Household debt spiked 1.5 times in 6 years, but there is a ‘good news’ – Times of India

NEW DELHI: The Covid-19 pandemic has not only led to business disruptions but has also resulted in spike in household debt since 2020.
Even before the pandemic struck, the average amount of debt among rural households jumped by a whopping 84 per cent, while that of urban households increased by 42 per cent — that is almost 1.5 times — for the six year period from 2012-2018.
However, the ‘good news’ is that share of debt from non-institutional credit agencies declined significantly to 34 per cent in 2018 from 44 per cent in 2012, a report by the State Bank of India’s (SBI) economists showed.

Formalisation of economy
With share of non-institutional credit agencies declining, especially in rural India, there is an indication of increasing formalisation of the economy.
Decline in such credit sources has been witnessed significantly in Bihar, West Bengal, Rajasthan, Haryana and Gujarat.

One of the main reasons for this decline can be attributed to rise in number of Kisan Credit Card (KCC) issuances, especially in Haryana and Rajasthan which witnessed an average rise of 9 per cent.
In the past 7 years, the number of KCC cards has jumped by 5 times, the report said.
Further, farm loan waiver has been another major reason for reducing share of non-institutional credit agencies.

Source: SBI Research
‘Agriculture reforms can help in formalisation’
Economists at SBI believe that the recent reforms in agriculture could further help in formalisation of the economy.
Agriculture is one of the mainstay sectors of the economy with nearly 44 per cent of the people dependent on it. The sector has 16 per cent share in the growth of the economy.
However, at present it is growing only at the range of 3 per cent to 4 per cent.
Hence, the report says that focussing on the sector has become extremely important to ensure its development.
In the light of this, the report stated,: “It has become important in the context of the spate of recent reforms that include permitting private wholesale markets, contract farming, direct purchase from farmers and land leasing across states both under the earlier state-level Acts, and now under the central Acts.”
Besides, it suggested making agriculture cash credit at par with other segments.
“As per the norms of asset classification for agriculture advances, in 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/ renewal,” the report said.
Post Covid household debt
The household debt to GDP ratio spiked during the pandemic.
The report estimates it to have risen sharply to 37.3 per cent in 2020-21 as against 32.5 per cent in year ago period.

Even though it expects debt as percentage of GDP to have declined by 34 per cent in the first quarter of financial year 2021-22, economists at SBI believe that it has increased in absolute terms.
“In absolute numbers, the household debt has increased to Rs 75 lakh crore in the first quarter of FY22 from Rs 73.59 lakh crore in FY21,” it said.
They also project that household debt in both rural and urban areas might have doubled in 2021 as compared to 2018.
Increase in debt-asset ratio
The debt-asset ratio, which is an indicator of household indebtedness, has increased to 3.8 in 2018 from 3.2 in 2012 for rural households. For urban households, the ratio has risen from 3.7 to 4.4.

Kerala, Madhya Pradesh and Punjab were the three states that witnessed a deterioration of at least 100 bps (basis points) in debt asset ratio over the six-year period ended 2018, the report said.