Consumer Savings Will Continue To Surge In Lockdown 5: SBI Report

With India going into Lockdown 5, State Bank of India’s Economic Research Department believes that consumer savings will continue to surge.

The Department, in its report Ecowrap, has observed that many households may have marginal propensity to consume less because several types of spending are not easily available amid social distancing constraints.

Analysing the trends in deposits since the lockdown was first imposed, on May 25, Ecowrap said the data revealed that deposits (savings, current and term) increased significantly during Lockdown 1 as people were apprehensive in the beginning about spending, and turned frugal.

“During Lockdown 2, there was a 25 per cent decline in bank deposits, but term deposit accrual was very healthy. The increase in deposits is also attributable to government spending picking up pace with the hike in WMA (ways and means advances) limits,” said Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI.

Ghosh observed that the situation became critical during Lockdown 3, when such deposit growth turned significantly negative, indicating people may have used the build-up to start spending as they realised that lockdowns could be a recurring phenomenon.

However, the depletion was only 12 per cent of the deposit build-up in Lockdown 1 and Lockdown 2, indicating significant risk aversion in consumer spending.

In Lockdown 4, there has been an increase in deposits again, indicating consumers were uncertain about spending and are instead saving in bank deposits, said Ghosh.

Rise in advances

As far as advances are concerned, the report said there was a jump in term loans in Lockdown 1, and again in Lockdown 4.

“We believe while such a jump in Lockdown 1 was genuine, as companies availed of unutilised limits, in Lockdown 4, it could be the result of both interest application and some disbursement of unutilised limits.

“The increase in cash credit in May might reflect more the application of interest as most of the companies have taken moratorium (now extended from three months to six months). Thus, such growth in credit component needs to be treated with caution,” said Ghosh.

The report assessed that going forward, the decline in credit to the retail sector may continue with the Centre and the Maharashtra government extending the lockdown till June 30. While most of the power plants are now working with up to 85 per cent capacity, that might be still be a harbinger of greater domestic consumption because of the heat wave conditions.

“Banks are also leveraging digital platforms to meet the credit requirement in the retail sector. For corporates, they will require more of enhancement of working capital loans as well as term loans over the medium term until the growth environment stabilises,” Ghosh said.

The report expects sectors such as NBFC, metal, automobile, power, infrastructure, tyre & tubes and petroleum to seek more credit from banks due to enhanced working capital cycles and medium-term uncertainty.

While the forbearance on repayment of loans provides some cushion to banks on asset quality and provisioning, the report cautioned that a prolonged slump would make it more vulnerable.

Cash transfers

Ecowrap emphasised that the present situation warrants more cash transfers and increased capital expenditures as the pandemic crisis is at an unprecedented scale and has severely impacted peoples’ ability to eke out a living.

Additionally, international evidence suggests that the more severe and prolonged the economic downturn, the higher the share of households that will be liquidity-constrained and the more households will need to use transfer of income for basic needs, pushing up overall marginal propensity to consume and a faster recovery.