Financial Liabilities of Household Sector in India

Financial Liabilities of Household Sector in India

Subject :Economy

Context:

In the recent period, liabilities of the household sector have increased and their assets in the form of accumulated savings have also enlarged according to an article  ‘Financial Liabilities of Household Sector in India  in the RBI’s latest monthly Bulletin.

Details:

• Total borrowings of the household sector from institutional sources have risen by 28.3 percent from  March 2019 to September 2021
• Credit to the household sector consists of both personal and non personal loans to individuals including  Hindu undivided family (HUF), un-incorporated enterprises such as proprietary and partnership concerns, joint liability groups, NGOs, trusts and groups.
  • Personal loans included mainly housing loans, vehicle loans, credit cards and educational loans.
    • Share of personal loans in total credit to households has risen steadily.
  • Non-Personal loans to household comprised mainly agricultural loans, industrial loans, and trade loans
    • The share of credit for agricultural activities reduced and trade remained around 10 per cent in total credit of households during the last nine years.
• Savings is an important indicator for the sustainability of borrowings as it contributes to the buildup of assets that can be used for discharging future liabilities.
• Household liabilities and assets  can be captured in the ratio of their bank credit to bank deposit.

Concept:

Institutional lending sources include Institutional source of credit —the credit offered by authorised and credential associations such :

• Scheduled commercial banks ( SCBs)
• Non banking financial companies (NBFCs)
• Housing finance companies (HFCs)
• Cooperative banks
• Regional Rural Banks

Credit Deposit Ratio

• It is the ratio of how much a bank lends out of the deposits it has mobilised. 
• It indicates how much of a bank’s core funds are being used for lending, the main banking activity.
• To calculate the loan-to-deposit ratio, divide a bank’s total amount of loans by the total amount of deposits for the same period.
• The regulator (RBI)  does not stipulate a minimum or maximum level for the ratio. But, a very low ratio indicates banks are not making full use of their resources. And if the ratio is above a certain level, it indicates a pressure on resources.
• Typically, the ideal loan-to-deposit ratio is 80% to 90%.
  • A loan-to-deposit ratio of 100 percent means a bank loaned one dollar to customers for every dollar received in deposits it received.
  • A credit-deposit ratio of over 70 percent indicates pressure on resources as they have to set aside funds to maintain a cash reserve ratio of 4.5 per cent and a statutory liquidity ratio of 23 per cent. Under such a scenario Banks can lend out of their capital, but it is not considered prudent to do so.

Importance:

• The ratio gives the first indication of the health of a bank.
  •  A very high ratio is considered alarming because, in addition to indicating pressure on resources, it may also hint at capital adequacy issues, forcing banks to raise more capital.
• The loan-to-deposit ratio is used to assess a bank’s liquidity by comparing a bank’s total loans to its total deposits for the same period.
•  LDR helps to show how well a bank is attracting and retaining customers. 

The LDR can help investors determine if a bank is managed properly. If the bank isn’t increasing its deposits or its deposits are shrinking, the bank will have less money to lend.