Households' Debt and Savings Report

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Context:

• The Household Debt and Savings Report 2023 reveals that the debt levels are reckoned to have touched an all-time high of 40% of GDP by December 2023.

Household Savings

• Household financial savings refer to currency, bank deposits, debt securities, mutual funds, pension funds, insurance, and investments in small savings schemes.
• The total of these savings is referred to as gross household financial savings. Once financial liabilities, including loans from banks, non-banking financial companies (NBFCs), and housing finance companies, are subtracted from gross savings, what remains is referred to as net household financial savings.

Household liabilities or household debt

• Household liabilities or household debt includes the combined debt of all people in a household, including consumer debt and mortgage loans.
• So, it is defined as all liabilities of households (including non-profit institutions serving households) that require payments of interest or principal by households to the creditors at a fixed dates in the future.

Household Debt and Savings Report 2023

Record High Debt Levels

• The report highlights that household debt in India has reached a historic high, accounting for approximately 40% of the Gross Domestic Product (GDP) by December 2023. This surge in debt signifies a significant financial burden on households across the country.
• Low Net Financial Savings: Simultaneously, the report indicates that net financial savings have plummeted to their lowest levels, estimated at around 5% of GDP. This suggests a concerning trend of reduced savings and increased reliance on debt among Indian households.

Causes of Dismal Savings

• Weak Income Growth: One of the primary factors contributing to the dismal savings scenario is weak income growth. Despite economic growth, household incomes have not seen substantial improvements, limiting the capacity for savings.
• Robust Consumption and Physical Savings: Despite stagnant incomes, there has been a robust trend in consumption, coupled with significant growth in physical savings. This suggests that while households are spending more, they are also investing in physical assets rather than financial instruments.

Household Debt Trends

• Growth in Various Loan Types: The report identifies that unsecured personal loans have been growing at the fastest pace within household debt, followed by secured debt, agricultural loans, and business loans. This diverse range of loan types indicates a widespread reliance on credit among households.

Outlook for Savings and Debt

• Stagnant Savings Levels: Despite efforts to boost savings, household net financial savings are estimated to remain stagnant at around 5% of GDP in the foreseeable future. This suggests a persistent challenge in encouraging saving behaviors among households.
• Rising Financial Liabilities: While there is a slight increase in gross financial savings, financial liabilities have also risen in tandem. This indicates that while households are saving more, they are also accumulating more debt, potentially exacerbating financial stress.

Implications and Trends

• Low Total Savings Despite High Physical Savings: Despite physical savings reaching a decade-high in 2022-23, total savings are at a six-year low level of 18.4% of GDP. This suggests that while households are investing in physical assets, overall savings are diminishing.
• Impact on Gross Domestic Savings (GDS): The decline in net financial savings has contributed to a decrease in India's Gross Domestic Savings (GDS), which have eased to 30.2% of GDP. This trend is concerning as savings are crucial for driving investment and economic growth.
• Dramatic Decline in Savings: The report characterizes the fall in net financial savings of households as 'dramatic', indicating the severity of the situation. This decline has significant implications for private consumption and household investment growth in the current economic climate.

Analyzing Household Debt Sustainability in India

Debt Service Ratio (DSR): Debt Service Ratio, also known as DSR or referred to as debt ratio, is the ratio of a person's total debt to their household income. It measures the ability of a person to settle their debt obligations.

• DSR serves as a critical metric for evaluating the sustainability of debt, gauging the proportion of income allocated to servicing debt-related obligations.
• Despite its significance, comprehensive data on household DSR remains scarce in developing nations, including India.

Variables for Estimation

• Components Required: Estimating DSR necessitates consideration of three key variables: debt-to-income ratio, residual maturity or tenure, and effective interest rate.
• In India, the bulk of household debt is managed by the banking sector, with housing finance companies (HFCs) and non-banking finance companies (NBFCs) contributing approximately 10% each.

Trends in India's Household Debt

• Increasing Debt-to-Income Ratio: India witnessed a notable surge in the household debt-to-income ratio, escalating to 48.1% in FY23 from 42.2% in FY19.
• DSR Calculation: Based on an effective interest rate of 10% and a residual maturity of 5.3 years in FY23, calculations indicate that Indian households had a DSR of approximately 12%.

Comparative Analysis

• India's DSR Position: India's household DSR has consistently exceeded that of most advanced economies, highlighting a concerning trend.
• International Comparison: Comparison with countries like China, France, the UK, and the US underscores India's relatively higher DSR despite a lower debt-to-income ratio.

Assessment of Threshold

• Current Status: Analysis suggests that Indian households have yet to reach the threshold DSR level, indicating some resilience.
• Projection: Projections indicate that, without intervention, Indian households are expected to reach the threshold level within the next five to six years.

Strategies for Debt Management

• Residual Maturity Extension: Increasing the residual maturity profile emerges as a key strategy to alleviate the debt burden on Indian households.
• Impact of Adjustments: Extending maturity and reducing interest rates can significantly enhance the sustainable debt-to-income ratio, with projections indicating a potential increase to 65%.

Implications for India

• Rapid Debt Growth: India witnesses a rapid escalation in household debt, with non-housing loans playing an increasingly significant role.
• Regulatory Caution: The Reserve Bank of India (RBI) adopts a cautious stance, emphasizing the need for collaboration among regulators and lenders to mitigate risks associated with escalating household debt.
• Anticipated Challenges: Anticipation of potential challenges necessitates proactive measures to ensure the gradual distribution of growth impact over time, averting sudden hindrances to economic growth.

SOURCE: THE HINDU