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Posted by: Uma Shashikant and Arti Anand Bhargava on Mon, Feb 2nd, 2015

The Skewed Financial Savings of Indian Households

The financial savings of the Indian household remains invested in conventional instruments.  The preference for interest-bearing debt instruments is too high that it accounts for over 90% of the financial savings. The composition of financial savings has undergone some significant changes in the last 10 years. Consider how the savings were invested in 2004-05.


Household Savings invested in 2004-05


Source: RBI, Amfi


Bank deposits, small saving schemes and insurance were the primary choices.  Hardly 2% was invested in shares, debentures and mutual funds. If one considered the equity-linked saving scheme as a category, it saw net outflows of 0.4% in that year. In the year 2004-05, the government reduced the interest payable on small saving schemes, bringing the overall interest costs from 11.9% to 8.5%[1]. The share of small savings has been falling ever since.  In 2005-06, the erstwhile Section 88 was replaced by Section 80C and the threshold amount for the same was increased to Rs.1 lakh. The boom years in the capital markets also led to an increase in the allocation to equity, debt and mutual funds in household assets, peaking in 2007-08.


Household Savings invested in 2007-08


Source: RBI, Amfi


Almost 10% of the savings were allocated to capital market instruments, the peak in the last 10 years. About 0.81% was also allocated to equity linked saving schemes.  The biggest positive shift was in bank deposits, which now accounted for over 53% of the household savings. The increased automation, branch expansion and promotion of banking activities could be possible reasons for this increase. Small saving schemes dropped to a negative 2% allocation (or net outflow).


Household Savings invested in 2013-14

Source: RBI, Amfi


Since 2010, RBI had been increasing the interest rates. This combined with a slower growth in deposits, compared to lending, led to high interest rates on bank deposits. After the financial crisis of 2008, investor interest in capital markets and mutual funds have reduced. The data for 2013-14 shows that households have close to 60% in bank deposits and hardly 3% in capital market instruments. The money that moved out of small savings seems to have gone into bank deposits, in the last 10 years.


This skew towards debt instruments has important implications for the long-term wealth of the households, and the capital available for economic growth.  Debt instruments provide interest income, that at best matches inflation. An asset allocation with such a small exposure to equity can severely compromise long-term goals of households. At the same time, long-term projects are starved of equity capital.  A strong distribution network, an increase in investor education and awareness programmes, and perhaps tax incentives may be needed to correct this severe skew in investment preferences of households.


Thanks to Sanjay Kulkarni for pointing out the error in one of the charts.


[1] 2011, Report of the Committee on Comprehensive Review of National Small Savings Fund, Government of India

Gabriel Nadar on Wed, Feb 18th, 2015 6:02:05 pm

Hi, I dont think there is anything wrong with it,when people invest in banks FD, RD or in life insurance policy ultimately banks lends to corporates, so there is no scarcity of capital for growth, there are PE which provide capital to corporates, once IPO is done than there investment in equity is not leading to economic growth of corporates..secondly retail investor should prefer debt against equity as they dont have knowledge of equity and equity beats inflation is a myth, only few companies give u return beating inflation and finding those cos is a big task which a retail investor cant do...MF SIP maybe a option still even it can gor wrong..

Bhagyashree Joglekar on Tue, Feb 10th, 2015 5:05:46 pm

Very,useful information from financial advisors perspective.Thank you, madam.

Dharmendra Naaharavaar on Mon, Feb 9th, 2015 2:04:37 pm

Very informative.

Atul Kamdar on Sat, Feb 7th, 2015 7:53:24 pm

Inspite of the fact that almost 60% of the savings are in Deposits, we fail to understand the purpose of taxing the debt mutual funds so heavily by the latest 3 amendments in the last budget.

Ajit Purohit on Sat, Feb 7th, 2015 4:10:27 pm

Interesting & realistic & also very useful.

Amol Chitale on Sat, Feb 7th, 2015 10:13:24 am

Thanks for this info.This will be very helpful for Advisors/Distributors in convincing clients to make proper asset allocation.

DB DESAI on Fri, Feb 6th, 2015 1:41:07 pm

1. People do not believe in MF. 2. They want guarantee & difficult to convince. If you try hard they think you try to sell them something 3. Strict action needed to wash out all products guaranteeing high returns from the market. 4. Definite policy for genuine distribution fraternity is required. 5. Rather than focussing on number of investors or aum we should focus on how they are coming to the industry. j

sadashiv potadar on Fri, Feb 6th, 2015 11:40:03 am

Indian people are risk averse. While investing their hard earned money, they usually go for the assured income instruments. Of late, we observe that a variety of sets of KYC norms instead of a single financial KYC norm would have assisted the investors to opt or atleast give a try to the new forms of investment. Thanks for the 20 year informative study report. Sadashiv Potadar

JOHN PETER on Fri, Feb 6th, 2015 9:47:59 am

very useful information

SANJAY KULKARNI on Fri, Feb 6th, 2015 9:42:58 am

Indeed a very informative input on household savings and it shows clearly the mindset of an indian investor. We are still saving and not investing

VINOD POPTANI on Fri, Feb 6th, 2015 7:40:03 am

This is pure indication that media is not sufficient to produce Result in the field of Financil Literacy though in the Glamour Life it affects vwey quickly I would like to share one my call that Guwahati Guy(Recently Recruited) is Working With Morgan Stanley with a Handsome Pakage of 12lacs is not interested in the Equity Products not Because of Market Link Products but seeking commission pass back in Tradition Life Insurance Policy i denied as a Financial Planner i recommended him Term plan along with ELSS investment. Surpringly when i explained him the insurance schemes he dosen't know the Leaving Certificate

rbinarayanan on Fri, Feb 6th, 2015 6:44:43 am

quiet realistic.mailed response to cie

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