A recent report by the Reserve Bank of India throws light on the financial complexion of Indian households. Very briefly, we tackle five points: Assets, Liabilities, Pension, Insurance and Retirement. You can read the entire report here.
What assets do Indian households own?
A large fraction of the wealth of Indian households is in the form of physical assets, particularly gold and real estate.
The average Indian household holds 77% of its wealth in real estate (which includes residential buildings, buildings used for farm and non-farm activities, constructions such as recreational facilities, and rural and urban land), 7% in physical goods (such as transportation vehicles, livestock and poultry, agricultural machinery and non-farm business equipment), 11% in gold and the residual 5% in financial assets (such as deposits and savings accounts, publicly traded shares, mutual funds, life insurance and retirement accounts).
Retirement accounts play a very limited role in household balance sheets, even at the top of the wealth distribution.
What do their liabilities look like?
Despite the high holdings of real estate, mortgage penetration is low early in life, and subsequently rises as households age. Indian households tend to borrow later in life and are more likely to reach retirement age with positive debt balances, which is a source of risk given that they are no longer earning income during these years.
The above two are clearly connected. Social arrangements in which households bequest housing wealth to future generations and in turn receive support during retirement are an underlying determinant of these patterns.
However, mortgage loans account for only a small part of total liabilities (23%) and the role of other secured debt (such as vehicle loans and instalment credit for durable goods) is well below the levels observed in other countries.
Instead of secured debt, most Indian household debt is unsecured (56%), which reflects a high reliance of Indian households on informal, non-institutional sources of lending such as moneylenders and intra-family loans. Such debt generates high costs for Indian households and is likely to lead to households becoming trapped in a long cycle of interest repayments.
Also noticeable is a non-negligible role for gold loans (7.6%), which are a unique feature of the Indian market, and absent from other countries, suggesting that gold plays a dual role as an investment asset as well as a store of collateral value for Indian households.
The Indian household finance landscape is distinctive through the near total absence of pension wealth. Pension accounts and investment-linked life insurance products exist, but they are only used frequently by households located in a small group of states, while in most other states, the contribution of pensions wealth to household wealth is negligible.
Low levels of insurance penetration (life and non-life) despite numerous sources of risk such as rainfall (leading to income shocks in largely agrarian segments of the population), health shocks, and catastrophes such as floods or cyclones.
77% of Indian households either do not expect to retire, or have not actively planned for retirement. Despite the large share of real estate in household wealth, only very few households expect to benefit from this part of accumulated wealth to finance expenses in old age. Instead, most households (more than 50% of the population) expect to rely heavily on help from their children.
This suggests that Indian households actually implement a variant of a reverse mortgage contract, promising to leave their property wealth as bequests, and benefiting from the children’s care and monetary support during old age. Of course, this can have positive externalities for society, helping to maintain strong family relationships, solidifying cultural norms and fostering social cohesion. Nevertheless, the enforcement of this informal arrangement can also put substantial pressure on the social fabric of society, creating inter-generational tensions, limiting the education and productivity potential of the young generation, and locking up a large part of the nation’s wealth in highly illiquid assets.
Going forward, India faces an ageing population. Indian households seem poorly financially prepared to deal with the consequences of ageing. The lack of retirement savings and more generally the predominant reliance on the income-generating capacity of future generations generates large risks at all levels of the financial sector.
Courtesy: Morningstar, Image courtesy: ET