In today’s Finshots, we look at whether the massive fall in household financial savings coupled with a boom in small-ticket loans is a reason for worry.

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The Story

“Net financial savings of Indian households is at a 50-year low.”

That one headline sent everyone into a tizzy last month. See, the net financial savings is simply the difference between the investments made in financial assets such as bank deposits and the loans taken. So if this band — calculated as percentage of GDP — is narrowing, it could indicate that people are earning less, they’re saving less money, and taking loans to fund their consumption.

And that’s quite a scary phenomenon. Because we all know what happens when debt gets out of hand. People begin to default. They might enter into a debt trap where they borrow just to pay back old loans. And their long-term financial well-being gets compromised. Meanwhile, banks get saddled with bad loans. That affects their risk-taking ability too. They might dial back on lending money to parts of the economy that really need it.

It could be a vicious cycle.

But wait…the government was quick to provide a rebuttal. It pointed out that while people’s financial savings might be lower, they were actually investing more in physical assets — such as housing. And even SBI’s economic research team jumped in echoing that same sentiment. They said that while loans were rising, a substantial chunk was for buying homes — 50% of the loan value in the system as of March 2023 was for homes. And that meant that physical assets were being built by households too.

So yeah, maybe things are not so dire.

Also, there might be another positive lens through which we can view all this.

It’s something that Marcellus, an investment management firm pointed out and it’s called the Lifecycle Hypothesis Model. It was created in the 1950s by Franco Modigliani and Richard Brumberg. And in a nutshell, it says that when people are young, their income might be on the lower side. So they have a tendency to borrow money to spend on consumption. YOLO and all that, right!

But as they get older, the income levels rise and this overtakes the spending behaviour. The borrowings reduce. And the savings increase. It’s just how it is.

Now consider this in the context of what’s happening in India today. Firstly, we have a very young demographic. The median age of our population is 28. And that means the a large section of India are in the early years of the careers. So there might be a mismatch between their incomes and their consumption aspirations. They might resort to borrowing.

And it’s not necessarily a bad thing. If you’ve been reading us for a while, you might remember this bit we wrote:

…consumer confidence is headed higher. When the RBI conducted a survey in December, it found more optimism among the people with regard to employment prospects and the economy. Also, people’s outlook on discretionary spending (things like cars and TVs) has moved into the positive zone for the first time since the pandemic began. If people spend more money, companies will have to crank up their capacity to meet the demand.

This was on 2nd January in a story titled “India is ready to lend big in 2023”.

So yeah, despite the global economy looking quite gloomy, Indians are upbeat about their future. And who can blame us — we’re still one of the fastest growing economies in the world. It’s natural then to extrapolate income growth into the future. And live to the hilt today.

Also, don’t forget the American economy has been built on mass consumerism as well since the 1950s. Now you can disagree with the state of their economy now, but, the spending helped forge superior economic growth for decades. So again, it’s not necessarily a bad thing when citizens spend money.

But we still have to talk about some problems. Problems that the RBI seems to be worried about.

And it’s the rise of unsecured loans, or the ones without any collateral, in this mix. Especially the ‘tiny’ personal loans as Reuters put it.

For instance, while overall bank credit in FY23 grew by 15%, the growth in these unsecured loans worth ₹10,000-₹50,000 zoomed by a staggering 48%. And the defaults are already creeping up. While the overall bad loans in the retail segment is below 1.5%, in the tiny personal loan category, it has soared to 8.1% already. To make matters worse, according to a UBS report released this month, the share of lending to people who’re already past their due dates has nearly doubled from 12% in FY19 to 23% in FY23.

Put all this together and you’ll see that there’s a certain section of the economy that’s actually taking on more loans just to pay older dues. They’re struggling to pay the bills. And we can’t paper over this problem. And with credit becoming even more easily accessible — fintechs like Google Pay now launching ‘sachet’ loans and the growth of Buy Now Pay Later Schemes, you have wonder if there are some dark clouds on the horizon. Is there a credit disaster lurking around the corner?

We don’t know. And we certainly hope that’s not the case. Luckily, the RBI has already made it known to lenders that this type of lending might just be problem. That it’s not comfortable with the lending spree in the unsecured segment. It wants them to rein it in.

And maybe that’s exactly what we need to avoid the great Indian growth story from going off the rails.

Until then…

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