Explained: How the pandemic impacted household savings, deposits and debt

Explained: How the pandemic impacted household savings, deposits and debt

Last week, the Reserve Bank of India (RBI) released its preliminary estimate of household financial savings. For lakhs of households in the country, the Covid-19 pandemic has led to a decline in financial assets such as bank deposits, pension money, life insurance funds and currency holdings. While the RBI estimated an increase in debt of around 20 crore households, which contribute around 60% of gross savings in the economy, financial savings showed a decline of over 45% from June to December 2020.

The broad takeaways from the estimate:

Financial savings

When the pandemic first struck, household financial savings initially jumped In the first quarter of 2020-21, but went on to witness sequential moderation in the next two quarters. According to the RBI’s preliminary estimate, household financial savings were at 8.2% of GDP in the third quarter, after being at 10.4% of GDP in the second quarter (ended September 2020) and 21% the June quarter. In absolute terms, net financial assets of households fell to Rs 4,44,583 crore in the December quarter from Rs 4,91,906 crore in the September quarter and Rs 8,15,886 crore in the June quarter.

Household deposits

While overall bank deposits have been going up, the share of households has been coming down. The ratio of household (bank) deposits to GDP declined to 3.0% in the December quarter of 2020-21 from 7.7% in the previous quarter, the RBI said. In absolute numbers, household deposits fell from Rs 3,67,264 crore in September to Rs 1,73,042 crore in December. This could be, according to banking analysts, due to the tendency of households to withdraw cash to meet emergency needs. During April-June 2020, deposits had fallen to Rs 1,25,848 crore from Rs 4,55,464 crore in January-March. This suggests that when Covid infections shoot up, deposits of households decline, only to pick up partially when the situation improves and fall again when infections rise again later.

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Currency holdings

Significantly, currency holdings showed fluctuations with households keeping more whenever Covid infections were moving upward. Cash holdings were at a high of Rs 2,06,889 crore in the June quarter of 2020. This declined to Rs 17,225 crore in September and recovered partially to Rs 91,456 crore in December, when infections came down. After the government announced a stringent lockdown in March last year, currency with the public increased by Rs 3.07 lakh crore between March and June, from Rs 22.55 lakh crore to Rs 25.62 lakh crore in the fortnight ended June 19, 2020. Now, currency with the public is at a record high of Rs 28.78 lakh crore, as per the latest RBI data.

Life insurance funds

The insurance industry has undergone a significant transformation since the pandemic struck, with demand for policies rising. Life insurers’ new business premium income had declined 27.9% in April and May 2020. However, for the full fiscal 2020-21, premium income recovered and rose by 7.49%. Life insurance funds of households plummeted to Rs 33,549 crore in March quarter of FY2020. However, as infections and deaths increased, funds rose to Rs 1,23,324 crore in June quarter, Rs 1,42,422 crore in September quarter and Rs 1,56,320 crore in December quarter of FY2021. The insurance industry ended the last financial year at 9% growth in life and non-life combined. During the April-May period of the current fiscal, it has grown 17%.

Equity holdings

Stock markets have progressively improved with the Sensex rising from 28,265 at the beginning of April 2020 to above 52,000 now. After the decline in March and the beginning of April 2020, the markets recovered but households’ investment in equity declined. Equity holdings rose to Rs 18,599 crore in the June quarter, but declined to Rs 8,291 crore in September and Rs 5,307 crore in December. The share of savings in shares and debentures out of total household financial savings, which was 3.4% in FY20, is likely to increase in FY21 to 4.8-5% (or to 0.7 % of GDP from 0.4% of GDP in FY20), which is still much lower than 36.5% in the US, according to an SBI report. Mutual fund holdings of households contracted by Rs 51,926 crore in the March 2020 quarter but improved later, showing a growth of Rs 66,195 crore in June 2020, Rs 11,909 crore in September and Rs 65,312 crore in December.

Small savings

Household savings in small saving schemes like post office and National Savings Certificate remained unchanged at Rs 75,879 crore in the three quarters of FY 2021. Most of these schemes have a lock-in period, preventing investors from withdrawing from them.

Household debt

The household debt to GDP ratio, which is based on select financial instruments, has been increasing steadily since end-March 2019. It rose sharply to 37.9% at end-December 2020 from 37.1% at end-September 2020, the RBI said. Households’ liabilities to the banking sector contracted by Rs 1,38,472 crore in the June quarter of 2020, but increased to Rs 2,18,216 crore in December. The RBI had announced a moratorium on loan repayment last year. “Despite higher borrowings from banks and housing finance companies, the flow in household financial liabilities was marginally lower in the December quarter of 2020-21 following a marked decline in borrowings from non-banking financial companies,” it said.

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