Household savings fall to two-decade low
At 18.6% of GDP at current prices in FY17, down from a peak of 25.2% in FY10; financial savings at a 2-yr low of 7.8%
The household savings rate continues to decline and has touched a two-decade low in 2016-17. Household savings as a proportion of the gross domestic product (GDP) at current prices declined to 18.5 per cent in 2016-17, the lowest rate since 1997-98.
The figure was 19.2 per cent in 2015-16, and 25.2 per cent at its peak in 2009-10. Initially, the decline was led by physical savings — households’ savings in real estate and bullion — but financial savings are now showing strain.
Household financial savings were down 10 basis points in 2016-17 to 7.8 per cent of the GDP against 7.9 per cent in 2015-16. This is the first year-on-year decline in the rate of financial savings in the last two years, and the biggest drop in five years.
At its height in 2009-10, financial savings by households was 12 per cent of the GDP.
The analysis is based on historical data on savings as estimated by the Central Statistical Organisation (CSO). The savings estimates for 201617 have been sourced from Emkay Global Financial Services. Financial savings include bank and nonbank deposits, claims on the government, insurance funds, and provident and pension funds besides direct and indirect investment in shares and debentures.
Total household savings is gross physical plus financial savings net of household financial liabilities (outstanding loans).
The household savings rate is falling at a time when the financial market’s dependence on domestic investors is at a multi-year high and the flow of retail money into mutual fund schemes is at its peak. Investment in shares and debentures accounted for 3.4 per cent of total household savings in 2016-17, the highest since 2009-10, according to Emkay Global Financial Services.
“A strong rebound in retail inflows into equities beginning in the middle of 2014 has been central to the current bull run, especially in mid- and smallcap stocks. Its sustainability is, however, questionable given the growing pressure on savings, including financial savings,” says Dhananjay Sinha, head of equity research at Emkay Global Financial Services.
With the inclusion of peer-topeer (P2P) lending into a macro regulatory framework, India has now joined the ranks of countries such as the UK, the US, and China among others, which have a regulatory framework for this model. P2P lending has been facilitating easier access to loans for consumers, who are either denied credit by traditional banks or are not served at all. By bridging the gap between consumers and credit, P2P lending platforms are helping achieve the goal of financial inclusion. The validation of the P2P model by the government and the Reserve Bank of India (RBI) will play a significant role in boosting confidence among lenders and borrowers. Ushering in greater transparency The online P2P lending model has been embraced by some of the most developed economies in the world, and both borrowers and lenders have reaped rich dividends from the democratisation of credit. The RBI’s guidelines on P2P lending have brought the country at par with some of the global economies, which have a mature and regulated alternative lending market. The regulations aim to ensure greater transparency between the platform, the lenders, and the borrowers.
Under the guidelines, defaultrelated information on borrowers has to be shared with credit bureaus. So far P2P platforms could use credit bureau data to assess borrowers but could not share data about their borrowers with the bureaus. This will happen now. It will make borrowers wary of defaulting on a loan taken from a P2P platform because such a default will affect their credit score and they will find it harder to get a loan from banks and NBFCs.
Credit information on the borrower will also have to be mandatorily shared with lenders. This will allow the latter to take better informed decisions about whether to give loans after assessing the borrower’s credit profile. The RBI guidelines also have provisions for timely and effective redressal of grievances of both borrowers and lenders.
Prior to the issuance of these guidelines, a few malpractices had crept in. Some platforms had started promising principal protection and assured returns to lenders. In my view, this is against the very grain of the P2P lending model. The RBI guidelines, which take a stringent view of such practices, can be expected to put an end to them.
The guidelines also have useful provisions with regard to data security, reporting and even fund transfer mechanism.
The manner in which the RBI guidelines seek to define permitted activity, scope of work, regulations on capital, governance and business continuity, reflect deep thought and detailed planning. This bodes well for the entire ecosystem. The regulations are not stringent but they are innovative and will help the industry grow. Connecting borrowers and lenders There is substantial disparity between the demand for credit and its supply in the Indian economy at present, be it for individual borrowers or businesses. Before the advent of online P2P lending, commercial lending and borrowing was dominated either by traditional banks or by the unorganised lending sector. Over the past three-four years, P2P lending platforms have helped connect borrowers directly with lenders, and enabled them to avail of easy and instant loans, by leveraging technology and automation.
Traditional financial institutions are unable to cater to the needs of a large section of the society which remains unserved. A majority of the citizens of this country have no credit history and are hence overlooked by banks. They are forced to borrow money from unorganised lenders, leaving them vulnerable to exploitative and less than legal practices. Even if they do manage to secure a loan approval from a bank, borrowers with low credit scores often have to pay high interest rates. But with the fully automated and transparent credit evaluation system that online P2P platforms use, borrowers can secure funds in a hassle-free manner with minimum documentation.
Further, P2P lending has opened up growth opportunities for India’s micro, small and medium enterprises (MSME) with easier access to credit. There are an estimated 48 million MSMEs in India, employing nearly 11 crore people, which contribute about 45 per cent of the country’s manufacturing output and about 40 per cent of its exports. Despite this, MSMEs are extremely underserved by traditional banking institutions, especially when it comes to meeting their credit requirements. Online P2P lending holds a tech-driven solution to this issue and has been addressing the credit gap by facilitating smoother access to working and growth capital for businesses across the country.
Recognition for the P2P model has now opened up the credit market in the country. With individuals lending to one another, interest rates for borrowers can be expected to go down as lending and borrowing activities increase. This has proven to be true in the more mature markets for P2P lending, where increased confidence in the model has resulted in a reduction in interest rates.
Profiting from P2P lending
The guidelines will also introduce lenders to a lucrative investment opportunity, now that the RBI is regulating P2P lending. Returns from P2P loans are competitive, when compared with those from traditional instruments such as mutual funds, equity, debt, etc. Also, unlike these investment tools, both principal and interest start getting credited to the lender’s bank account from the very next month. They can reinvest their incomes for better and compounding returns.
When done right, P2P lending can lead to higher gains for lenders at relatively lower risk. Investors can also enhance their opportunity to earn profits by further sourcing credit assets from across loan classes and risk categories to optimise their portfolios. Given its potential as a lucrative avenue of investment, P2P lending is perfectly capable of commanding nearly 15-20 per cent of the portfolio among Indian investors in the next few years.
The inclusion of the sector into the ambit of a regulatory framework will gradually make it capable of competing with traditional investment instruments. In addition, a collaborative effort between regulators and fintech players will ensure smooth implementation of these regulations in the sector and support the creation of a stable, alternative lending market in the country.