India's household debt increased on an average by 1.5 times between 2012 and 2018. The state-wise trend indicates that the rural households' average debt more than doubled in 18 states for the six years ended 2018, while seven states witnessed the same for urban households. Over the next three years till 2021, the household debt in rural and urban areas might have doubled, says a research note.
In a report, Dr Soumya Kanti Ghosh, group chief economic adviser of State Bank of India (SBI), says, "The COVID-19 pandemic has resulted in a spike in household debt to gross domestic product (GDP) rate. As per our estimates, household debt rose sharply to 37.3% in 2020-21 from 32.5% in 2019-20 (Bank for International Settlements-BIS estimates are at 37.7% as of December 2020). We estimate that household debt as a percentage of GDP has declined to 34% in the first quarter (Q1) of FY21-22 with the commensurate rise in GDP in Q1, though it has increased in absolute terms."
The recently released India Debt & Investment Survey (AIDIS) report for 2018 shows an increase in the average amount of debt among rural as well as urban households, with the average amount of debt increasing by 84% and by 42%, respectively for rural and urban households for the six years ending 2018. The average amount of debt among rural households increased by 84% to Rs59,748 in 2018 from Rs32,522 in 2012. Similarly, in urban homes, the average amount of debt increased by 42% to Rs1.20 lakh.
"We estimated the 2021 rural and urban household debt to track the impact of COVID-19 on the households. In 2021 the rural household debt is expected to increase to Rs1.16 lakh and urban to Rs2.33 lakh, indicating that COVID impacted the households significantly," the report from SBI says.
AIDIS aims at generating the average value of assets, the average value of outstanding debt per household and incidence of indebtedness, separately for the rural and urban sectors of the country, for states and union territories (UTs), and different socio-economic groups. These indicators are amongst the most critical measures of the indebtedness of the respective domains of the population and are crucial inputs for the estimation of the credit structure. The survey was spread over 5,940 villages covering 69,455 households in the rural sector and 3,995 blocks covering 47,006 households in the urban sector.
The state-wise trend indicates that except for Goa and Sikkim, the average rural households' debt has increased in all other states, with a more than 200% increase in some states.
Notably, five states, including Maharashtra, Rajasthan and Assam, witnessed a simultaneous doubling in average debt across urban and rural households.
The debt-asset ratio, an indicator of household indebtedness, has increased to 3.8 in 2018 from 3.2 in 2012 for rural households and from 3.7 to 4.4 for urban households.
Kerala, Madhya Pradesh and Punjab are the three states that witnessed a deterioration of at least 100 basis points (bps) in debt asset ratio over the six-year period ending 2018. On balance, the pace of asset creation seems to have kept pace almost on an even keel across rural and urban areas, with a marginal tilt towards the latter.
SBI says, "The good thing is that in rural India, the share of outstanding cash debt from non-institutional credit agencies has declined significantly to 34% in 2018 from 44% in 2012."
Notably, almost all states have registered a steep decline in non-institutional credit in rural areas, indicating the increase in formalisation of the economy. The share of non-institutional credit has declined significantly in Bihar, West Bengal, Rajasthan, Haryana and Gujarat.
Despite the improvement shown by states, the share of non-institutional agencies in outstanding cash credit in rural areas is more than 45% in Andhra Pradesh, Bihar, Telangana and Rajasthan. Interestingly, many of these states, except for Bihar, West Bengal and Gujarat, have also announced farm loan waivers post 2014.
Even in Haryana and Rajasthan that witnessed loan waiver schemes, the share of non-institutional credit declined contrary to popular perception. SBI says this could be explained by a significant increase in Kisan credit cards (KCC) penetration in these two states. "Our estimates show that the number of KCC cards has jumped by five times over the seven years ended 2020. For the record, Haryana and Rajasthan did witness an average increase of 9%!"
Dr Ghosh says, SBI believes that the recent reforms in agriculture could further help in the formalisation of the economy, despite the political cacophony; however, there is still a fundamental reform pending in the realm of the Reserve Bank of India (RBI).
"This is making agriculture cash-credit at par with other segments. As per the norms of asset classification for agriculture advances, in the case of an agriculture cash credit account, a farmer has to repay the entire outstanding (principal along with interest) to seek fresh loans from the banks, unlike other segments of cash credit business where, if the borrower has cleared interest payments, he/she would be eligible for enhancement or renewal. It would be in the interest of the farmer if the farmer is given renewal or enhancement, especially when the bank is satisfied with the farmer in terms of his/her landholding or paying capacity," the report added.
Of the significant crop-producing states, nine states have more than the average national debt, out of which six states announced farm loan waivers since 2014, with Rajasthan and Karnataka announcing it twice.
"However, a serious concern is that even states with low household debt are going for loan waivers. Further, states are implementing loan waivers irrespective of the debt-asset ratio of households and hence the extent of rural woes may be more than we anticipated," SBI says.