Digital consumer credit in India – time to take a close look
By Niyati Agrawal & Rakshith S Ponnathpur, Dvara Research
Saving is an essential component of financial planning for households. It can help them cope with risks and emergencies, plan for life-cycle goals, and capture opportunities through investments in business and human capital. Household savings also form a major component of national savings. With almost 60% contribution, they are crucial for the economy. However, the household savings rate has been falling over time, bringing the national savings rate down with it (Patnaik and Pandey 2019). This has a negative impact on the overall macroeconomic growth of the country. Hence, it becomes important to study the savings made by households in detail.
To do this, we map the formal savings potential of the households over a period of six years, from January 2014 to December 2019, using the Center for Monitoring Indian Economy’s (CMIE) income and expenditure data. We first define the formal savings potential of households as the fraction of income left with them after incurring all the expenditure in a month. We also call it the surplus rate. Since CMIE doesn’t capture the amount saved or allocated in different assets by households, this surplus amount includes informal savings such as savings in cash or informal savings schemes. Therefore, we call it the potential of the households to save formally, as this surplus can be converted to formal savings, in either physical or financial assets. This is different from the household savings rate of the country which is annually reported by the Central Statistics Office (CSO) because the household savings rate of the country takes only formal savings in physical and financial assets into consideration.
We find that our surplus rate is much higher than the household savings rate of the country. This is expected because our surplus rate could be accounting for both savings in formal and informal institutions, whereas the household savings rate of the country considers only formal savings. However, what is interesting to note is that our calculated surplus rate has not been falling over time. Had it been falling; the falling household savings rate could be attributed to the falling potential of the households to save. But we find that the surplus rate, or the households’ potential to save formally, has been, on average, increasing over time, by an annual growth rate of 3%. This could mean that though the households’ income and savings are increasing, they are not being channelised into the formal sector.
To check if there is an urban-rural divide vis-a-vis surplus rate, we also map the rural and urban surplus rates over time. We find that though the urban surplus rates remain higher than the overall surplus rates and the rural surplus rates, neither the urban nor the rural surplus rates have been falling over time. For further analysis, we divide the households based on their incomes into five income quintiles and map each income quintile’s surplus rate over time. We find that the potential of the households to save formally for all income quintiles has been positive and, on average, increasing over time. This means that even the lowest income quintile households manage to maintain a surplus. However, the lowest income quintile households often rely on informal modes of savings, which doesn’t get captured in the household savings rate of the country.
Finally, we look at how the households’ surplus rate has changed in different states over time and contrast our findings with an earlier piece of research on the participation of households of different states across various financial assets. We observe that there are significant gaps in the households’ potential to save and their actual participation in formal saving instruments, especially financial.
These findings reiterate the need for understanding the underlying factors behind the falling household savings rate of the country, even though the formal savings potential of the households has been increasing. As mentioned earlier, it is possible that the surplus of households is not being channelised into the formal sector. There could be various reasons behind it. The positive surplus exhibited by even the lowest income quintile households shows a lack of access to formal savings, as such households often rely on informal ways to save. It could also be due to low demand by households because of factors such as willingness, high transaction cost, trust deficit, regulatory barriers, information and knowledge gaps, social norms, and behavioural biases (Collins et al., 2009; Karlan, Ratan and Zinman, 2014).
While we do not explore these constraints in this brief, we believe that these findings reinforce the case for financial service providers to innovate across products and processes, to enable household savings in formal instruments. Therefore, there is a need to channelise households’ surplus into the formal sector as this will not only ensure households’ overall well-being, but it will also directly impact the household savings rate of the country, thereby increasing economic growth.
To know more, please read our research brief on “Analysing Trends in Indian Households’ Potential to Save” here.
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References
Collins, Daryl, Jonathan Morduch, Stuart Rutherford, and Orlanda Ruthven. 2009. Portfolios of the Poor: How the World’s Poor Live on $2 a day. Princeton University Press.
Karlan, Dean, Aishwarya Lakshmi Ratan, and Jonathan Zinman. 2014. “Savings by and for the Poor: A
Research Review and Agenda.” Review of Income and Wealth 36-78.
Patnaik, Ila, and Radhika Pandey. 2019. Savings and capital formation in India. June 10. https://macrofinance.nipfp.org.in/PDF/PatnaikPandey-savings_and_capital_formation_in_India.pdf.
