Real estate dominates Indian household savings with highest allocation: Report (2024)

Household savings are broadly classified into two primary forms: financial and physical assets, with financial assets representing 56% and physical assets comprising 44% of the overall household savings, says global brokerage firm BofA Securities said in its recent report.

Physical savings: shining bright

As of FY22, household savings in financial assets stand at ₹28 trillion, twice the ₹14 trillion seen in FY12. On average, an Indian household holds 77% of its total assets in real estate, 7% in other durable goods, and 11% in gold.

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The reports show that the share of physical savings in total household savings has steadily tapered from 69% in FY2012 to 49% in FY21. However, it rose again to 61% of the total in FY22, and the brokerage expects it to rise further in FY23 as well.

Accordingly, it expects total household savings in FY23 to surpass the level seen in FY22, owing to a further increase in physical savings.

Financial savings are still weak

Financial savings are computed on a net basis, where gross financial assets are adjusted for financial liabilities, primarily comprising loans obtained by households from banks and non-bank financial institutions.

In the last decade, the report indicates that the growth rate of financial liabilities, at 16.1% year-on-year, has exceeded that of gross financial assets, which averaged 10.8% year-on-year.

Notably, in FY23, there was a significant surge in financial liabilities, rising by 76% year-on-year, leading to a considerable decline in net financial assets.

According to the report, financial liabilities as % of GDP have been rising steadily from 4.1% of GDP in FY19 to 5.8% of GDP in FY23. 75% of total household borrowings are via banks and 25% from non-banks. This has changed from 79% and 21%, respectively, in FY19, suggesting a rising imprint of non-bank institutions.

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On the savings front, the report highlighted that household savings are shifting from traditional bank deposits, including non-bank deposits, towards capital markets.

In FY2001, conventional bank deposits accounted for 39% of total financial savings, while capital markets only captured 4%. Fast forward to FY2023, and these figures stand at 37% and 8%, respectively.

With the enhancement of financial literacy, savings directed towards life insurance, provident funds, and pension funds have steadily increased from constituting 34% of the total in FY2001 to representing 40% of overall financial savings in FY2023, the report stated.

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Decline in currency-parked savings

RBI’s latest data on the quarterly movement of the flow of financial assets and liabilities of households shows that in FY23, savings parked as the currency fell from 12% of the total in FY22 to 7% of gross financial assets in FY23. This, according to the brokerage, is getting redistributed towards bank deposits, which have risen from 22% to 35% of the total during the same period.

As % of GDP, net financial assets fell from 7.2% in FY22 to 5.1% in FY23. This happened as financial liabilities as % of GDP rose from 3.8% in FY22 to 5.8% in FY23, alongside a fall in financial assets as % of GDP from 11.1% in FY22 to 10.9% in FY23.

Per capita income and real interest: two main drivers of financial savings

Per capita income and the real interest rate are typically the two main drivers of financial savings.

"Empirical research suggests that rising per capita income was found to have a weak positive effect on savings rate, even though it correlates with private consumption growth remarkably well. This is understandable for a middle-income economy where the propensity to consume is relatively high. As for the real rate, studies indicate that a rise in the real interest rate increases the household saving rate in the short run.," said the brokerage.

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Even though the real repo rate was negative in FY23, it was less negative in FY22, and that resulted in a higher growth rate of financial savings, it added.

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Published: 19 Feb 2024, 04:32 PM IST