55% of retail credit has gone to housing, education, vehicles in last 2 years: SBI Ecowrap

The RBI House Price Index shows a modest acceleration since FY21, which may be acting as a motivator for buying homes.

There is a shift in financial savings from households towards physical assets like housing in the past two years, triggered by recovery in the real estate sector and low interest rate regime during the pandemic. This change in savings behaviour can have significant policy implications, particularly concerning growth and the revitalisation of investments, according to the State Bank of India’s Economic Research Department’s report, SBI Ecowrap.

“On the liability side of households, out of Rs 8.2 billion increase, Rs 7.1 billion was accounted for by increase in household borrowing from commercial banks. Juxtaposing this increase in borrowing from commercial banks with the increase in bank credit, we find that 55 percent of the retail credit to households in the last two years have gone to housing, education and vehicle purchase,” it said.

This clearly indicates that the shift from financial savings to physical savings was also triggered by a low interest rate regime in the pandemic.

“We also believe that the shift to physical assets is also triggered by a recovery in the real estate sector and the increase in property prices. The RBI House Price Index shows a modest acceleration since FY21, which may be acting as a motivator for buying homes. This increased ‘pull’ factor thereby pushing up capital spends in a multitude of sectors. If this is indeed the proximate story of the revival in household investment, this has strong policy implications for growth and investment revival,” the report mentioned.

There is a significant long run relationship between housing loans and household savings in physical assets. Every Re 1 increase in Housing loans has resulted in Rs 2.12 increase in household’s savings in physical assets for the 14 year period ended FY22.

The decline in net financial savings of households has resulted in a concomitant increase in household savings in gross physical assets. The trend is again shifting and the share of physical assets is expected to reach approximately 70 percent level in FY23, due to decline in share of financial assets. We believe that the total household savings – both financial and physical – for FY23 would still surpass the FY22 levels despite the decline in financial savings as household savings in physical assets has jumped Rs 6.5 lakh crore in FY22 over FY21 and as per current trends it is expected to jump further by up to Rs 5 lakh crore in FY23 and hence will outstrip the increase in household indebtedness,” according to the report.

The net financial saving of the household sector – the most important source of funds for the two deficit sectors, namely, the general government sector and the non-financial corporations – moderated to 5.1 percent of GDP in FY23 from 11.5 percent in FY21 and 7.6 percent from pre-pandemic year FY20.

“It has been said that it fell to a 50 year low, however this is completely misleading as household savings must be looked into as a sum total of physical and financial savings. Financial liabilities jumped Rs 8.2 trillion since pandemic, outpacing the increase in gross financial savings at Rs 6.7 lakh crore, thus explaining the fall in household net financial savings by Rs 1.5 trillion / 2.5 percent of GDP. On the asset side of households, there was an increase of Rs 4.1 lakh crore in insurance and provident and pension funds,” it said.

The shift to physical assets has an interesting policy connotation. Household sector investment gradually recovered to reach 11.8 percent in FY22. It is pertinent to note that there has been an increase in capital formation as a percentage of household gross savings to 60 percent in FY22 from a low of 47.8 percent in FY21. Thus, households have now started utilising more of their savings for capital formation. This number is expected to increase further to a decade high of approximately 68 percent in FY23, the report stated.