Household savings decline due to rising home, auto, personal loans

New Delhi: Household savings are estimated to have declined for the third year in a row in FY24 as liabilities on account of interest towards housing and vehicle loans have continued to rise, but the trend could reverse in 2024-25 on account of the impact of RBI's curbs on personal loan.

The net household savings declined sharply by Rs 9 lakh crore to Rs 14.16 lakh crore in three years to 2022-23, as per the National Account Statistics 2024 data released by the Ministry of Statistics and Programme Implementation (MoSPI).

Explaining the data, ICRA Chief Economist Aditi Nayar attributed the declining trend in household savings to a sharp 73 per cent year-on-year increase in liabilities during 2022-23.

She further said that as per the indication the trend of decrease in household savings has continued in 2023-24, the data for which is likely to be released later.

However, the trend could reverse in 2024-25 as Reserve Bank of India (RBI) has taken measures to curb unsecured personal loans, she told PTI.

Chief Economic Advisor V Anantha Nageswaran attributed the decline to a shift in portfolio where savings were being channelised to real assets.

"Household net financial savings flows were lower in FY23 and there were some concerns around that, which said households are saving less. But, in reality, it was a portfolio shift where the savings were going into real assets," Nageswaran had said at a NCAER event on Wednesday.

Following is an explainer of what household savings means, the historical data and the outlook for 2024-25.

1. What does households mean? Households include everything that is not government or corporate within the national accounts statistics system of classification. It can include partnership and sole proprietorship.

2. How has the household savings been historically? Household savings had touched a peak of Rs 23.29 lakh crore in 2020-21 - the year which saw the second wave of the Covid pandemic. Following that it has been on a decline.

It then fell to Rs 17.12 lakh crore in 2021-22 and further to Rs 14.16 lakh crore in 2022-23.

3. What are the liabilities that erode household savings? Liabilities are mainly the housing, auto, personal and other loans that an entity takes from financial institutions.

Loans to households by financial corporations and NBFCs increased four-fold to Rs 3.33 lakh crore in 2022-23 from Rs 93,723 crore in 2020-21. It grew 73 per cent in 2022-23 over Rs 1.92 lakh crore worth of loans in 2021-22.

4. Why are the liabilities going up? According to Nayar, a part of this is towards housing loans. We have seen the housing market recover after Covid and housing sales have touched highs in the next few years post Covid. But it is not just housing loans where household liabilities have gone up. It also includes vehicle and education, agri and business loans.

"It looks quite likely that household liabilities will go up in FY24 so some of these trends may continue. However, with the recent tightening of regulation by RBI, we do expect that some categories of personal loans will see slower growth in FY25. and that will augur well for household savings rate for the current fiscal," Nayar said.

Seeing a surge in personal loans, the RBI in November last year, raised the provisioning requirement for unsecured loans, including personal loans.