A macro-level estimate of the pattern of household finance is now in the offing thanks to the initiatives of the Reserve Bank of India.
Recently, the Reserve Bank set up a committee on household finance. The terms of reference included:
• To benchmark the current depth of household financial markets in India vis-a-vis those in other major world markets and to identify areas of priority for growth and change.
• To characterise and evaluate Indian households' demands in formal financial markets (for assets such as pensions, as well as liabilities such as home loans) over the coming decade.
• To consider whether, how and why the financial allocations of Indian households deviate from desirable financial allocation and behaviour (e.g, the large household allocation to gold).
• To evaluate the design of new systems and to redesign the existing systems of incentives and regulations to encourage and enable better participation by Indian households in formal financial markets.
Consisting of eminent persons including representatives from the financial sector regulators, the committee is expected to submit its report by July next year.
The relationship of Indian households with the financial sector has quite a few peculiarities. There are wide differences in the nature of relationships of rural and urban households with the financial sector. Indigenous financial outfits continue to have a hold on the savings pattern of rural households. Yet, bank deposits constitute the major source of household investments. According to an estimation made by the Reserve Bank of India, bank deposits constitute 46.3 per cent of a household’s financial assets in 2015.
In traditional households, the love for yellow metal continues to be very strong, resulting in huge investments in the non-financial asset. The huge expansion of the jewelry trade all over the country in recent years facilitates this type of household investment. Surprisingly, banks, which are expected to facilitate investments in financial assets, have been selling gold coins to their customers!
Life insurance is yet to become an important destination for household savings. Insurance premia now constitute 18.9 per cent of household savings. Though the number of insurance policies is 360 million - one of the highest in the world - data pertaining to the actual number of persons insured is not readily available. It is quite likely that the percentage of insured households may be disproportionately more in urban areas than in the rural sector.
Indian households have very little dealings with the stock exchanges. Hardly 4.6 per cent of their savings is invested in company shares. Of late, the emergence of mutual funds is slowly improving the flow of household savings into the share market indirectly.
Unorganised household borrowings
As far as household borrowings are concerned, they are largely diversified having very little reliance on the banking sector and other institutional financial agencies. While the data relating to household borrowings from banks is not available, a rough estimation is attempted as follows: total number of borrowing accounts (non-food credit accounts) of the banking sector is only 14.42 crore as on March 2015, of which only 4.99 crore are in rural areas accounting for only 8.1 per cent of the total credit lent by the banking sector. Inferentially, only a small number of households, particularly rural households borrow from banks. According to NSSO, Situation Assessment Survey, 2014, farm households’ borrowing from banks is 42.9 per cent of their total borrowings.
According to the recently released Reserve Bank of India’s Annual Report for 2015-16, financial liabilities of all households have increased to 3 per cent of the gross disposable national income in FY 2016. However, banks’ penetration in rural households is only inching, while urban households are found to be having more housing loans from housing finance companies than from commercial banks. The committee is expected to provide a comprehensive estimate of household finance in India, identifying areas of priority for growth and change. The Report is expected to indicate the necessity of redesigning the existing systems of incentives and regulations to encourage and enable better participation by households in formal financial markets. It would also facilitate the comparison of the Indian situation with that of advanced economies.