is viewed as disincentivising the savings as many of the investments are not available for exemption. Unless these investments are given as deductions/exemptions, the new tax regime may not be attractive.

“Also in FY 23 the net financial savings of households have declined to a 43-year low of 5.1 per cent of GDP. This is also on account of rise in financial liabilities of households,” Hajra remarked.

On his part Sabnavis said: “This is a challenge as people tend to move to market instruments to earn higher returns. But the risk is high. Hence mutual funds have become very attractive today.”

On the credit flow Hajra said: “Personal loans have been increasing in the past two years. Household financial liabilities have increased significantly in the last year 2022-23. This is due to significant increase in housing loans. Loans by non-banking financial companies and housing finance companies also increased significantly. However the loan towards the industry sector has been growing only at seven per cent in the last 15 months.”

However, Sabnavis said that the growth in personal loans (unsecured) has slowed down as rates are up while the overall credit has grown steadily.

According to Hajra, traditional banking has kept its space while the new credit platforms are growing at a rapid pace.

“We expect the Reserve Bank of India (RBI) to frame adequate guidelines to regulate these entities,” Hajra said.

Queried about the investments by the private sector and the government, he remarked that the latter has continued as a premium player in capex investment.

While the private sector has to pick up in full steam, the government thrust on infrastructure development and easing the regulatory environment for investment friendly policy has been the theme in the last few years.

“With the government focusing on schemes like the Prime Minister Gati Shakti Yojana and encouraging public-private-partnership (PPP) projects, we expect crowd in private investment,” Hajra said.

In a research report, CARE Ratings said the credit off-take from the banks continued to grow, increasing by 20.3 per cent year-on-year (y-o-y) to reach Rs. 159.7 lakh crore, for the fortnight ended January 12, 2024.

This rise was due to the impact of HDFC’s merger with HDFC Bank along with the growth in personal loans. If we exclude the impact of the merger, credit grew at a lower rate of 16.1 per cent y-o-y for the fortnight compared to last year’s growth of 16.5 per cent.

The outlook for bank credit off-take continues to remain positive for FY24, CARE Ratings said.

The outlook for bank credit off-take continues to remain positive for FY24, supported by factors such as economic expansion and a continued push for retail credit which has been supported by improving digitalisation, the credit rating agency said.

“Elevated interest rates, any further rise in the repo rate, inflation, and global uncertainties regarding geopolitical issues are other key factors that could weigh on credit growth,” CARE Ratings said.