Household debts in India were skyrocketing even before the pandemic made matters worse
The number of Indian households in debt and the amount they owed increased between 2012 and 2018, making these families more likely to fall into the debt trap, shows an analysis of the latest government data by Dvara Research, an organization policy research focused on financial inclusion and social protection.
This increase in indebtedness is more marked among rural households (84%) than among urban households (42%), according to the analysis which compared the All India Debt and Investment Survey of the 70th round of the National Sample Survey with the 77th, released in September. Low-income households in cities remain more vulnerable than those in rural areas, mainly because they do not have enough valuable assets that can be sold quickly to repay their debts.
Two other important findings from this survey are that female-headed households are less indebted and southern Indian states have higher levels of indebtedness.
The All India Debt and Investment Survey collects information on the assets, liabilities, savings, consumption and capital expenditures of Indian households, such as land or property. Household debt is measured as a percentage of a country’s gross domestic product, and according to a recent study work document According to the Bank for International Settlements, increased household debt leads to increased consumption and GDP growth in the short term. However, in the long run, if the share of household debt in GDP exceeds 60%, it can have a negative impact on the economy.
In India, this percentage is 30% -40%, after falling from a high of 43% in 2008 to a low of 31% in 2016, and has risen since.
The last survey was conducted in 2019 and household debt and vulnerabilities have since increased significantly due to the ongoing Covid-19 pandemic. The share of household debt in GDP has resurrected from 32.5% in 2019-’20 to 37.3% in 2020-’21. Another to augment is slated for 2021-2022 due to bank deposit depletion as families grapple with the burden of healthcare expenses incurred during the second wave of Covid-19.
The survey captures two key measures of indebtedness: the incidence of indebtedness, which is the share of households with unpaid debts, and the average stock of debt – the amount of debt burden per household.
Between 2012 and 2018, the incidence of debt increased by four percentage points in rural areas while the average outstanding debt increased significantly in rural and urban areas by 84% and 42%, respectively, as we said earlier.
Urban poor vulnerable
The survey also assesses the debt-to-asset ratio – the outstanding debt of households as a proportion of the total value of their assets. This ratio estimates the financial health of a household, and the higher the ratio, the more precarious the financial health and the lower the capacity of a household to repay loans. (However, a better indicator of a family’s over-indebtedness is its debt-to-income ratio.)
The debt ratio increased slightly in both the rural (3.2% to 3.8%) and urban (3.7% to 4.4%) segments – that is, the value loans and mortgages of families increased, relative to their ownership of the assets.
The survey divides households into 10 asset classes based on the value of their assets. Our comparison between asset classes showed that the rise in the debt ratio is more due to households with more assets than to those with less.
The ratio is highest among the lowest rural and urban asset classes, which have negligible assets – 39.1% among the lowest rural, and 549.7% and 75.4% among the two classes. of the lowest urban assets. The poorest families today have the most debts in relation to their assets and the least capacity to repay it.
While over 90% of households in the highest rural asset classes own land, only a third of the lowest rural asset classes own it. The urban poor are worse off in this regard, with less than 1% of households in the two lowest urban asset classes owning less land.
If the debt ratio is single digits, it would indicate low debt. But this is not necessarily the case in India as most household assets are illiquid, that is, they cannot be quickly sold to raise funds to pay off debt. Land and buildings account for 87% and 91% of the value of assets in the urban and rural segments, respectively, according to the survey report.
For a more realistic measure of a household’s ability to take on debt, its debt-to-liquid asset ratio can be taken into account – it only includes assets that can be sold quickly to service the debt. In all household categories, this ratio is higher than the debt ratio – 40 to 60% among rural households and 25% to 60% among urban households. This means that across classes, Indian households are vulnerable to increasing indebtedness.
Southern states are ahead of the rest of the country on most indebtedness indicators, both in the rural and urban segments. The figures for Kerala, Andhra Pradesh and Telangana are particularly high, and both the incidence and the volume of debt increased by several percentage points in these states between 2012 and 2018.
However, the growth of debt outpaced the growth of assets in Kerala, thus increasing the debt-to-asset ratio while the value of assets grew faster in the two Telugu-speaking states.
The share of non-institutional debt (from sources such as private lenders) in total outstanding debt in Andhra Pradesh is 64% for rural areas and 42% for urban areas; in Telangana, it is 59% for rural areas and 27% for urban areas. This figure is significantly higher than the national average (34% for rural areas and 13% for urban areas) and despite the strong presence in these states, formal financial institutions provide credit, particularly to low-income segments.
The assessment of the situation of agricultural households carried out in parallel with the survey also reveals that households in southern states are more indebted. While increased indebtedness does not necessarily mean a proportional increase in vulnerability, the latest survey report also shows that a substantial share of loans were taken out to meet consumer needs and medical spending, indicating a risk trap. the resulting indebtedness.
The incidence and volume of debt are also high in rural Rajasthan, while the volume of debt and debt-to-asset ratio are high in urban Maharashtra and Haryana.
Houses run by women
Households headed by women have a lower debt ratio, indicating less financial hardship, than those headed by men and this holds true for the entire rural-urban divide. However, those in the poorest rural households (37%) and the two poorest levels of urban households (361% and 53% respectively) headed by women have a high debt ratio, signaling financial distress among women. low income. households headed by a head.
Despite the emphasis on lending to women through microcredit andSupport Group – Banking Liaison Program, we find a lower incidence of debt and outstanding debt, on average, among female-headed households. In the rural segment, 36% of all male-headed households reported having debt (average debt was Rs 63,480), while 28% of all female-headed households reported having debt (average of Rs 35,100).
In the urban segment, this difference is higher, almost double – 23% of all male-headed households are in debt, with debt of Rs 1.3 lakh on average, compared to 18% of all male-headed households. women, who are in debt Rs 67,732 on average.
This lower likelihood and level of indebtedness observed among female-headed households may be due either to a lack of access or to fewer women opting for credit, or both, and to verify this there is needs further analysis. Studies have, however, shown a significant improvement in access to formal credit for women in India in recent years, albeit at a slower pace than for men.
We have written to the Secretary of the Department of Economic Affairs of the Union Ministry of Finance, the Chief Secretaries of Telangana and Kerala and the Secretary of Finance of Andhra Pradesh to ask what the government is doing to improve the situation. We’ll update the story when we hear from them.
This article first appeared on IndiaSpend, a nonprofit data-driven, public interest journalism organization.