Bengaluru: The number of Indian households under debt and the amount they owed increased between 2012 and 2018, making it more likely that these families would fall into a debt trap, shows an analysis of the latest government data by Dvara Research, a policy research organisation focused on financial inclusion and social protection.

This rise in indebtedness is sharper among rural households (84%) than urban (42%), as per the analysis, which compared the All India Debt and Investment Survey (AIDIS) from the 70th round of the National Sample Survey with the 77th, released in September 2021. Lower-income households in cities continue to remain more vulnerable than those in rural areas, mainly because they do not own enough valuable assets that can be sold quickly to repay debts.

Two other significant conclusions from this survey are that women-led households are less indebted and that the southern states of India show higher levels of indebtedness.

The AIDIS survey gathers information on Indian households' assets, liabilities, savings, consumption and capital expenses, such as on land or property. Household indebtedness is measured as a share of a country's gross domestic product (GDP), and according to a recent working paper by the Bank for International Settlements, increased household indebtedness causes a rise in consumption and GDP growth in the short run. However, in the long run, if the share of household indebtedness in the GDP crosses 60%, it can have a negative impact on the economy.

In India, this percentage is 30-40%, having fallen from a peak of 43% in 2008 to a low of 31% by 2016, and has been on the rise since.

The latest AIDIS was conducted in 2019 and household indebtedness and vulnerabilities have since increased substantially due to the ongoing Covid-19 pandemic. Household debt's share of GDP has risen from 32.5% in 2019-20 to 37.3% in 2020-21. A further rise is being predicted for 2021-22 because of depleting bank deposits as families struggle with the burden of health expenses incurred during the second Covid-19 wave.

As IndiaSpend has reported, the pandemic-led economic crisis has increased indebtedness among small entrepreneurs, farmers, domestic workers and marginalised communities.

Sharp rise in rural indebtedness

The AIDIS captures two key measures of indebtedness: the incidence of indebtedness, which is the share of households with outstanding debts, and average outstanding debt--the quantum of debt burden per household. Between 2012 and 2018, the incidence of indebtedness increased by four percentage points in rural areas while the average outstanding debt grew significantly in both rural and urban areas by 84% and 42%, respectively, as we said earlier.

Urban poor more vulnerable

The AIDIS also assesses the debt-to-asset ratio--the outstanding debt of households as a share of the total value of their assets. This ratio estimates a household's financial health, and the higher the ratio, the more precarious the financial health and the lower a household's ability to repay loans. (However, a better indicator of a family's over-indebtedness is the ratio of its debt to its income.)

The debt-to-asset ratio has increased marginally both in rural (3.2% to 3.8%) and urban (3.7% to 4.4%) segments--that is, the value of families' loans and mortgages has risen, relative to their ownership of assets.

The AIDIS splits households into 10 asset-holding classes on the basis of their asset value. Our comparison across asset-holding classes showed that the rise in the debt-to-asset ratio is driven more by households owning more assets than by those that have fewer assets.

The ratio is highest among the lowest rural and urban asset-holding classes, who own negligible assets--39.1% among the lowest rural, and 549.7% and 75.4% among the two lowest urban asset-holding classes. The poorest families now have the most debt relative to their wealth and the least ability to repay it.

While more than 90% of households belonging to the higher rural asset-holding classes own land, only a third from the lowest rural asset-holding classes do. The urban poor are worse off in this regard, with fewer than 1% of households from the lowest two urban asset-holding classes owning any land at all.

Low debt-asset ratio mostly because of illiquid assets

If the debt-asset ratio is in single digits, it would indicate low indebtedness. But this is not necessarily the case in India because most households' assets are not liquid--that is, they cannot be quickly sold to raise funds to pay off a debt. Land and building make up 87% and 91% of asset value in urban and rural segments, respectively, as per the AIDIS report.

For a more realistic measure of a household's ability to deal with debt, their debt-to-liquid-asset ratio can be considered--this includes only those assets that can be sold quickly to service debts. Across all categories of households, this ratio is higher than the debt-asset ratio--40-60% among rural and 25-60% among urban households. This means that across classes, Indian households are vulnerable to rising indebtedness.

Higher indebtedness in southern states

The southern states are ahead of the rest of the country across most indebtedness metrics both in rural and urban segments. The figures for Kerala, Andhra Pradesh and Telangana are particularly high, and both incidence and volume of debt have increased by several percentage points in these states between 2012 and 2018.

However, debt growth has outpaced asset growth in Kerala thereby increasing the debt-to-asset ratio while the value of assets has grown faster in the two Telugu-speaking states.

The share of non-institutional debt (from sources such as private lenders) in the total outstanding debt in Andhra Pradesh is 64% for rural and 42% for urban areas; in Telangana, it is 59% for rural and 27% for urban areas. This is substantially higher than the national average (34% for rural and 13% for urban areas) and despite the strong presence in these states of formal financial institutions providing credit, especially to the low-income segments.

The situational assessment of agricultural households carried out alongside the AIDIS also finds households from the southern states to be more indebted. While increased indebtedness need not necessarily mean a proportional increase in vulnerability, the latest AIDIS report also shows a substantial share of the loans having been taken for meeting consumption needs and medical expenses, pointing to an ensuing debt trap.

The incidence and volume of debt are also high in rural Rajasthan, while volume of debt and debt-to-asset ratio are high in urban Maharashtra and Haryana.

In women-led homes, low indebtedness

Households headed by women have a lower debt-asset ratio, indicating less financial distress, than those run by men and this holds across the rural-urban divide. However, those from the poorest of rural households (37%) and the two poorest tiers of urban ones (361% and 53% respectively) led by women have a high debt-to-asset ratio, signalling financial distress among low-income women-headed households.

Despite the emphasis on lending to women through microcredit and the Self-Help Group- Bank Linkage Programme, we see lower incidence of debt and outstanding debt, on average, among households led by women. In the rural segment, 36% of all households led by men reported having a debt (average debt was Rs 63,480), while 28% of all households headed by women report having a debt (average of Rs 35,100).

In the urban segment, this difference is higher, nearly double--23% of all households headed by men are indebted, with a debt of Rs 1.3 lakh on average, as against 18% of all women-led households, which are indebted Rs 67,732 on average.

This lower likelihood and level of indebtedness observed among female-headed households can either be because of lack of access, or because fewer women opt for credit, or both, and ascertaining the same requires further analysis. Studies have however shown significant improvement in access to formal credit for women in India in recent years, although at a slower rate than for men.

We wrote to the secretary of the Department of Economic Affairs in the Union finance ministry, the chief secretaries of Telangana and Kerala, and the finance secretary of Andhra Pradesh to ask what the government is doing to improve the situation. We will update the story when we hear back from them.

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