Indians Are Moving Away From Bank Deposits And Small Savings Towards Market Linked Mutual Funds

There has been a consistent fall in small savings, since 2019-20. Small savings (excluding Public Provident Fund or PPF) came down to Rs 2.0 lakh crore in 2022-23 from Rs 2.6 lakh crore in 2019-20.

Rising inflation has pushed up the interest rates for bank deposits and small saving schemes. Despite higher rates of return in regular bank deposits and returns of the small savings deposits in recent times, the fact remains higher inflation means, the real return from deposits (rate of interest minus inflation) have fallen over time.  As a consequence, households (that can save substantially) have started to prefer parking their money in stock markets seeking higher returns.

Since the pandemic, there has also been a marked shift towards provident and pension funds, including PPF. People, in general, also keep on putting their savings in life insurance funds. People’s savings pattern however has failed to boost overall household savings --  a cause for serious concern.

Rising Indebtedness

The stress in household budget is quite evident in recent financial liabilities figures. Household loans from commercial banks almost doubled from around Rs 6 lakh crore in the pandemic year 2020-21 to Rs 11.9 lakh crore in 2022-23.

The year 2022-23 also witnessed an increase in household loans offtake from other financial institutions as well. As commercial banks became cautious in extending retail loans, many borrowers turned to NBFCs (non-banking financial companies).

More than double the increase in total household financial liabilities, from Rs 7.7 lakh crore in 2018-19 to Rs 15.8 lakh crore in 2022-23, encapsulates the crux of growing household indebtedness in the Indian economy. This can adversely affect capital formation (in other words, the investment needed for expansion of new and existing industries and services sector).

Impact On Overall Economy

The macroeconomic consequence of dwindling household savings could have far-reaching implications. Household saving is the largest source of financing capital formation of the economy. It has gone down from 64.7 per cent of gross savings in the economy in the pre-pandemic year of 2019-20 to 60.9 per cent in 2022-23, according to the Ministry of Statistics and Programme Implementation (MoSPI) data.

In simple words, households in the Indian economy save the most – that money is then available to producers of goods and services in the economy as credit. As long as that credit flow is smooth, industries and services expand their operations, and subsequently the GDP increases.

Household financial assets jumping to 15.4 per cent of GDP in the peak pandemic year of 2020-21 from 12.0 per cent in the previous two years is a well-highlighted statistical fact now. However, the next two years saw dipping financial household assets. However, the alarming phenomenon has been a 200-basis point rise in household financial liabilities in 2022-23, at 5.8 per cent of GDP.

The Secretariat delved deep into this rising household indebtedness earlier.

As the economy traverses new frontiers in terms of GDP, different parameters, which have shown up indicate a lopsided distribution of economic benefits of that upward output trend. Recent household savings and investment figures are no exception.

While one section of the population is jumping on the mutual funds’ SIP bandwagon in search of higher returns, another section is running down bank deposits (or, existing savings) to meet their emergency needs, like health and education.

This is not sustainable. Moreover, depleting the savings of a sizeable number of households will eventually hit the process of capital formation in the economy.

Small savings have remained one of the largest sources of gross capital formation in the economy. In today’s relatively high-interest rate scenario, therefore, it may not be a bad idea to incentivise it by increasing rates of return in some of these small savings schemes.