Firm offers time-bound road map for getting more of public savings into financial assets.
First the facts. India’s savings rate has increased substantially in recent years. Indian households save more than other emerging markets, China or Brazil. Household savings were 25 per cent of India’s gross domestic product (GDP) in 2008, as compared with five per cent in Brazil and 15 per cent in China. The figures for Britain and the US were two and one per cent, respectively.
Now the figures. Less than half of household savings is invested in financial assets. According to data compiled by consulting firm McKinsey, financial assets constitute 41 per cent of household savings in 2008, and the figure has remained the same over the past four years. About 35 per cent of the savings are in real estate.
| FACTS AND FIGURES | |||||
| Household savings in physical assets (59%) | Household savings in financial assets (41%) | ||||
| i) | Real estate | 35 | i) | Provident and pension fund | 6 |
| ii) | Gold | 5 | ii) | Insurance | 12 |
| iii) | Currency | 7 | iii) | Shares and debentures (including MF) | 7 |
| iv) | Others (including equipment and machinery) | 12 | iv) | Deposit | 18 |
| v) | Govt claims | -2 | |||
| Note: Govt claims include investment in government securities and investment in small savings Source: McKinsey; Year 2007-08 | |||||
More, there is very low participation in direct equities, as well as mutual funds, beyond the top 10 cities. About half of international financial advisors are located in the top five cities. Usage of plastic money is also limited beyond 10 cities.
The consulting firm has prepared a report, shared with the finance ministry and bankers. And, it has given a road map of how the physical assets could be turned into financial ones.
Bankers have agreed to form a steering committee to take the finding of the report forward. The steering committee will work with McKinsey to firm up recommendations, to be then given to the government and financial sector regulators.
“Even banks can convert at least five per cent of the physical assets into financial assets. Then, there will be an addition of Rs 60,000 crore in bank deposits,” said a banker who attended the report’s presentation a few days earlier, at the corporate office of the State Bank of India.
The McKinsey suggestions come when deposit growth has been far below the Reserve Bank of India’s (RBI’s) projection of 18 per cent for 2010-11, while credit off take is one with the central bank’s projection of 20 per cent. RBI had recently said resources should not constrain the growing demand of industry and hamper economic growth.
Till November 5, the growth in deposits was 15.2 per cent, with an outstanding deposit base of Rs 48,10,227 crore, according to RBI data. Bank credit, on the other hand, grew by 22.1 per cent in the 12 months ended November 5.
McKinsey has drawn a short to medium-term road map and suggested actions needed to convert 10 per cent of physical assets to financial assets over the next three to five years. It suggests various actions by the government and regulators over the next 12-18 months, such as new products like gold accumulated funds and real estate index derivatives. It also points to the importance of increasing the reach and penetration of financial intermediaries, such as business correspondents.
One-time amnesty schemes to bring in the stock of physical assets and providing guaranteed returns to a broader range of financial products are other suggestions.
