As of end-March 2023, the household financial assets of Indians stood at 135.0 per cent of gross domestic product (GDP) while their financial liabilities were 37.8 per cent of GDP; their net financial wealth was thus placed at 97.2 per cent of GDP, according to RBI’s July bulletin issued on Thursday. The spike in financial assets during the Covid-19 pandemic amidst restrictions on contact-intensive services and subdued growth in liabilities led to an increase of 12.6 percentage points in net financial wealth between the end of March 2020 and the end of March 2023. Equity and investment funds of households increased more than 1.5 times from 2011-12 to 2022- 23. Household debt to financial assets ratio has remained stable during the period.
The study for estimating the financial wealth of Indian households in the RBI July bulletin presents quarterly estimates of the financial wealth of Indian households from June 2011 to March 2023, including their investments in listed equity accounting for variations in asset prices.
Households form the bedrock of any macroeconomic framework as the key drivers of consumption, savings, and overall economic activity. Household consumption depends upon their income as well as wealth.
“In this context, monitoring household financial position not only provides a better assessment of their well-being but also can help improve understanding of the evolving private consumption and economic activity for a forward-looking monetary policy. Apart from the periodic saving or dissaving, the net wealth of households, defined as the difference between total asset holdings (financial and non-financial) and liabilities accumulated over the periods is also affected by holding gains or losses (revaluations) and other changes in volume. The evolving trajectory of net financial wealth (NFW) focusing on the stock of financial assets net of liabilities can help assess the potential financial vulnerabilities and implications for household debt sustainability,” says RBI July bulletin.
Trends In Household Financial Wealth In India:
As of March 2023, total household financial assets are estimated at Rs 363.8 lakh crore, equivalent to 135.0 per cent of the GDP. In contrast, the outstanding liabilities amounted to Rs 101.8 lakh crore, accounting for 37.8 per cent of GDP. The resultant NFW is estimated at Rs 262.0 lakh crore (97.2 per cent of GDP). The pandemic period witnessed a jump in the financial assets and NFW for the two years from March 2020 to March 2022. In 2022-23, with the resumption of normal economic activities, the NFW also normalized due to a strong revival in both bank and non-bank lending to households coupled with a relatively moderate growth in financial assets.
For the entire period of study starting from June 2011 to March 2023, the financial assets rose at a compounded quarterly growth rate (CQGR) of 3.0 per cent, while the liabilities expanded at a CQGR of 3.3 per cent; NFW recorded a CQGR of 2.9 per cent during the same period.
Compositional Shifts In Financial Assets:
Deposits have sustained their dominance in total financial wealth in the last decade, though with an increasing interest towards other investment instruments, viz., equity and investment funds and insurance and pension funds. The share of equity and investment funds in total financial wealth increased by more than 50 per cent between 2011-12 and 2022- 23. Amidst exponential growth in digital payments, the currency share in household financial assets has moderated. The Indian household participation in the equity market has increased over time, with total demat accounts reaching 11.4 crore in 2022-23 from 3.6 crore in 2018-19 (Sebi, 2023). The share of listed equity holdings in the total financial assets of Indian households was 11.1 per cent as of March 2023.
The stock market decline after the onset of the pandemic pulled down the net financial wealth of households in Q4:2019-20 by around 3.0 per cent over the preceding quarter. This decline was more than offset by the accumulation of savings and deposits in 2020-21 due to the pandemic-induced restrictions on spending and the subsequent revival of the stock market. On a cumulative basis, the financial assets of households rose by by Rs.2 lakh crore between the quarter-ended December 2019 and the quarter-ended March 2023; around 23 per cent of this increase was due to asset price gains, and the rest due to incremental financial savings.
Composition Of Household Debt:
Mortgages make up the lion’s share (more than 50 per cent) of household debt in advanced economies (AEs), while in emerging market economies (EMEs) non-mortgage debt forms at least two-thirds of the total (IMF, 2017). The latter comprises both secured and unsecured personal loans, viz., vehicle loans, education loans, credit card outstanding, business loans for industry, trade, transport, finance, and loans for agriculture. Similar to other EMEs, the banking sector in India dominates as a supplier of credit to households with almost 80 per cent share in the total credit; non-bank entities i.e., HFCs and NBFCs are also emerging fast as the source of credit in recent years. The share of non-bank debt increased by around seven percentage points from end-March 2012 to end-March 2023
Adverse income shocks can get amplified in the presence of elevated debt levels. While the indebtedness of Indian households has been on an upward trajectory reflecting financial deepening, it needs to be seen in the context of an increase in their financial assets as well. The household “leverage” ratio - defined as the ratio of household debt to financial assets - has remained largely flat and range-bound since 2011-12.
The Way Forward:
The analysis by RBI indicates that deposits are still the most preferred instrument of saving although market-based instruments are gaining share. The accumulation of financial assets and net financial wealth jumped in 2020-21 due to the pandemic-induced restrictions on mobility and spending along with subdued growth in liabilities; net financial wealth has since exhibited some normalization as household consumption picked up on the return of normalcy.
In India, there exist 17.1 lakh active unlisted/private limited companies as compared to only 6,658 listed companies as of end-May 2024; information on household holdings in these unlisted companies and consistency in their valuation would help to strengthen estimates of financial wealth presented in this study. Furthermore, significant household investments in India still flow into non-financial assets such as real estate, gold and precious metals. Regular and comprehensive household wealth surveys can enrich the estimates of household overall wealth, encompassing both financial and physical assets and liabilities.
